A little over a year ago, I argued that the Federal Reserve should consider charging banks for the privilege of holding their reserves. The reasoning for this is straightforward: charging interest on banks (instead of paying interest, as the Fed now does) will encourage banks to come up with more profitable uses for their money, such as lending to firms and individuals.
It seems to have taken a while–and some distance–for that memo to get through. In evidence before a the House of Commons Treasury Committee earlier this week, Bank of England Deputy Governor Paul Tucker raised the issue, although stressing that action on this possibility was not imminent.
According to the Financial Times, “…the deputy governor cautioned that this was a “radical idea” that was “not something anyone should clutch on to as the answer to the universe…This would be an extraordinary thing to do and it needs to be thought through very carefully.”
I am glad to see that it is under consideration.
Regardless of the level of short-term interest rates, the remuneration rate is still higher than the U.S. Department of the Treasury’s: “Daily Treasury Yield Curve Rates” 2 years out (i.e., the short-end segment of the yield curve is still inverted after 4+ years).
This is the exactly same monetary policy blunder as the BOG & FDIC made during the 1966 S&L credit crisis. This borrow short, to lend long, funding matrix depletes the NBs of loan-funds (induces dis-intermediation [not deleveraging] – where the size of the NBs shrink, but the size of the CB system remains the same. I.e., the NBs are not now, nor have ever been, in competition with the CBs from the standpoint of the CB system.
By allowing the CBs to out bid the NBs for short-term funding (savings), the Fed lowers the net interest margins for both lenders & savers, induces maturity mis-matches, discourages lending in multifaceted ways, in short, reduces real-gDp, & forces the Fed to follow an easier or less restrictive monetary policy (i.e., causes stagflation).
How do you think stagflation (business stagnation accompanied by inflation), originated in the early 60’s? It was predictable & predicted.
It will continue to take increasing infusions of Reserve Bank & Commercial Bank credit to generate the same inflation-adjusted dollar amounts of gdp as long as interbank demand deposits are remunerated. Contrary to Milton Friedman, legal reserves are not a tax.