The Fed as Banking's Mattress
As the laughable concept of "deposit insurance" crumbles, you as the person with money have to figure out where it is safe to hide the stuff. Do you think it's strange that the banks find the Fed to be not only lender of first resort but the also the safest place to park their cash?
Don't we punish Swiss and offshore banks for doing this? Why is the Fed allowed to participate?
US Banks continue to hoard over $850 billion in cash at the Federal Reserve. They are required to hold some reserves there, but since the Fed started paying interest on deposits last year, that amount spiked and stayed at these elevated levels.
In fact that deposit amount has been rising recently. The reason has to do with the collapse in interbank deposit rates (LIBOR).
Out to 3 months the rate is almost the same as the overnight rate. It's an indication of the spectacular rise in confidence banks have in each other and their own ability to fund themselves short-term. If you are a bank treasurer however, and you have a choice of depositing your excess cash with other banks or with the Fed at almost the same rate, your preference would be to park the money with the Fed. And that is exactly what is taking place with the decline in LIBOR rates.
But if they pull the plug and let all of that money out, we're fucked. Well, they're fucked first because then the curtain comes tumbling down and everyone realizes how useless if not destructive they were all along. Yes, that's JDA's professional opinion, someone write it down. I'd love to bet some actual Fed rats actual money as to this outcome but A) their code of conduct doesn't let them gamble and B) the definition of actual money is still very much up for debate.
Anyway. That's where we're at. The mattress.