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The Fed acting as intermediary should work

Tuesday, October 7, 2008 | Helmut Is this Spam?

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Banks are wary of lending in the inter-bank market because the risk of a black hole is considerable. The current lack of transparency increases that risk.

To prevent the financial system from choking up, the Fed will begin paying interest on balances held at reserve banks, effective Thursday, October 9. Banks will be paid interest at two separate rates: 0.1 percent below the fed funds target rate on balances held to meet their reserve requirements; and a lower rate of 0.75 percent below the target rate for balances in excess of requirements.

By lending to the Fed, the risk of default is reduced. This might stop the hording of cash that is happening at the moment.

Any thoughts on this?



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