The current situation is not QE because the money does not circulate in the economy. I think the confusion is that this bank liquidity, allows “dormant” depositor money to be shifted to other banks, or other types of deposits, but also a percentage to be reallocated to inflate assets prices, like Gold , BTC, equities, at least temporarily. So, traders are seeing that as being similar to QE, which frankly is what traders are trying to figure out here. Similar to the short term market pump after Lehman collapse. Would you agree with that?
Perhaps it may be giving the perception of liquidity. But, the market’s liquidity is still very poor right now. I think some of the funds will be shifted around, yes. For example, someone taking the cash out may put it in money market funds or such. But these are basic deposits so I doubt they make their way to investments at a large scale. But, I agree that may be the thought process and therefore, people are seeing this as bullish.
I read your post carefully. I've been curious about this topic lately, so I visited this site for the first time. Even in Korea where I live, this topic is a hot issue these days. If it's not too much trouble, I have a question that I was curious about while reading your post.
If the discount window and BTFP loans are evaluated at market value, can't they generate deposit liquidity?
Thank you for reading and the thoughtful question. Let me try to explain this.
Firstly, if these bonds were maturing today, the bank would get 100% of the face value. The bank invested in these bonds with that idea: that they will hold these to maturity and depositors’ money is safe.
Now, especially after Silicon Valley Bank’s collapse, more and more depositors (account holders) want to withdraw their funds. If you notice the chart I posted of funds moving to money market funds.
So these deposits were already supposed to be cash in the accounts of the banks that can be returned to the depositor at any time. Instead the bank invested them in bonds where the value fell due to higher interest rates.
So if you see it that way the Fed is only temporarily giving these banks funds, that they would’ve gotten on maturity anyway to fulfill the deposit balance with cash at the moment. This is providing temporary liquidity which should have always been there held as current deposits. So there is no additional money created in the system.
A person may withdraw from one bank and put it in another bank. But this situation is temporary so in the meantime, the banks have to pay the Fed back by raising deposits in the market or rather attracting those deposits back. The other option is to cut lending so that they can keep the funds within the bank rather than lending it out.
Lending is part of what creates money supply in the system.
I have a question - why is the BTFP not considered QE but borrowing through the Discount Window is? It seems like the BTFP accepts less collateral (by giving loans against collateral at par value rather than market value). Even in the case of the discount window, the fed takes collateral. Could you help me understand?
Reference:
"Why is this not QE if the Fed’s balance sheet is increasing?
Because the Fed is taking in the bonds as collateral and that is what is inflating the Fed’s balance sheet. However, these are just being held as collateral against the loan given to the Banks and therefore, they will be returned as the Banks pay off the loan."
"The Discount Window “discounts” the collateral. Say the face value of treasuries is $100. The current value on the Bank’s book is $50. The Fed will lend the Bank against the $50. The BTFP will lend the Bank $100, i.e., the original face value or par value, despite the current value being $50."
I strongly disagree with your statement that is not a QE. You have to distinguish "market value" and "par value". As an example, take 10 year paper that trades at 0.9 cents per dollar. Its market value now is 0.9, BUT FED AND ONLY FED is giving you 1 USD thus creating this 0,1 USD. Please check balance sheet level, which you can find on FED st luis. How do you expain this? https://twitter.com/TaviCosta/status/1636472853498593286
I’m not sure if you’ve read the article before disagreeing. Because I have explained this in the article. The increase in the Fed’s BS is as a result of the bonds held as collateral. This temporary and will be returned. The par value lending that the Fed is doing is to create deposits liquidity not new money. QE implies new money that circulates in the economy and fuels asset bubbles. This is not the case here. Please read some of the responses to Tavi’s tweet. There are people replying there as well to clarify the situation. I don’t mind if you disagree but I have written an explanation to all of this.
Of course I read your article - same as with previous becasue all are good! :)
Please consider following situation: government issued 1000 USD nominal bond. Bank bought this bond for nominal value, government spent 1000 USD - we have 1000 USD in ciruculation from this activity. Then interest rates went up, now this bond is valued at 800 on the market. Then FED stepped in and is offering 1000 USD for this bonds - no matter if only as a loan. The clue here is that liquidity provided is from FED's balance sheet and inflates bond's value in the short term. Not single one participant from real economy is offering you 1000 USD for this bond held (1000 USD from issuance still in real economy), but only FED - thus creating artificial liqudity from its balance sheet growth. So in total you will have 2000 USD from this activity in the short term in the system.
It is true that this phenomenon could be only temporary and this liquidity will stay inside banking sector.
This is a great read! learned a lot from this. But curious when it is said that "burden doesn’t fall on taxpayers", what does this mean exactly? Because from what I understand, the Dept. of Treasury providing $25 billion as credit protection means that the Treasury guarantees a fail safe mechanism. But doesn't money from the Treasury come from taxes? So technically, taxpayers still bear the burden? Thanks in advance.
Excellent write up, thank you. I agree.
