Comments on: Further Discussion of the Central Banks’ Attempts to Stimulate Interbank Lending http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html Mon, 23 Nov 2009 10:17:20 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html#comment-2464 Anonymous Sun, 16 Dec 2007 23:23:00 +0000 http://www.nakedcapitalism.com/2007/12/further-discussion-of-the-central-banks-attempts-to-stimulate-interbank-lending/#comment-2464 anon @ 4:34<br/><br/>the actual funds rate is called the 'fed effective' rate, which is the daily average of actual trades, usually slightly different than the target rate<br/><br/>the fed basically adjusts reserves in line with closing any gap between the effective and the target as they go along <br/><br/>you can google a daily time series on the fed effective going back 50 years anon @ 4:34

the actual funds rate is called the ‘fed effective’ rate, which is the daily average of actual trades, usually slightly different than the target rate

the fed basically adjusts reserves in line with closing any gap between the effective and the target as they go along

you can google a daily time series on the fed effective going back 50 years

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html#comment-2461 Anonymous Sun, 16 Dec 2007 21:34:00 +0000 http://www.nakedcapitalism.com/2007/12/further-discussion-of-the-central-banks-attempts-to-stimulate-interbank-lending/#comment-2461 A very interesting quote from Steve Cecchetti's article:<br/><br/><i>the Federal Reserve Bank of New York reports that in 3 out of every 10 days since the crisis started, the maximum trade in the federal funds market exceeded the discount lending rate. [...] It’s not supposed to work this way. The discount lending rate is supposed to put a cap on the federal funds rate in the interbank market.</i><br/><br/><br/>This leads to the question of whether the highest TAF auction bid submitted on Monday will be higher than the discount rate. After all the TAF will be anonymous and will not have the public stigma of borrowing at the discount window. Based on the Cecchetti quote, the answer will almost certainly be yes (because, basically, that's the situation we're already in).<br/><br/>However, we'll probably never know about it if it happens, because <a HREF="http://www.federalreserve.gov/monetarypolicy/files/TAFfaqs.pdf" REL="nofollow">all auction winners will pay the lowest possible winning rate</a> (the "stop-out rate"). Thus, in the TAF, the Fed will lend money for less than nearly all auction winners would actually be willing to pay. Only the stop-out rate will be announced, and no information about individual bids will be made public.<br/><br/>Still, we have at least the theoretically possibility that the TAF rate will turn out to be higher than the discount rate, if $20 billion worth of high bids are submitted. Wouldn't that make for an interesting day on the markets.<br/><br/><br/><br/>PS,<br/><br/>To clarify, the famous Fed "rate" awaited breathlessly by Wall Street when Ben Bernanke and the FOMC meet every six weeks or so, and recently cut again to 4.25%, is in fact the "federal funds <i>target</i> rate". The Fed targets this rate by conducting open market operations (repos and so forth). However, what this fed funds rate actually applies to is overnight lending of reserves by banks to one another, and each individual transaction is negotiated between the banks involved. Thus if Bank A lends overnight to Bank B, the interest rate will in general not be exactly 4.25%, but could be something higher.<br/><br/>The Cecchetti quote says that some particular "Bank B"s out there are already paying more than the discount rate... that is, they are paying more to borrow from some fellow bank than they would to borrow from the discount window!<br/><br/><br/>This is fairly arcane stuff, so I would appreciate if someone would tell me I've got this wrong. A very interesting quote from Steve Cecchetti’s article:

the Federal Reserve Bank of New York reports that in 3 out of every 10 days since the crisis started, the maximum trade in the federal funds market exceeded the discount lending rate. [...] It’s not supposed to work this way. The discount lending rate is supposed to put a cap on the federal funds rate in the interbank market.

This leads to the question of whether the highest TAF auction bid submitted on Monday will be higher than the discount rate. After all the TAF will be anonymous and will not have the public stigma of borrowing at the discount window. Based on the Cecchetti quote, the answer will almost certainly be yes (because, basically, that’s the situation we’re already in).

However, we’ll probably never know about it if it happens, because all auction winners will pay the lowest possible winning rate (the “stop-out rate”). Thus, in the TAF, the Fed will lend money for less than nearly all auction winners would actually be willing to pay. Only the stop-out rate will be announced, and no information about individual bids will be made public.

