0% loans,changing rules all the time risk, just buy Treasuries, why loan?

Discussion in 'Economics' started by KINGOFSHORTS, Jan 28, 2010.

  1. Since banks can get 0% loans and go long treasures for risk free money, and you have the fear of the big tax coming, increasing capital requirements and rules changing depending on how the president and congress feels that week why loan to joe six pack who will probably default?

    It seems no one in the whitehouse has figure it out yet.
  2. Joe sixpack is either not creditworthy, or doesn't want to go further in debt to buy a house that will fall in value, or start some moronic business that will be sure to fail. Instead joesixpack is paying down debt.

    Banks like to make money and the spread on lending to joesixpack is much greater than the spread on lending to the US gubmint. Joesixpack either isn't creditworthy or just plain doesn't want more debt on his books.
  3. Daal


    The 'banks get money at 0%' is a myth, the actual banking spread did not rise much during the Fed slashing of rates, banks actually fund themselves through deposits, CDs, etc
  4. dhpar


    some do of course. but on average money costs 12bps. why do you think there is so much in excess reserves...?
  5. Bond markets have sucked up and are continuing to suck up all the liquidity in the economic system, why do u think the equity mkts are so illiquid right now? The small/mid cap space has been virtually decimated, liquidity-wise
  6. Daal


    As I understand the excess reserves are pilling up on the asset side of the banks balance sheet when they sell their GSE MBS or UST in the market that the Fed is injecting funds(through the primary dealers), its the liability side that defines the bank cost of capital. Margins, it didnt improve much, from 3.36%(sep 2007) to 3.51%(sep 2009), of the $13T liabilities of banks $9T are deposits plus $1.5T in equity
  7. dhpar


    yes. but why would you fund yourself at high costs when you have idle cash sitting on your table and yielding only 12bps? you would just use this cash - wouldn't you?

    the funding that is occurring is long term only to take advantage of low yields across the curve and match assets with liabilities.
  8. Untrue. Actually there is a dearth of product out there right now. This is why there was no negative reaction to the Fed ceasing to purchase MBS.

  9. Daal


    A bank needs a certain amount of liquid assets avaliable always, the QE purchases did not increase that materially, the banks swaped non-loans liquid assets(UST, GSE MBS) for deposits at the Fed. Now, the fed did overvalued the liquid cash type assets by some amount(pimco claims 40bps in the MBS case) and this might increase the bank willingness to get rid of the cash at the margin but still they will keep a lot of it around because there is no reason not do, they had that liquidity buffer before the QE purchases(just in a different composition)
  10. dhpar


    this is the crux of the future of america imo.

    the fed is basically killing economy by stating that rates are going to be low for extended period. this is a deja vu a la japan, i.e. crowding out of private sector/spirit par excellence.

    banks will basically load up their balance sheets with carry trade because the risk of downside is underwritten by fed. therefore they will not need to employ the balance sheet for more risky business - like starting up the economy with new loans. consequently despite fed's efforts to bring inflation they will bring deflation (or more likely stagflation in the long term). pimco calls this new normal - LOL.

    to get the economy moving fed needs to start to think outside the box. free up banks' balance sheet by making the carry trade risky, e.g. say that rates will move up and that the first move is going to be large. banks will then have to rebalance to more risky asset (not the risk free carry trades).

    but that's likely not going to happen. americans are basically committing a suicide - they are allowing the economy to be nationalized and providing money for it at the same time (and for FREE).

    we need a new Lucas, i.e. new theory of expectations. i am afraid that's not in intellectual abilities of the fed. in fact they are still denying that free money were one of the main culprits behind this (and many previous) crisis.

    when will we know that the fed may be taking a right path? the first should be the flattening of the yield curve as the risk adversity recedes - yesterday we saw a small hint of what happens when fed official has balls. equities go up, curve flattens and spreads tighten improving the accessibility of credit via any market...
    #10     Jan 28, 2010