Gross to Bernanke: QE3 Will Cause Banks to Lend Less [wealthwire]
September 7, 2012 Leave a comment
easing little more than useless, but they’re planning a third round to go into effect sometime this fall. Jim Rogers believes QE3 is already underway, but the Fed’s staying quiet about their activity… for now.
The Federal Reserve’s FOMC is scheduled to conclude its meeting on September 13. The country is waiting on pins-and-needles to hear what the Fed’s decision will officially be…
Investors are riled up and scarcely anyone is excited about the coming QE3.
Now bond-guru and co-founder of asset management firm Pimco, and manager of the largest mutual fund in the world Bill Gross argues that the Fed’s latest QE efforts and bond buying programs will make borrowing so cheap that banks may not lend as readily anymore.
You see, banks get a pretty sizable cash stockpile when they lend out from depositors, to which they pay zero or little interest. Additionally, it’s common for most lenders to sell mortgages to Fannie Mae or Freddie Mac, which can borrow at even lower rates and profit from enforcing a fee.
Still, even interest-free savings accounts do cost banks money. Those banks still have payrolls to keep up with and other expenses like computer systems and ATM machines. As interest rates fall to historic lows, “the spread between those fixed costs, which don’t drop with interest rates, and what a bank can make lending becomes very thin.”
The Fed and other central banks have complicated the system of lending and borrowing to a catastrophic level. Bank profits could be the flaw in Bernanke’s latest plan. Of course there’s no guarantee that things will work out in this fashion indefinitely – this is just speculation.