Guest Post: The Fed Is Saying One Thing But Doing Something Very Different

Washington’s Blog

Ben Bernanke has said that the Fed is trying to promote inflation, increase lending, reduce unemployment, and stimulate the economy.

However, the Fed has arguably – to some extent – been working against all of these goals.

For example, as I reported in March, the Fed has been paying the big banks high enough interest on the funds which they deposit at the Fed to discourage banks from making loans. Indeed, the Fed has explicitly stated that – in order to prevent inflation – it wants to ensure that the banks don’t loan out money into the economy, but instead deposit it at the Fed:

Why is M1 crashing? [the M1 money multiplier basically measures how much the money supply increases for each $1 increase in the monetary base, and it gives an indication of the “velocity” of money, i.e. how quickly money is circulating through the system]

Because the banks continue to build up their excess reserves, instead of lending out money:

(Click for full image)

These excess reserves, of course, are deposited at the Fed:

(Click for full image)

Why are banks building up their excess reserves?

As the Fed notes:

The Federal Reserve Banks pay interest on required reserve balances–balances held at Reserve Banks to satisfy reserve requirements–and on excess balances–balances held in excess of required reserve balances and contractual clearing balances.

The New York Fed itself said in a July 2009 staff report that the excess reserves are almost entirely due to Fed policy:

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1.1 Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.

[Figure 1 is here]

Why are banks holding so many excess reserves? What do the data in Figure 1 tell us about current economic conditions and about bank lending behavior? Some observers claim that the large increase in excess reserves implies that many of the policies introduced by the Federal Reserve in response to the financial crisis have been ineffective. Rather than promoting the flow of credit to firms and households, it is argued, the data shown in Figure 1 indicate that the money lent to banks and other intermediaries by the Federal Reserve since September 2008 is simply sitting idle in banks’ reserve accounts. Edlin and Jaffee (2009), for example, identify the high level of excess reserves as either the “problem” behind the continuing credit crunch or “if not the problem, one heckuva symptom” (p.2). Commentators have asked why banks are choosing to hold so many reserves instead of lending them out, and some claim that inducing banks to lend their excess reserves is crucial for resolving the credit crisis.

This view has lead to proposals aimed at discouraging banks from holding excess reserves, such as placing a tax on excess reserves (Sumner, 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta, 2009). Mankiw (2009) discusses historical concerns about people hoarding money during times of financial stress and mentions proposals that were made to tax money holdings in order to encourage lending. He relates these historical episodes to the current situation by noting that “[w]ith banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”

[In fact, however,] the total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions.

The liquidity facilities introduced by the Federal Reserve in response to the crisis have created a large quantity of reserves. While changes in bank lending behavior may lead to small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves depicted in Figure 1 reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.

This conclusion may seem strange, at first glance, to readers familiar with textbook presentations of the money multiplier.

Why Is The Fed Locking Up Excess Reserves?

Why is the Fed locking up excess reserves?
As Fed Vice Chairman Donald Kohn said in a speech on April 18, 2009:

We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level.

Kohn said in a speech on January 3, 2010:

Because we can now pay interest on excess reserves, we can raise short-term interest rates even with an extraordinarily large volume of reserves in the banking system. Increasing the rate we offer to banks on deposits at the Federal Reserve will put upward pressure on all short-term interest rates.

As the Minneapolis Fed’s research consultant, V. V. Chari, wrote this month:

Currently, U.S. banks hold more than $1.1 trillion of reserves with the Federal Reserve System. To restrict excessive flow of reserves back into the economy, the Fed could increase the interest rate it pays on these reserves. Doing so would not only discourage banks from draining their reserve holdings, but would also exert upward pressure on broader market interest rates, since only rates higher than the overnight reserve rate would attract bank funds. In addition, paying interest on reserves is supported by economic theory as a means of reducing monetary inefficiencies, a concept referred to as “the Friedman rule.”

