To give banks an extra incentive to lend money instead of hoarding reserves, the central bank also lowered by 0.27 percentage points the interest rates that it pays banks for reserves deposited with it.
That does make sense, and it is exactly the opposite of policy in the US, where the Fed has raised the interest it pays on these reserves. But, of course, we need $400 billion in excess reserves to finance the bailout program, so that losses from bad investments can be transferred to the public. This is so much more important than getting new finance out into a frozen economy.
2 comments:
Can you give me a little more amplitude on this statement:
"But, of course, we need $400 billion in excess reserves to finance the bailout program, so that losses from bad investments can be transferred to the public. This is so much more important than getting new finance out into a frozen economy."
I am not real sure how this $400B is a bad debt transferred to the public unless it is a part of the $700B already spoken for by the Congress. Is that where you are?
Trucker,
We have a misunderstanding. I'm referring to the fact that excess reserves held by member banks at the Fed have swollen to $400B. The Fed has encouraged this by paying competitive interest rates on these reserves, which are then used as assets against the new liabilities acquired by the various bailout facilities.
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