Thursday, December 31, 2009

Term Deposits at the Fed

Voltron says: so the fed's plan for sopping up all the money they've injected into the system before it causes all kinds of inflation is to offer the banks term deposits of up to one year. Basically selling CDs to the banks so they can earn interest. They have also pledged to keep short term interest rates low, so the banks can borrow money from the fed - basically for free - then give it back to the fed and earn interest. Well, that's one way to keep the banks profitable. The fed issuing debt puts them in direct competition with the Treasury which would raise interest rates. Unless of course, the fed continues to buy treasuries themselves. At the end of a year, the term deposits are returned to the bank (plus interest) so how exactly does this remove the money from the system? It comes back . . . plus interest. So they're just kicking the can down the road (again).

So to recap: The fed is going to lend money overnight at zero interest to banks that will use it to buy one year term deposits from the fed, who will use the money to purchase treasuries from the government to fund the deficit and push long term interest rates low. follow? make sense? no? good. That's because it doesn't make sense. The inmates are running the asylum.

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