The Rock & Hard Place
The Credit & Equity Markets are all looking to the Federal Reserve for some sort of Quantative Easing (QE). The FOMAC (Federal Reserve Open Market Committee) meets for 2 days tomorrow, 9/21/11.
Here’s something I’ve seen kicked around that could Really Help or Really Hurt the Economy and Housing Market. I hear real estate agents and real estate investors comment constantly that the Banks need to start lending. At this point this could be bad for the economy.
WHY BAD? Inflation, like most of you have never seen could be triggered. Here’s why. The US operates a fractional reserve system. Under this system a bank can lend to customers up to a set dollar reserve. Now, remember back to TARP, the Bank Bailout. All that money the feds threw at the TBTF’s did not go out the door as consumer or business loans.
Instead, the Banks sat on the money. Why, two reasons. First, the banks were and are so Risk Adverse money was not going to be lent. Second, the money was parked at the federal reserve and the banks were and are paid 0.25% on those reserves.($16T) With NO Risk to the banks.
As more folks caught on to this deal, someone came up with the idea to move the interest the feds pay on the bank reserves to 0.00%. This in an effort to MAKE the banks lend, increasing “the appetite for more Risk”. Ok, I’m for not paying the banks to park money. BUT FORCE BANKS TO ACCEPT MORE RISK ?? They are so Under Capitalized, Risk is the last thing they need to think about.
The “I” Word Now, I feel we are in a period of Deflation. Just look at property values and the US dollar. However, if the banks dumped $16T into the economy, Without Aggregate Demand to off set the additional funds in the system…The inflation rocket will be fired.Just say’ in….
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