Daily Ticker

The Fed Is Paying Banks to Sit on Cash But They’d Rather Be Lending It, Says Mark Dow

A few weeks back, the Daily Ticker's Henry Blodget wrote an editorial for the Business Insider entitled: OUTRAGE OF THE DAY: Do You Realize That The Government Is Still Paying Banks Not To Lend…?

In the story Henry describes how "the Federal Reserve is still paying big banks not to lend money. And it's doing that while screwing average Americans who have been responsible and lived within their means."

Never one for subtlety, Henry goes on to describe the consequences of having the Fed pay banks interest on what's called "excess reserves":

"The Federal Reserve is quietly continuing with one of the many outrageous bank-bailout programs it initiated during the financial crisis--the one in which it pays big banks interest on their "excess reserves." What are "excess reserves"? Money that the banks have but aren't lending out--money that banks are just keeping on deposit at the Fed.

The Fed is paying banks 0.25% interest on this money. 0.25% interest may not sound like much, but it's more than the banks are paying you to keep money in your savings or money-market account. It's also more than you'll earn if you lend the Federal government money for 2 years."

But fund manager Mark Dow of Pharo Management, a former staff economist at the IMF and Treasury, says what the Fed is doing is not as egregious as Henry makes it sound.

"These banks would love to be lending; 25 basis points is nothing to them," Dow says. The problem continues to be a lack of loan demand.

Even if that's true, Henry asks, why do banks deserve to get this special treatment, while other businesses get no benefit from sitting on their cash?

As unpalatable as it may be, Dow insists this "interest on excess reserves" and the other more explicit bailouts for banks were -- and are -- a necessary evil to keep the banking system up and running.

"Most of these guys might have gotten bailed out but they lost a lot of money. It's not like they made money, they lost less than they should have," he says. "They should have lost everything but had they lost everything the collateral damage would have been massive."

How massive? Ordinary Americans would not have been able to access their money at ATMs and even blue-chip companies would have struggled to make payroll.

"Unless you want to kill the capitalist system," you need to support the banking system, Dow says.

Life isn't fair, and neither is capitalism.

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