By Dr. Pitchfork
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Will the Fed begin paying negative interest on reserves? Well, not just yet, but that's one of the options Bernanke has left, says Fed apologist Alan Blinder:
In October 2008, the Fed acquired the power to pay interest on the balances that banks hold on reserve at the Fed...
So the third easing option is to cut the interest rate on reserves in order to induce bankers to disgorge some of them. Unfortunately, going from 25 basis points to zero is not much. But why stop there? How about minus 25 basis points? That may sound crazy, but central bank balances can pay negative rates of interest. It's happened.
Charging 25 basis points for storage should get banks sending money elsewhere. The question is where. (from the Wall St. Journal, "The Fed is Running Low on Ammo")
Where, indeed. Likely it will go into things like gold, oil, or longer-dated Treasuries, but it sure as hell won't help the real economy in the form of credit for small businesses. Bank balance sheets are still riddled with non-performing assets, and loan loss provisions have been delusionally inadequate. (Thanks, FASB.) The banks wouldn't (and couldn't) increase lending without some sort of guarantee from Uncle Ben. And surely they would never do that...
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Read Mish's take-down of Blinder's recommendations:
Former Fed Vice Chairman vs. Mish: Is the Fed Out of Ammo?
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Gary North called this months ago: Negative Interest Rates