The notion of counter-party risk is understood by a tiny fraction of the folks who participate in finance.
The Federal Reserve didn't approve them to do that, because they were worried that it could "destabilize the financial system."
> The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet...
> Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans...
> Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks
https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
The deposit rate that customers expect is higher than the rate they would get for storing liquidity with the fed so their spread is already negative. That means there already isn't anything for them to "take a few basis points for themselves" out of.
The Fed pays 10bps IOER or IORR rates https://www.federalreserve.gov/monetarypolicy/reqresbalances...
CDs are paying about 45bps eg https://www.salliemae.com/banking/certificates-of-deposit/?d...
So on a gross basis this plan already loses them 35bps before any costs they have themselves. If they actually planned to do this and the fed didn't approve the plan, it's because it's not economically viable not because it somehow posed a threat to the system.
If the money just sits there in a bank account and rots for all eternity you get unemployment and deflation.
The solution to this problem has been to loan out money so that someone else invests the money on your behalf. Inflation exists as an incentive to invest your money and since future incomes are greater (thanks to inflation) it is not very difficult for the borrower to pay the loan back plus some.
Investing doesn't make sense if you have deflation. You can just sit on the money and get rich by on the backs of others. A growing unemployment rate is unavoidable. To maintain stability you would somehow have to get rid of all the useless people or make them work for goods instead of money.
Also, what do you mean "cash"? Printed bills? Deposits in commercial banks' checking accounts? Would savings accounts count too (they can be frozen for some amount of days)? Deposits in Fed accounts?
And it's not going to get any better.
What sad times we live in.
