Because banks have so much cash, the fed-funds market where they tap reserves experiences very little day-to-day trading. One New York Fed study shows daily trading volume in the market has contracted from an already-thin $200 billion before the financial crisis to nearly $50 billion. Moreover, traditional U.S. commercial banks are especially inactive. The most active players are government sponsored Federal Home Loan Banks and foreign banks.
“The fed funds market is but a shadow of what it was prior to the crisis,” Raymond Stone, an analyst at Stone McCarthy Research, said in a note to clients Wednesday. “It is no longer clear that the funds rate is the key determining factor of the behavior of short-term interest rates.”
Read the whole thing.
I feel like the fed acts like a successful doctor, learning lots of good stuff from the patient.
Arnold, long time reader, first time commenter. Just stumbled across this, thought you may enjoy. Its thesis: the combination of cognitive ignorance and Knightian uncertainty suggests that simple not complex techniques are better. The focus is on financial regulation.
http://www.bankofengland.co.uk/research/Documents/fspapers/fs_paper28.pdf
Also, I got a lot from reading your articles at The American on Moral Reasoning and Public Discourse and The Political Implications of Our Own Ignorance. I enjoyed your thesis, although I’ve just started reading David Moss’s When All Else Fails, which argues that perception problems (ie ignorance) are a major cause of government-provided insurance. Interested to further explore his arguments.