The lending interest in the Money Market hit 10%. This was not some anti-inflation movement in the 1980s. It was just last month, September 2019. It didn't last long and didn't get passed to consumers in their money market accounts. It did send reverberations throughout the banking world. Banks in the United States basically ran out of money. The Federal Reserve of New York pumped $125 Billion into the system to restore liquidity.
From the lack of headlines, you would think this is something which happens everyday. It wasn't. Banks don't usually run out of money. $125 billion is still a lot of money. It is the most the Feds have ever released in a quick,emergency fashion.
The suggestions for going forward from this event are more concerning. Historically, banks are only allowed to count money as cash reserves. That is probably why they are called "cash reserves." However, there is allegedly a movement afoot to allow banks to count bonds, specifically US Treasuries, as cash reserves. That will allow banks to lend even more money than currently. If people thought that the credit crisis of the late 2000s was bad, they haven't seen anything yet. If banks are allowed to lend more based on holdings of Treasury bonds and then run into a cash crunch, the logical step will be to cash those bonds. That puts the entire US deficit structure at risk. It could make Treasury bonds near worthless or require the Treasury to put the printing presses on overdrive to pay off the debt.
The United States government has never defaulted on Treasury bonds. If the banks start counting them as cash, that day may come.
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