The current situation is not QE because the money does not circulate in the economy. I think the confusion is that this bank liquidity, allows “dormant” depositor money to be shifted to other banks, or other types of deposits, but also a percentage to be reallocated to inflate assets prices, like Gold , BTC, equities, at least temporarily. So, traders are seeing that as being similar to QE, which frankly is what traders are trying to figure out here. Similar to the short term market pump after Lehman collapse. Would you agree with that?
Perhaps it may be giving the perception of liquidity. But, the market’s liquidity is still very poor right now. I think some of the funds will be shifted around, yes. For example, someone taking the cash out may put it in money market funds or such. But these are basic deposits so I doubt they make their way to investments at a large scale. But, I agree that may be the thought process and therefore, people are seeing this as bullish.
I read your post carefully. I've been curious about this topic lately, so I visited this site for the first time. Even in Korea where I live, this topic is a hot issue these days. If it's not too much trouble, I have a question that I was curious about while reading your post.
If the discount window and BTFP loans are evaluated at market value, can't they generate deposit liquidity?
Thank you for reading and the thoughtful question. Let me try to explain this.
Firstly, if these bonds were maturing today, the bank would get 100% of the face value. The bank invested in these bonds with that idea: that they will hold these to maturity and depositors’ money is safe.
Now, especially after Silicon Valley Bank’s collapse, more and more depositors (account holders) want to withdraw their funds. If you notice the chart I posted of funds moving to money market funds.
So these deposits were already supposed to be cash in the accounts of the banks that can be returned to the depositor at any time. Instead the bank invested them in bonds where the value fell due to higher interest rates.
So if you see it that way the Fed is only temporarily giving these banks funds, that they would’ve gotten on maturity anyway to fulfill the deposit balance with cash at the moment. This is providing temporary liquidity which should have always been there held as current deposits. So there is no additional money created in the system.
A person may withdraw from one bank and put it in another bank. But this situation is temporary so in the meantime, the banks have to pay the Fed back by raising deposits in the market or rather attracting those deposits back. The other option is to cut lending so that they can keep the funds within the bank rather than lending it out.
Lending is part of what creates money supply in the system.
Excellent.
Thank you.
Very useful. Thank you.
Hey Ayesha, great article.
I have a question - why is the BTFP not considered QE but borrowing through the Discount Window is? It seems like the BTFP accepts less collateral (by giving loans against collateral at par value rather than market value). Even in the case of the discount window, the fed takes collateral. Could you help me understand?
Reference:
"Why is this not QE if the Fed’s balance sheet is increasing?
Because the Fed is taking in the bonds as collateral and that is what is inflating the Fed’s balance sheet. However, these are just being held as collateral against the loan given to the Banks and therefore, they will be returned as the Banks pay off the loan."
"The Discount Window “discounts” the collateral. Say the face value of treasuries is $100. The current value on the Bank’s book is $50. The Fed will lend the Bank against the $50. The BTFP will lend the Bank $100, i.e., the original face value or par value, despite the current value being $50."
Actually, neither is considered QE. Sorry is that was not clear.
Great write up, thank you for this! Could one conclude it is the end of QT?
Shouldn’t be. So far the Fed is still running off assets from the balance sheet. There has been no change in that program.
I strongly disagree with your statement that is not a QE. You have to distinguish "market value" and "par value". As an example, take 10 year paper that trades at 0.9 cents per dollar. Its market value now is 0.9, BUT FED AND ONLY FED is giving you 1 USD thus creating this 0,1 USD. Please check balance sheet level, which you can find on FED st luis. How do you expain this? https://twitter.com/TaviCosta/status/1636472853498593286
I’m not sure if you’ve read the article before disagreeing. Because I have explained this in the article. The increase in the Fed’s BS is as a result of the bonds held as collateral. This temporary and will be returned. The par value lending that the Fed is doing is to create deposits liquidity not new money. QE implies new money that circulates in the economy and fuels asset bubbles. This is not the case here. Please read some of the responses to Tavi’s tweet. There are people replying there as well to clarify the situation. I don’t mind if you disagree but I have written an explanation to all of this.
Of course I read your article - same as with previous becasue all are good! :)
Please consider following situation: government issued 1000 USD nominal bond. Bank bought this bond for nominal value, government spent 1000 USD - we have 1000 USD in ciruculation from this activity. Then interest rates went up, now this bond is valued at 800 on the market. Then FED stepped in and is offering 1000 USD for this bonds - no matter if only as a loan. The clue here is that liquidity provided is from FED's balance sheet and inflates bond's value in the short term. Not single one participant from real economy is offering you 1000 USD for this bond held (1000 USD from issuance still in real economy), but only FED - thus creating artificial liqudity from its balance sheet growth. So in total you will have 2000 USD from this activity in the short term in the system.
It is true that this phenomenon could be only temporary and this liquidity will stay inside banking sector.
This is a great read! learned a lot from this. But curious when it is said that "burden doesn’t fall on taxpayers", what does this mean exactly? Because from what I understand, the Dept. of Treasury providing $25 billion as credit protection means that the Treasury guarantees a fail safe mechanism. But doesn't money from the Treasury come from taxes? So technically, taxpayers still bear the burden? Thanks in advance.
How do you know that money hasn't been printed to cover these loans?