And the conclusion to the above-linked New York Fed article states:

We also discussed the importance of paying interest on reserves when the level of excess reserves is unusually high, as the Federal Reserve began to do in October 2008. Paying interest on reserves allows a central bank to maintain its influence over market interest rates independent of the quantity of reserves created by its liquidity facilities. The central bank can then let the size of these facilities be determined by conditions in the financial sector, while setting its target for the short-term interest rate based on macroeconomic conditions. This ability to separate monetary policy from the quantity of bank reserves is particularly important during the recovery from a financial crisis. If inflationary pressures begin to appear while the liquidity facilities are still in use, the central bank can use its interest-on-reserves policy to raise interest rates without necessarily removing all of the reserves created by the facilities.

As the NY Fed explains in more detail:

The central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.

Is the large quantity of reserves inflationary?

Some observers have expressed concern that the large quantity of reserves will lead to an increase in the inflation rate unless the Federal Reserve acts to remove them quickly once the economy begins to recover. Meltzer (2009), for example, worries that “the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.” Feldstein (2009) expresses similar concern that “when the economy begins to recover, these reserves can be converted into new loans and faster money growth” that will eventually prove inflationary. Under a traditional operational framework, where the central bank influences interest rates and the level of economic activity by changing the quantity of reserves, this concern would be well justified. Now that the Federal Reserve is paying interest on reserves, however, matters are different.

When the economy begins to recover, firms will have more profitable opportunities to invest, increasing their demands for bank loans. Consequently, banks will be presented with more lending opportunities that are profitable at the current level of interest rates. As banks lend more, new deposits will be created and the general level of economic activity will increase. Left unchecked, this growth in lending and economic activity may generate inflationary pressures. Under a traditional operating framework, where no interest is paid on reserves, the central bank must remove nearly all of the excess reserves from the banking system in order to arrest this process. Only by removing these excess reserves can the central bank limit banks’ willingness to lend to firms and households and cause short-term interest rates to rise.

Paying interest on reserves breaks this link between the quantity of reserves and banks’ willingness to lend. By raising the interest rate paid on reserves, the central bank can increase market interest rates and slow the growth of bank lending and economic activity without changing the quantity of reserves. In other words, paying interest on reserves allows the central bank to follow a path for short-term interest rates that is independent of the level of reserves. By choosing this path appropriately, the central bank can guard against inflationary pressures even if financial conditions lead it to maintain a high level of excess reserves.

This logic applies equally well when financial conditions are normal. A central bank may choose to maintain a high level of reserve balances in normal times because doing so offers some important advantages, particularly regarding the operation of the payments system. For example, when banks hold more reserves they tend to rely less on daylight credit from the central bank for payments purposes. They also tend to send payments earlier in the day, on average, which reduces the likelihood of a significant operational disruption or of gridlock in the payments system. To capture these benefits, a central bank may choose to create a high level of reserves as a part of its normal operations, again using the interest rate it pays on reserves to influence market interest rates.

Because financial conditions are not “normal”, it appears that preventing inflation seems to be the Fed’s overriding purpose in creating conditions ensuring high levels of excess reserves.

As Barron’s notes:

The multiplier’s decline “corresponds so exactly to the expansion of the Fed’s balance sheet,” says Constance Hunter, economist at hedge-fund firm Galtere. “It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can’t get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break.”


It’s not just the Fed. The NY Fed report notes:

Most central banks now pay interest on reserves.

Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin – argues that the Fed should slowly reduce the interest paid on reserves so as to stimulate the economy.

Last week, Auerbach wrote:

The stimulative effects of QE2 may be small and the costs may be large. One of these costs will be the payment of billions of dollars by taxpayers to the banks which currently hold over 50 percent of the monetary base, over $1 trillion in reserves. The interest payments are an incentive for banks to hold reserves rather than make business loans. If market interest rates rise, the Federal Reserve may be required to increase these interest payments to prevent the huge amount of bank reserves from flooding the economy. They should follow a different policy that benefits taxpayers and increases the incentive of banks to make business loans as I have previously suggested.

