Saturday, 10 September 2011

Institutions Don't Need Our Money

Forget the credit crisis, we're in the midst of a deposit crisis. 

In a series of excellent posts citing the NY Feds' work on shadow banking, FT Alphaville explains there are too few of these safe harbours for all the institutional cash that needs them. This is different from the mistaken investments made in toxic "AAA" sub-prime mortgage debt. This is about a shortage of the highest grade bank deposits and government bonds. In fact, the NY Fed reports "that 90 per cent of instutional cash pools are subject to management policies where safety [rather than yield] is the primary objective."

This can turn government bonds and other high grade debt into kind of Giffen Good, which people paradoxically consume more of as the price rises. This can continue to the point that the bond rate becomes negative (as has happened with Swiss debt) and some banks may even charge depositors for depositing cash on which it can no longer make a return.

In turn, this awakens the so-called "Triffin Dilemma", whereby a country that has a reserve currency (like the US) runs a large current account deficit to fuel consumption and provide the rest of the world with liquidity, yet suffers "from the declining value and credibility of any currency which runs a persistent trade deficit - eventually leading to a reluctance of creditors to hold the reserve currency."

All of which suggests that institutions don't need our cash - that perhaps we're better off allocating it directly to those who do need it, like people and SMEs, through 'horizontal credit intermediaries' that don't add unnecessary cost or contribute to the deposit crisis.

Image from CurtisMorley.


Thomas Barker said...

If you take inflation into account, banks have been charging you to hold your money for a while now.

And on a related note ...

" ... took on "too much risk" in recent years. I think it is equally accurate to suggest that the financial system took on too little risk.

Consider the risks that were not taken during the recent credit and "investment" boom. While hundreds of billions of dollars were poured into new suburbs, very little capital was devoted to the alternative energy sector that is suddenly ..."

Pragmatist said...

Cheers, Thomas!

The Interfluidity post is excellent.


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