Why Bank Equity Infusions May Not Work

If banks can borrow at the Fed Funds rate today at 1.00% and buy 30 year Treasuries at 4.25%, why would they ever lend money? Wouldn't it seem like too much trouble to actually underwrite credit, administer draws, read reports, etc. when all they have to do is buy the Treasuries and wake up in 30 years? That is what happened in Japan. Now while banks may be somewhat worried that the Federal Government may inflate, what does it matter to the banks because they are only transacting in dollars anyway. If the rate on loans to businesses and consumers is significantly above the long term bond yield, then maybe we can break this potential logjam. It will be interesting to see it all play out. It certainly would imply downward pressure on long T-bond yields. But my guess is that the government may specifically place limits on the amount of Treasuries a bank can hold so as to reduce/eliminate this arbitrage opportunity.

Right now, it seems like banks are paying massive rates to garner bank deposits from consumers. While growing these bank deposits are largely a desire to grow a stable funding base, it may also be that banks anticipate higher rates on loans and maybe even long Treasuries in the future. These factors currently seem to be at odds and it is not at all clear how it plays out.