Deposit Outflows Shine Light on Fed Program That Pays Money-Market Funds
wsj.com
wsj.com
Bank of America Advantage Savings†
Standard Pricing
Account Balance Rate % APY %
Less than $2,500 0.01% 0.01%
$2,500 and over 0.01% 0.01%But they've emailed to actively solicit me to move money from other banks into my eTrade savings.
Sounds like Bank of America (and Wells Fargo, etc.) are going to see cash moving out of their banks if they keep up the BS low-interest rates.
I've kept my current bank for various reasons but I'm much more aware of sweeping excess cash into my brokerage account.
[0] https://www.wealthfront.com/blog/why-is-wealthfront-cash-acc...
When we want to rein in inflation by paying people to save, I hear a thundering silence on the prospect of preferentially tackling the highest velocity money to obtain the most inflation control per dollar. Instead, we let banks get away with this (see parent post) and focus on paying rich people to save, when by the previous logic we ought to be doing the exact opposite.
Hmmmmmm. It almost feels like the driving force here isn't good stewardship but rather the self-interest of well-heeled economic forces.
Capped personal savings instruments would be the next step (see: I-Bonds).
If you, say, give people $100 in a year if they keep $1000 on deposit for the whole year, you'd be paying them to save. Sure, the poorer people are going to go out and spend that $100 when it comes in. And if there's no new incentive to keep the $1000 in savings, they may likely spend that too. And you'd need to limit it to one offer per natural person, etc, or people with access to lots of money would endeavor to make many $1000 accounts to get the 2x market rate interest I made up.
Maybe $1000 is too much to ask poor people for, but you could scale it down. If you do it right, you get both the policy goal of reducing velocity of money, because you're getting people to save rather than spend some money, and you also get the typical policy goal of distributing money to the poor because even if everyone can get this $100, it's more impactful to the poorer.
Or you could do a savings account linked to a lottery. Every $1 in savings up to $X gets you a ticket, if the bank earns about the federal funds rate on the deposit, give half to the individual depositors, and pool the other half to share among the lottery winners. Might be more 'exciting' for some people and encourage more savings that way.
This is a good idea. Could it be implemented under current regulation as a neobank?
https://www.theleague.coop/solutions/savers-sweepstakes
And here's a hip app based version that isn't a bank, but keeps your funds at a bank:
Not sure about the terms or pay ratios on either of these, but I didn't come up with the idea, and I kind of find it distasteful, but it would seem to hit the right mix of meeting policy goals and attracting the desired clientele, so I restated it.
Many poor folks carry credit card balances at 15+% interest. Paying those off would be much more efficient for them that those CDs. Unfortunately if they manage to pay their credit cards they soon start racking them up again.
It's not that most people are maxing out credit cards on fur coats and caviar, they're paying for necessary and often unplanned expenses. They rack up credit card charges because as soon as they pay off one expense they get hit with another. This is especially true for people stuck with 15% interest rates.
This is the opposite of the mainstream economic consensus. The point of stimulus is to stimulate. Velocity makes fiscal stimulus more efficient. Even the Fed, in the depths of crises, pleads for fiscal stimulus because of its power and breadth relative to monetary methods.
Pooling huge amounts of resources under the control of people who don't know how to manage it is pure waste, for no good reason. Giving them money on autopilot is even worse. And the whole idea of the federal reserve setting interest rates is bizarre, why is this market of all markets is the one where people want to try central planning? It is the perfect time to try a free market based approach. The US has been fighting the market on the price of money for decades and it is just putting them in a worse and worse spot.
Was the fall of the Soviet Union not enough to convince people that economic central planning is a mistake? What on earth will it take.
Edit: linking article (I found it in a spreadsheet passed around Twitter at the time)
[0] https://seekingalpha.com/article/4586797-list-of-banks-paper...
I don’t think this explanation is plausible.
10-30 year bonds bought during 2020-2022 did not offer 5% yields. They were below 2.5% (30yr) and below 2% (10yr). Hence the “Zero” in ZIRP.
Edit: I read the comment wrong but it’s still nonsensical the other way. ZIRP era bonds are already worth less. Banks can offer much closer to the ~5% safe rate than most are. Depositors are just largely insensitive to rates. The concept is called “deposit beta.”
