Fed paying interest on deposits = causing credit lockup

scriabinop23 · Oct 27, 2008

Quote from Daal:

thats the point the fed is trying to make, they need to hike the interest rate to discourage banks from lending at the fed funds market at less than the target. but the point is that banks have so much cash they are lending like hell, not to the consumer but into the fed market. they dont seem slighly worried

the fed staff are a bunch of academics but if the interest on reserves were causing a credit lockup you would expect these phds from the Chicago University to notice

ok. this is confusing.
Aren't banks foregoing fed funds 1.15 by lending lower than that? That doesn't make sense... Please explain more. I thought interbank lending was seized as well.

Daal · Oct 27, 2008

the interest hike 'will become effective for the maintenance periods beginning Thursday, October 23.'
the EFF started to move up, I dont know why it isn't there yet

krazykarl · Oct 27, 2008

Quote from scriabinop23:

ok. this is confusing.
Aren't banks foregoing fed funds 1.15 by lending lower than that? That doesn't make sense... Please explain more. I thought interbank lending was seized as well.

LIBOR > Fed-funds

Banks have plenty of incentive to lend to each other.

scriabinop23 · Oct 27, 2008

Quote from Daal:

the interest hike 'will become effective for the maintenance periods beginning Thursday, October 23.'
the EFF started to move up, I dont know why it isn't there yet

I misread your previous message. That is why I was confused. You are saying the recent move to pay higher interest was a response to banks lending below fed funds... Which makes sense. I imagine it will move to FF target - .35 ...

Now here is my question: A flood of money below fed funds tells banks *are* willing to lend to each other. That is not consistent with what the press has been telling. What's going on with interbank lending minus the story of these fed funds. I thought 'paralyzed with fear' was the mantra.

scriabinop23 · Oct 27, 2008

Quote from krazykarl:

LIBOR > Fed-funds

Banks have plenty of incentive to lend to each other.

10/24 10/23 Change
OVERNIGHT 1.28125 1.20625 .07500
1 WEEK 2.16250 2.19750 -.03500
2 WEEKS 2.48500 2.55375 -.06875
1 MONTH 3.24000 3.25875 -.01875
2 MONTH 3.37875 3.38625 -.00750

Overnight libor barely above what the fed pays on reserves. Illuminate more. Looks to me banks are scared shitless to lend long (more than a day!) ... Overnight isn't the problem. Earning 1.15% is better than 0%. If I am not lending one month out with excess reserves, I am forgoing 2% or so instead of 3 with this new policy.

The more I think about this, this is about banks holding onto foreclosure properties and bad assets, and they will need a LOT more capitalization before they lend out to consumers.

Daal · Oct 27, 2008

Quote from scriabinop23:

Now here is my question: A flood of money below fed funds tells banks *are* willing to lend to each other. That is not consistent with what the press has been telling. What's going on with interbank lending minus the story of these fed funds. I thought 'paralyzed with fear' was the mantra.

the fed funds market is a overnight market(1 day loans). while libor can go from overnight to many months maturities. longer term libor maturities suffered the worst. the overnight libor had 'spikes'(like the fed funds 6% spikes) but it crashed right after it. overnight libor has crashed to 1.27% right now, plenty of lending going on. guess everybody thinks they can get their money back before the other bank goes under watching their stock/cds etc
http://www.bloomberg.com/apps/quote?ticker=US00O/N:IND