In September, Auerbach explained:

Immediately after the recession took a dramatic dive in September 2008, the Bernanke Fed implemented a policy that continues to further damage the incentive for banks to lend to businesses. On October 6, 2008 the Fed’s Board of Governors, chaired by Ben Bernanke, announced it would begin paying interest on the reserve balances of the nation’s banks, major lenders to medium and small size businesses.

You don’t need a Ph.D. economist to know that if you pay banks ¼ percent risk free interest to hold reserves that they can obtain at near zero interest, that would be an incentive to hold the reserves. The Fed pumped out huge amounts of money, with the base of the money supply more than doubling from August 2008 to August 2010, reaching $1.99 trillion. Guess who has over half of this money parked in cold storage? The banks have $1.085 trillion on reserves drawing interest, The Fed records show they were paid $2.18 billion interest on these reserves in 2009.

A number of people spoke about the disincentive for bank lending embedded in this policy including Chairman Bernanke.

Jim McTague, Washington Editor of Barrons, wrote in his February 2, 2009 column, “Where’s the Stimulus:” “Increasing the supply of credit might help pump up spending, too. University of Texas Professor Robert Auerbach an economist who studied under the late Milton Friedman, thinks he has the makings of a malpractice suit against Federal Reserve Chairman Ben Bernanke, as the Fed is holding a record number of reserves: $901 billion in January as opposed to $44 billion in September, when the Fed began paying interest on money commercial banks parked at the central bank. The banks prefer the sure rate of return they get by sitting in cash, not making loans. Fed, stop paying, he says.”

Shortly after this article appeared Fed Chairman Bernanke explained: “Because banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed, the interest rate the Fed pays on bank reserves should help to set a floor on the overnight interest rate.” (National Press Club, February 18, 2009) That was an admission that the Fed’s payment of interest on reserves did impair bank lending. Bernanke’s rationale for interest payments on reserves included preventing banks from lending at lower interest rates. That is illogical at a time when the Fed’s target interest rate for federal funds, the small market for interbank loans, was zero to a quarter of one percent. The banks would be unlikely to lend at negative rates of interest — paying people to take their money — even without the Fed paying the banks to hold reserves.

The next month William T. Gavin, an excellent economist at the St. Louis Federal Reserve, wrote in its March\April 2009 publication: “first, for the individual bank, the risk-free rate of ¼ percent must be the bank’s perception of its best investment opportunity.”The Bernanke Fed’s policy was a repetition of what the Fed did in 1936 and 1937 which helped drive the country into a second depression. Why does Chairman Bernanke, who has studied the Great Depression of the 1930’s and has surely read the classic 1963 account of improper actions by the Fed on bank reserves described by Milton Friedman and Anna Schwartz, repeat the mistaken policy?

As the economy pulled out of the deep recession in 1936 the Fed Board thought the U.S. banks had too much excess reserves, so they began to raise the reserves banks were required to hold. In three steps from August 1936 to May 1937 they doubled the reserve requirements for the large banks (13 percent to 26 percent of checkable deposits) and the country banks (7 percent to 14 percent of checkable deposits).

Friedman and Schwartz ask: “why seek to immobilize reserves at that time?” The economy went back into a deep depression. The Bernanke Fed’s 2008 to 2010 policy also immobilizes the banking system’s reserves reducing the banks’ incentive to make loans.

This is a bad policy even if the banks approve. The correct policy now should be to slowly reduce the interest paid on bank reserves to zero and simultaneously maintain a moderate increase in the money supply by slowly raising the short term market interest rate targeted by the Fed. Keeping the short term target interest rate at zero causes many problems, not the least of which is allowing banks to borrow at a zero interest rate and sit on their reserves so they can receive billions in interest from the taxpayers via the Fed. Business loans from banks are vital to the nations’ recovery.

The fact that the Fed is suppressing lending and inflation at a time when it says it is trying to encourage both shows that the Fed is saying one thing and doing something else entirely.