These banks cannot afford to pay close to the Fed overnight rate.
Not too long ago someone tried to charter a bank that just took deposits and placed them in the Fed overnight, but the charter wasn't approved because the bank wouldn't perform the economic role expected of a bank, which is to make loans that stimulate small business.
https://www.investopedia.com/best-high-yield-savings-account...
https://www.doctorofcredit.com/high-interest-savings-to-get/
CIT savings connect is 4.5% with no BS, and it is not obscure.
https://www.cit.com/cit-bank/bank/savings/savings-connect-ac...
https://en.wikipedia.org/wiki/First_Citizens_BancShares
Either way, they are FDIC insured, so as long as the website experience to transfer money in and out is good, it should not be a problem.
https://www.forbes.com/sites/hanktucker/2023/03/27/svbs-new-...
Everything they do feels like duct tape.
The Fed and other central banks are fairly limited in what they can do. Adjusting interest rates up and down is like adjusting the water levels of the ocean. It has broad effects when what we probably need are lots of smaller, targeted actions, like tax reform.
That said, the central banks are a huge part of the problem because they also tend to act way too late. We should never have had 0% interest rates for as long as we did.
This is off-topic but it reminds me of a conversation with my plumber. I tend to fix things before they are broken. It seems that this would avoid catastrophe.
I have used same plumber for almost 10 years and apparently I had been calling him prematurely for many minor issues. He was, of course, happy to take care of those issues.
Finally, after 10 years or so, we are friends enough where he told me that I should wait a lot longer before calling him. Basically, if I am not panicking and begging him to come over within 24 hours then I should wait. Even with potential water damage, I would have saved money overall.
I don’t know how to calculate this but maybe it is cheaper sometimes to fix a catastrophe than to preventively fix something.
Second -- this talk about "MMFs" doesn't distinguish between different kinds of MMFs. Some hold Treasuries. Others hold other Treasury obligations, or government debts. Most hold stuff from banks. How can you generalize across all these?
Third -- how can an ordinary person get the repo rate? Are there funds full of only these agreements? That do nothing but roll them?
So I thought I'd point out of a recent HN discussion of a Financial Times article about that:
Banks provide us with insurance against our future liquidity risk, up to the $250k or so FDIC limit. MMF's do not have that same level of insurance.
The govt should not take the risk away from being an equity shareholder in a bank, that's wrong. I'm fine with them taking the risk away from customers of the bank, that's what FDIC is all about. Most customer money in banks is not FDIC insured anymore and that's a problem. Perhaps $250k/account is not enough insurance these days, but that's a different discussion
If banks can't survive, that's the equity shareholders problem, just like any other business.
What happened with CS, when their govt decided to bail out the equity shareholders makes me very unhappy. The equity shareholders knew the reputation of CS was trash, and continued for decades to ride it further down the drain. They deserved to get flushed for having decades to fix the problem and refusing.
https://www.wsj.com/articles/for-the-first-time-the-fed-is-l...
That article has errors, e.g. “the Federal Reserve was designed to make money for the government from its monopoly on issuing currency.” And that’s not what they’re saying.
When rates rise bond prices go down. The Fed made rates rise while holding lots of bonds. Their value went down. This was expected, unavoidable and inconsequential; it is what the authors are complaining about. The interest the Fed pays on reserves is a policy choice to keep those reserves at the Fed and out of the economy. The Fed could turn it off at any time.
Oh Look, they just raised rates again, even after SVB and friends crashed and burned. They are totally serious. If Banks still haven't gotten the memo, there is no hope for them, and the equity shareholders deserve to get wiped to zero, it won't affect US mere mortals, provided we keep under our FDIC limit.
Monetarily, nothing. Financial-stabilitywise, it’s an inconvenient sucking sound at the banks. If you’re a bank that went to the SVB School of Risk Management, that will be a problem.
That said, if you are holding more than your FDIC limit, one should probably fix that and re-allocate to stay within the FDIC limits(Generally $250k/person/bank).
Divorcing monetary policy from fiscal policy concerns is a major reason for having an independent central bank in the first place.
Acting frequently at odds with the rest of government — and avoiding the currency being compromised by concerns of the rest of government — is an important part of why we have a Federal Reserve.
Nope, but they want to pretend they are