Despite the huge drop-off in lending to small businesses and its harmful effect on the economy, the Federal Reserve is paying banks to not lend:
One of the most outrageous "open secrets" of U.S. government policy these days is that the Federal Reserve is still paying big banks not to lend money.
And it's doing that while screwing average Americans who have been responsible and lived within their means...
The Federal Reserve is quietly continuing with one of the many outrageous bank-bailout programs it initiated during the financial crisis--the one in which it pays big banks interest on their "excess reserves."
The FED's decision to shell out $4 billion a year to banks for sitting on cash has stalled job creation:
Why aren’t banks lending to local businesses? The Fed’s decision to pay interest on $1.6 trillion in “excess” reserves is a chief suspect.
Where did all the jobs go? Small and medium-sized businesses are the major source of new job creation, and they are not hiring. Startup businesses, which contribute a fifth of the nation’s new jobs, often can’t even get off the ground. Why?
In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty,” Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing.
Businesses have to pay for workers and materials before they can get paid for the products they produce, and for that they need bank credit; but they are reporting that their credit lines are being cut. They are being pushed instead into credit card accounts that average 16 percent interest, more than double the rate of the average business loan. It is one of many changes in banking trends that have been very lucrative for Wall Street banks but are killing local businesses.
The Interest On Excess Reserves (IOER) policy has perversely distorted the global economy and may even be causing a European bank run, since their deposits are being shifted to the FED:
Kash Mansori at the Street Light blog has pulled data from the ECB’s data warehouse, showing a steep decline in deposits held by European monetary financial institutions (MFIs) — that is, banks and money market funds...
But a follow-up post takes it further. The Fed breaks down cash assets of commercial banks in the US by those that are domestically chartered, and those that are foreign-related. And it turns out foreign-related deposits have risen by a similar-ish amount (well, about €500bn)...
Deposits at the Fed are unusually attractive for foreign banks because of the regulatory landscape. Borrowing money via deposits that don’t exact an FDIC surcharge, and depositing them at the Federal Reserve, earning 25 basis points, is much more attractive to a foreign bank with a US branch than it is to a US bank. That regulatory gap also provides insight into why foreign-related banks have maintained sizable deposits at the Fed.
Is there another incentive for foreign firms to stock up on U.S. cash? Deutsche Bank and others may be preparing to roll over the spike in 10 year bonds issued in the wake of 9/11, when rival broker Cantor Fitzgerald gave birth to the electronic trading of Treasuries.