I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:

And see this.

Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen’s idea.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. GLH

    Mr. Washington: The reason the banks have so much reserves is simple. Mr. Bernanke is pumping reserves into the system because of his mistaken belief that excess reserves will cause the banks to make more loans. But, in reality banks cannot make loans if there are no borrowers and people can’t borrow because: they have no jobs, have no collateral, are trying to pay back the debt they already owe. RESERVES DON’T CREATE LOANS,LOANS CREATE RESERVES. It seems that even Mankiw is ignorant of this fact. And, of course politicians are ignorant of everything except who their corporate backers are. I suggest that you and others try reading Professor Bill Mitchel’s blog called billyblog. If you learn how the system works it will help when you criticize the Fed chief. He deserves your criticism, but it should be for the correct reason.

    1. ArmchairRevolutionary

      So GLH, you mean the the fact that the banks get paid .25% with no risk on money that costs them 0% has nothing to do with why they maintain these reserves? You think that Bernanke is just bewildered by the fact that banks are not lending out this money? Bernanke just can’t get the concept that without borrowers banks cannot lend? Seriously?

      My suggestions to you GLH is that you should ask the question: why would Bernanke if he does understand these things be following the policy that he is following? You might see that GW is more on target than you think.

  2. Paul Repstock

    GLH; I agree with your assesment of the problems of the banks in finding borrowers.
    I don’t understand all the implications of the stuff in the article above. But, I suspect that the Fed in the person of Mr. Bernanke is underestimating the banks or just flat screwing the people. Firstly, it would be irrational for the banks to assume the slightest risk of making loans to the market when they can instead take the free money from the Fed and earn a nice return on this money by keeping it as reserves at the Fed. This activity has a near zero cost. It is just a bookeeping entry. If the Fed would lend me money at 1% and allow me to put it into reserves at 2%, I would be earning a 100% profit for no risk. My only question would be, “Can I borrow more money please?” Secondly, The banks know very well that at some not too distant point there will need to be direct stimulus to reflate the economy. If this is not done, tax revenues will shrink and the economic pump runs dry. The government can create money. But, it requires revenues to justify this action. This is also necessary to promote demand growth which will lead to demand for loans. With the banks ability to multiply their holdings through fractional reserve lending they will not even need further government money to begin lending.

    This leads me to conclude that the only reason for the QE II/Reserve bonus scheme, is to recapitalize the banks, to paper over the gapping first and second mortgage exposures and give the semblance of stability for the purpose of maintaining the charade. In the process, the government has given up all control over the economy to the banks, which can decide whether or not they want the economy to rebuild, and what premium they will require to allow that.

    Given the financial industry’s predatory actions against debtors in general, there appears no reason to expect that they will settle for less than complete capitulation. The Fed’s actions would therefore appear to be contrary to the interests of the economy, with the sole benefit of slightly devaluing the sovereign debt.

    1. Nathanael

      You’re quite right that this entire thing is simply a scheme to give free money to the insolvent banks so as to “recapitalize” them.

      Trouble is, *Japan tried that*. It’s called the “Lost Decade”. Bernanke even wrote a paper about it.

      Bernanke has no excuse. His actions are dishonest and anti-American.

  3. Brick

    Right answer but I suspect the wrong mechanism. The velocity of money appears to have dropped as you would expect if banks are hoarding money. As one commenter has already pointed out the banks are not lending because the demand for sustainable lending as dropped. The question we should be asking is not why consumer lending demand is not picking up because this is obviously linked to wages and employment conditions but why business lending particularly for small business is not picking up. Business will point to lack of demand, but this is not the only story. QEII sends investors off in the search for yield and risk and they are not finding the right balance for investment in US business. Either the risk is too low and the yield not high enough or the risk is too high and the yield does not reflect it. QEII could be causing malinvestment and a decline in the velocity of money in the US as yield searchers look outside the country.

