http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm Interest Rates Paid on Required Reserve Balances Cut 25 bps to 0.00% Interest Rates Paid on Excess Reserve Balances Cut 30 bps to -0.05% Bonds would immediately soar, reducing borrowing costs. Banks would be forced to lend trillions if they want to make money. Could this be the jump start the economy needs?
Looking at the 13 week, it's at an infinitesimal .14, for an annualized yield of .56. Meantime, the 10 year is at 2.91. 2.91 - .56 = 2.35, guaranteed. Lend it out for a mortgage, and you could make 4 or 5% on money that costs you .56 to get. Looks like sufficient incentive already. My suspicion is that there aren't a lot of solvent borrowers around to make, say, mortgage lending more active than it is.
Banks (and so many organizations as well as some of us individuals) have mountains of capital that they very much would like to put to work. It's tough to get those six digit bonus checks by buying treasuries at these paltry yields and nights are spent dreaming of other places to put money. That's a big part of why rates are at historic lows - `cuz everybody wants to buy resi. . . good resi, anyway. But there is a huge risk that housing prices are heading much lower. And there are dark clouds on the economic horizon - darker than ever before. Nobody questions that a huge storm is coming. Keynes keeps getting weaker and weaker with every exertion while governments around the world are running out of fingers and toes to plug the holes in the dike. Even metaphors are getting mixed to the point of driving readers to distraction. Loaning money on a house to anybody who does not have good credit is riskier than ever while the rewards for doing so are historically low. And all six of us who have good credit already have mortgages. OTOH this is an amazingly great place for some brand spankin' new technology to take off like we've never seen before. Let somebody build a nanoassembler for instance - he'll have to go into hiding to avoid all the VCs chasing him down. Or cold fusion. Or a quantum leap in AI software, search engines or operating systems. Somebody comes up with the Next Great Idea⢠and he'll be rich beyond his wildest dreams.