Still, we have at least the theoretically possibility that the TAF rate will turn out to be higher than the discount rate, if $20 billion worth of high bids are submitted. Wouldn’t that make for an interesting day on the markets.

PS,

To clarify, the famous Fed “rate” awaited breathlessly by Wall Street when Ben Bernanke and the FOMC meet every six weeks or so, and recently cut again to 4.25%, is in fact the “federal funds target rate”. The Fed targets this rate by conducting open market operations (repos and so forth). However, what this fed funds rate actually applies to is overnight lending of reserves by banks to one another, and each individual transaction is negotiated between the banks involved. Thus if Bank A lends overnight to Bank B, the interest rate will in general not be exactly 4.25%, but could be something higher.

The Cecchetti quote says that some particular “Bank B”s out there are already paying more than the discount rate… that is, they are paying more to borrow from some fellow bank than they would to borrow from the discount window!

This is fairly arcane stuff, so I would appreciate if someone would tell me I’ve got this wrong.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html#comment-2458 Anonymous Sun, 16 Dec 2007 19:57:00 +0000 http://www.nakedcapitalism.com/2007/12/further-discussion-of-the-central-banks-attempts-to-stimulate-interbank-lending/#comment-2458 "Clearly, they were worried about the quality of the assets on the balance sheets of the potential borrowers." So the reason banks are willing to pay the higher LIBOR rate for overnight loans is that they are probably less liable to scutiny of the assets offerred as collateral. Let's call it the incredible premium. This suggests that the Fed's plan to accept some of these assets as collateral should include the right to sell it on the open market so as to establish a price. Of course, the Fed would take a loss (and would then be known as the loser of last resort) but so what. The issue apparently is transparency. “Clearly, they were worried about the quality of the assets on the balance sheets of the potential borrowers.” So the reason banks are willing to pay the higher LIBOR rate for overnight loans is that they are probably less liable to scutiny of the assets offerred as collateral. Let’s call it the incredible premium. This suggests that the Fed’s plan to accept some of these assets as collateral should include the right to sell it on the open market so as to establish a price. Of course, the Fed would take a loss (and would then be known as the loser of last resort) but so what. The issue apparently is transparency.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html#comment-2455 Anonymous Sun, 16 Dec 2007 14:41:00 +0000 http://www.nakedcapitalism.com/2007/12/further-discussion-of-the-central-banks-attempts-to-stimulate-interbank-lending/#comment-2455 If a carmaker chooses not to make or to make and not sell a car, surely that is its own business.<br/><br/>So too if a bank chooses not to lend to another bank except at high rates, what business is it of yours?<br/><br/>Frankly I do not understand your unwillingness to attempt to distinguish between a competitive private and or rigged government market price and availability of funds and willingness to loan these out.<br/><br/>My question to you is at what rate would you lend 500 million quid? If a carmaker chooses not to make or to make and not sell a car, surely that is its own business.

So too if a bank chooses not to lend to another bank except at high rates, what business is it of yours?

Frankly I do not understand your unwillingness to attempt to distinguish between a competitive private and or rigged government market price and availability of funds and willingness to loan these out.

My question to you is at what rate would you lend 500 million quid?

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/further-discussion-of-central-banks.html#comment-2453 Anonymous Sun, 16 Dec 2007 13:17:00 +0000 http://www.nakedcapitalism.com/2007/12/further-discussion-of-the-central-banks-attempts-to-stimulate-interbank-lending/#comment-2453 Good article by the professor.<br/><br/>The question of whether more fed rate cuts are appropriate is of course debatable. Nouriel Roubini has an excellent post yesterday in defense of cuts.<br/><br/>Either way, given that the 'stigma' of discount window borrowing is a problem, and given that the professor's interpretation is that the auction system will help avoid that, what is the argument against lowering the discount rate further (which is what the market was hoping for)? Good article by the professor.

The question of whether more fed rate cuts are appropriate is of course debatable. Nouriel Roubini has an excellent post yesterday in defense of cuts.

Either way, given that the ’stigma’ of discount window borrowing is a problem, and given that the professor’s interpretation is that the auction system will help avoid that, what is the argument against lowering the discount rate further (which is what the market was hoping for)?

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