Central Banks Market Tinkering & The Unintendended Consequence - pt 2

Another unintended and costly consequence of the Fed tinkering the rates and changing the rules overnight and panicking has been spotted by Mish:
Why Banks Aren't Lending
  • Banks are insolvent.
  • Banks do not trust each other.
  • There can be no trust with suspended mark to market accounting. No one believes what assets on balance sheets are really worth and there is no way to find out.
  • By suspending mark to market accounting the SEC heightened mistrust.
  • As part of the TARP passed by Congress, the Fed is paying interest on reserves.
Bernanke wanted ability to pay interest on reserves to put in a floor on interest rates. I am quite certain he believed he could hold rates at 2 with this provision. It did not work that way did it? The Fed Fund rates is now at 1.50 and interest rates futures suggest it is headed to 1.00 by March.

But an easily seen (yet still unseen by the Fed) ramification of paying interest on reserves is the fact that banks can collect interest by leaving money on deposit at the Fed rather than lending it out [emphasis mine].

Why should banks risk lending money to consumers or bank when instead they can deposit money at the Fed and collect interest? Thus, paying interest on reserves not only failed to put in a floor on rates, it also gave banks one huge reason not to lend.

This cancerous activity is now starting to get extremely counterproductive.

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