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July 30, 2009



all this money in the system should leave a lot of banks with excess cash well above thier reserve requirement.  Banks traditionally never wanted to hold any more than exactly thier reserve requirement, because they weren't earning anything on it, so they would ALWAYS lend it out in the overnight cash market, pushing it to another bank for as little as 1bp.  In fact, some banks were required to lend excess cash overnight, even in the times that meant they had to lend at zero (this has happened before... look at FF intraday lows around 9/25/08.  legend has it it's traded in the negatives, too, but i never saw that in my day).   This seriously pushes the money around, a lot of dollars with nowhere to go.  Banks were better off lending it somewhere else- (mortgages, business loans, whatever) than leaving in thier reserve account at the Fed.  So it's a fire sale- make a loan, or get nothing.  Put it in the public's hands.  let them chase too few goods with too much money.

Now that the Fed is paying on the reserves, the banks aren't going to force themselves to make the loans.  they'll do it if the public comes to them, but it isn't a fire-sale.  I think Dudley's trying to say that the Banks will now soak up the excess cash laying around that they previously would have forced into the marketplace. 


I clearly never understood this either. I thought paying interest on Fed Reserves gave the banks extra profit without the Banks doing taking any action. Of course I'm still peeved over the transfer tax enacted by Bernanke which took interest on my savings and gave it to the banks. Somehow I don't agree they are more needy or deserving than I of this money

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