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Less Than Zero

June 5th, 2014 - 2:34 pm

ZERO

Banking isn’t exactly rocket science. You deposit money, the bank lends it out for a profit, then shares some of the profits with you in the form of interest on the money you loaned them via your deposit. But what happens when conditions are so anemic that nobody wants to borrow anything? Eventually, this:

Mr. Dragi said the governing council’s 24 members—which include the head of Germany’s Bundesbank—were “unanimous and determined” to take any actions within their mandate, if needed.

In addition to a reduction in its main lending rate to 0.15%, a new low, from the 0.25% rate held since November, the ECB also dropped the rate on bank deposits parked overnight with the central bank to minus 0.1%, thereby charging commercial banks for keeping their money at the ECB, an unprecedented move for a central bank of its size.

That’s right, the ECB is now charging other banks for their deposits instead of paying them interest. That’s an attempt to get the commercial banks to withdraw their deposits and loan them to somebody, anybody, to get the velocity of money back up to sustainable levels.

What the ECB and the commercial banks can’t do however, is drum up demand. They’re trying to sell ice cubes in Alaska, or charcoal in Hell.

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All Comments   (3)
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I'm on a tablet, so I can't cut-and-paste the link, but on the von mises site is a book on bank credit by de Soto, which has an execellant explaination why "fractional reserve banking" is both unethical and economicly harmfull.

The reasons why we still haven't recovered, aside from not letting the economy wring out the malinvestment, can be summed up in the phrase "going Galt".
24 weeks ago
24 weeks ago Link To Comment
The easiest work around is to convert it to cash and stick it in a vault.

It's debatable whether the FED should be pumping up our big banks. But they are, slowly, by paying them a minimal amount of interest on their reserves. It's very possible that this actually a more conservative approach than the Europeans are taking.

They're essentially saying, "Make loans, any loans!. Or we'll make your balance sheet even weaker!"
24 weeks ago
24 weeks ago Link To Comment
"That’s an attempt to get the...velocity of money back up to sustainable levels."

Oh, and it'll work, too. I would be moving my money to more hospitable climes with considerable velocity...
25 weeks ago
25 weeks ago Link To Comment
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