Skip to comments.Here's What Fed May Do Instead Of More QE
Posted on 08/01/2012 3:27:16 AM PDT by Son House
The plan works in a fairly simple manner: In the UK`s case, the BofE is lending short-term government bills to banks, which use the securities as collateral to borrow money from the central bank at a rock-bottom rate - about 0.25% - and then make loans.
Banks can borrow up to 5% of the value of their existing loan books, and the loans from the BofE are four years in duration.
The program is similar to something the Fed tried, with considerable success, during the financial crisis that exploded in 2008.
The Fed is meeting Tuesday and Wednesday and will deliver its policy statement at the conclusion.
"As well as offering clear incentives for UK commercial banks to boost their lending, one of the benefits of the scheme is that, as it only involves a temporary swap of securities, it won`t boost the overall size of the Bank of England`s balance sheet," Paul Ashworth, chief US economist at Capital Economics, said in a note to clients.
The Fed`s program was called the Term Asset-Backed Securities Loan Facility and allowed primary dealers to borrow Treasury bills from the Fed in exchange for depositing collateral.
Instituting a similar program would be somewhat challenging for the Fed.
For one, the Fed will be out of short-term debt when it wraps up its Operation Twist program by the end of the year. The Twist involves selling short-term debt and buying longer-term notes in an effort to drive down interest rates and spur risk assets.
Also, there are some legal questions over what type of collateral the Fed can accept if it cannot lend T-bills.
Finally, there`s the reality that bank lending actually is increasing at a 5% pace in the US, so critics might say the program isn`t really necessary.
The Fed also may want to avoid one provision of the British program in which it grants the low rates to banks on 5% of their entire loan books, not just new loans.
The latter obstacle was emphasized by Alan S. Blinder, professor of economics and public affairs at Princeton University and former Fed vice chairman, in a Wall Street Journal op-ed piece Wednesday.
Blinder thinks the Funding-for-Lending Scheme is at least worth investigating, reasoning "it just might work, and the US economy certainly could use a boost."
Ashworth, at Capital Economics, points out that if the Fed adopted the plan and extended the rate to 5% of current loans it would expand the central bank`s balance sheet another USD 300 billion, something unlikely to be popular among Washington lawmakers.
"Nevertheless, it would make sense at a time when the demand for credit appears to be rising and banks are still tightening lending standards for some types of loans," he said. "As it stands, an FLS is obviously only in the early planning stages. But it will be interesting to see whether the idea develops more support at the Fed."
Free money for banks but not for thee.
Borrowing money you don’t have, and loaning it at a profit to those who will not put it in the economy, but rather use it to sell each other more derivatives. Brilliant!
If you can’t roll around naked on your assets, you don’t have any.
Sounds like fun.
The Bernanke can probably end this Depression by commanding everyone to do that..
(And not just the usual cow pies 0bama, Pelosi, Reid, Boehner, McConnell and Roberts give me).
>> one of the benefits of the scheme
At least they admit it’s a scheme!
Help me out here you high finance wonks... "spur risk assets" == "drive yields on cash equivalents to zero to force investors to invest in risky stuff like business expansion (== hiring), real estate, and stocks". Yes?
I think where this continues to fail is that the "business owner" class of investors are not foolish enough to borrow this synthetic Federal dough to invest in hiring and expansion while the Kenyan is POTUS. That drives all that "stimulation" funny money into the speculative "risk assets" like stocks. (Not real estate so far).
If I'm correct, then making more synthetic dough won't recover a damn thing except maybe the equities market. For awhile.
Sooner or later the piper is going to want to be paid too.
>> If you cant roll around naked on your assets, you dont have any.
If I roll around naked on my favorite asset, I’ll get chiggers. So I kinda sorta can’t. Does that mean I don’t have it? :-)
Ah, guys? I've spotted a little flaw in your plan. They've got plenty of money now and they aren't making loans.
They want to convert this economy totallt to an economy run by the government, for government purposes only. That way only the elites may profit from any decision that is made by government . . .
As for that greatly overuse term "unexpectedly" --
Nothing "unexpected" has happened to our nation in over 40 years. Everything is going exactly as planned. The elite get more and more and everybody else gets less and less.
” Here is what is actually going on. The elites in power have shipped all our jobs overseas to rape, pillage and burn the U.S. economy. Nothing good will happen as long as the privately owned fed continues to exist because the elites will not be happy until they have destroyed the middle class totally. “
George W. Bush
Obama.....all in the same elitist, globalist pork barrel.