September 15, 2011
By Shah Gilani, Capital Waves Strategist, Money Morning
So far, U.S. Federal Reserve policy has done nothing to help the economy. To the contrary, it's actually been quite destructive.
There are two reasons why Federal Reserve policy hasn't worked:
There are two reasons why Federal Reserve policy hasn't worked:
First, the Fed's artificially low interest rates are handicapping the economy.
Second, Bernanke is telegraphing Fed policy decisions to the markets, giving speculators an edge over investors.
By keeping overnight lending rates between 0.00% and 0.25%, banks can borrow at next to nothing and buy risk-free U.S. T reasury securities that yield a lot more than their financing costs. The result is a "positive interest rate spread," which is the basis for banks' revenues and profits.
Additionally, banks can borrow more money by using their Treasury securities as collateral for overnight and "term" loans. Then they use the cash they borrow to buy more Treasuries. They do this over and over again to leverage themselves.
Essentially, banks have become giant hedge funds that finance their "trading books" with virtually free money, courtesy of the Fed's zero-interest-rate policy.
By keeping overnight lending rates between 0.00% and 0.25%, banks can borrow at next to nothing and buy risk-free U.S. T reasury securities that yield a lot more than their financing costs. The result is a "positive interest rate spread," which is the basis for banks' revenues and profits.
Additionally, banks can borrow more money by using their Treasury securities as collateral for overnight and "term" loans. Then they use the cash they borrow to buy more Treasuries. They do this over and over again to leverage themselves.
Essentially, banks have become giant hedge funds that finance their "trading books" with virtually free money, courtesy of the Fed's zero-interest-rate policy.
Furthermore, the Fed is exacerbating this problem by telegraphing its moves. This happened most recently when the Fed announced its intentions to keep interest rates low for the next two years. And it may happen again after next week's Federal Open Market Committee (FOMC) meeting.
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