Will Banks Ever Pay Interest, Again?

[badcompany]

The only way I see this happening is if the Fed buys virtually all of the Federal debt. Otherwise, rising rates would bankrupt an already overburdeoned Federal Government.

Of course, the fed buying all debt would have its own consequences viz. the effect on the value of the currency.

As usual, Mises nailed it:

"The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

[Robert Goren]

The long and short answer is yes. The question is when. The answer is when the FED raises rates when inflation gets up to 3.5-4%. The FED controls interest rates period despite any and all the foolish talk about anything else doing it. The current rate is 1.5%. There will be some who doubt that number, but it is the number the FED will use.

[lamboguy]

interesting early reactions to the fed today. dollar and bond strength, metals kinda neutral however mining stocks positive, equity markets down.

[Saratoga_Mike]

The long and short answer is yes. The question is when. The answer is when the FED raises rates when inflation gets up to 3.5-4%. The FED controls interest rates period despite any and all the foolish talk about anything else doing it. The current rate is 1.5%. There will be some who doubt that number, but it is the number the FED will use.

Yes, that's why long rates went up during QE1 and QE2 (the opposite of what you're claiming).

[lamboguy]

why would anyone trust the banks with their money to begin with? in Cypress depositor's lost their money. they had a bank holiday over there. the same could happen here.

[badcompany]

Yes, that's why long rates went up during QE1 and QE2 (the opposite of what you're claiming).

But, isn't he right, at least to some extent?

While the fed controls the short term rates, completely, via the repo market, it can just as easily announce a massive purchase of 30 year bonds, and drive down rates. Of course, this has repercussions, but, theoretically, it can do so.

[Saratoga_Mike]

But, isn't he right, at least to some extent?

While the fed controls the short term rates, completely, via the repo market, it can just as easily announce a massive purchase of 30 year bonds, and drive down rates. Of course, this has repercussions, but, theoretically, it can do so.

No, QE1 and QE2 were meant to suppress rates - long rates went UP under QE1 and QE1, which is perfectly logical. Printing money is inflationary. That simple.

If you're asking on any given day could the Fed have an outsized impact on long rates? Yes. Is it sustainable? No - see QE1 and QE2.

The last 10 days or so (don't have a chart up, so could be off) are worrisome b/c the long-end is acting the way it did as QE1 and QE2 were wound down--rates started to go down (deflation concerns). I realize all of this is completely inconsistent with Fed claims, but I live in reality.