TFF and inflation
The following is a post written by Michael Hutchens on LinkedIn about the Term Funding Facility (TFF) that the Reserve Bank of Australia (RBA) created. It is such an important observation and I urge you to read it further (https://www.linkedin.com/posts/michaelhutchens_mired-in-red-ink-it-turns-out-rba-money-activity-6978305927254867968-tzKM?utm_source=share&utm_medium=member_desktop)
"Anyone who's got me talking about the Reserve Bank of Australia over the past couple of years would have experienced me ranting about how ridiculous and unfair the Term Funding Facility (TFF) is, and John Kehoe's article in AFR today explains my anger.
As John notes, "The TFF has become a wealth transfer from the public balance sheet to commercial banks and homeowners, who benefited from the TFF underwriting fixed mortgage rates of less than 2 per cent and turbocharging house prices."
For those unaware of the TFF, the RBA basically gifted $188 billion to Australia's largest banks for 3 years at a rate of 0.1% during 2021, with the goal of supporting small businesses struggling during the pandemic. See: https://lnkd.in/g96qBEiX
The problem was, quite predictably, that small businesses didn't want to take on more debt during a pandemic. So the banks simply lent it to property investors, which was like throwing petrol on a fire which was already out of control.
The result was a massive free kick to property owners and property investors, at the expense of small business owners and anyone not sitting on existing property assets.
Amazingly, after increasing interest rates, John notes that "The RBA is now paying those same banks a higher floating – and rising – rate of 2.25 per cent on $452 billion of deposits parked at the RBA."
So basically the RBA is lending money at 0.1% and borrowing it at 2.25%, the exact opposite of what a functional bank should be doing. And taxpayers are flipping the bill while the banks are simply gifted billions of dollars.
Still wondering why Macquarie Group had a record year last year?
I don't think any fiscal policy decision in history has even come close to causing as much financial damage and unfairness as this one monetary policy decision by the RBA during the pandemic.
Unbelievable stuff on every level..."