Raghu writes:
Who (other than the Fed) is going to lend money to banks at 1/2 of 0.25%?? This type of profit is only possible if the banks are somehow allowed to borrow from the Fed at <0.25% interest and then turn around and deposited it back at the Fed for a higher interest rate. This is a strange kind of arbitrage to say the least. Not even the Fed can be so corrupt as to allow something like this on the massive scale necessary to explain JP Morgan Chase and Goldman Sach's profits. What am I missing here?
============================================= Or me. The interest rate paid by the Fed is almost identical to the rate for three month T-bills. If the banks weren't parking their excess reserves with the Fed, they could still buy risk-free T-bills on the outside. I can see where the Fed might encourage the banks to maintain excess reserves to limit the disruption to the markets when it decides to tighten. But what great advantage accrues to the banks if it is the Fed rather than the US Treasury which is paying them equivalent interest on their money? I have very great difficulty understanding how the reserves Goldman and JPMC keep on deposit with the Fed explains their profitability. By all accounts, their huge profits over the past three quarters have come from their proprietary trading on corporate and emerging market debt and the explosive rise of US and global stock markets. That's been their carry trade of choice with the cheap Fed funding which has been generously made available to them, rather than the miserable eighth of a percent they earn on their reserves. Might not the huge aggregate buildup in excess reserves be a reflection of the economic downturn and the fragility of the US financial system rather than some great arbitrage opportunity which is providing the banks with windfall profits? Unlike the top tier banks, the weaker and smaller ones are hoarding capital both in the expectation of further losses and because demand from their customary small business and homebuying clientele has fallen off a cliff, and they also happen to be the most tied to the Fed through it's lending facilities. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