    1. nanute

      @charles: Thanks for the link. It sounds like a plausible analysis. It does make me wonder why QE1 had to be done with taxpayer dollars when the Fed could have used the same mechanism the first time around.

    2. Maju

      This explanation also sounds good, thanks Charles. I should go back to read Global Research more regularly, as I used to do. :/

      Here however I have two questions:

      1. Is this “creative accountancy” (it’s nothing else in fact, just that with public accounts) really going to work? I have the impression that in the mid-run “creative accountancy” does nothing but to create an unstoppable snowball of junk economics. It can at best be a short-term patch, never a real solution to real world economics.

      2. How does the Fed expect to reduce unemployment if the banks are not forced to get their so-easily-earned money circulating? Without money circulation (and as I say in my other comment, this is banks’ policy and not lack of serious demand for credit) the real economy cannot recover. I have no big problem in replacing markets by the state, but in such a hyper-capitalist context as the USA, the state can only do so much, as it is not really allowed to nationalize companies and put them to reactivate the economy under state direction or other such “socialist” activities.

    3. BillG

      Ellen’s position is that the federal government pays only 15% of the agreed interest on bonds held by the fed due to fed policy developed in the 60’s. As a result, when the fed buys treasuries from banks the banks are made whole (with newly printed cash) and the government’s net interest payments go down. That permits the federal government to do more borrowing by selling more treasuries to the banks. Presumably there are no limits to the feds balance sheet so they can continue to provide loans to the federal government, though QEX, for quite a long time.

      1. BillG

        Oh. And the government gets to keep on pushing that money into the economy and competing with you and I for resources and services. Isn’t that inflationary?

  4. Maju

    I read this earlier at Washington Blog and I hope I can ask the question more clearly here. First of all, it’s clear that Bernanke and assessors cannot be blind to what’s happening: that totally unprecedented mountain of idle reserves may have been a surprise for them in the first months maybe but certainly not for two whole years.

    So they are allowing this to happen with full consciousness, sabotaging this way the economic recovery. The explanations provided by the NYT and other media sound to wishful thinking. If any of them would be real, the Fed would have done this in the past and nope.

    The explanations offered by some commenters above, such as Bernanke being an ignorant idiot are simply not credible.

    Not being consumer demand for loans is also a blatant falsehood. I know cases of people with very credible jobs and salaries, even small company bosses, who are not getting but minimal credit. The reality is that the banks do not want to lend and that is because they have alternative profitable options such as freezing their money in State-subsidized safe spots, like the Fed.

    The best explanation offered so far is that of Paul Repstock: “to recapitalize the banks” (thanks Paul). So it would be a super-bailout worth trillions (or is it just worth 0.25% of that trillion-plus, i.e. the interest rate the Fed is offering, which is not too clear in the main article??) under a hidden scheme. Hidden till now, that is.

    But I still cannot believe this is a good enough explanation. There must be something else, such as maybe intently delaying recovery in order to push the working class against the ropes, not just in the USA but also in Europe (US bankers have been accused often to be behind the euro woes by means of speculative maneuvers, while China instead has been buying “endangered” bonds, surely with political-economical intent rather than as mere business).

    Does anyone have better ideas of why Bernanke and co. are running this scheme?

    1. Tao Jonesing

      “The explanations offered by some commenters above, such as Bernanke being an ignorant idiot are simply not credible.”

      Yeah, I’ve been getting tired of that one, too.

  5. nanute

    Mr.Washington: Perhaps you could expound on the effects of the M1 multiplier falling below 1 and the amount of money added to supply. And what happens to the supply when the M1 rises above 1? Making any sense?

  6. Vince

    If a bank has $100 million in required reserves and $100 million in excess reserves then both are earning 0.25%. Now they make a $10 million dollar loan and are required to have $1 million more in reserves. So now they have $101 million in required reserves and $99 million in excess reserves. Net result is the same; $200 million earning 0.25%.

    That was the Feds response to this particular critique. I have to admit , it makes sense to me. My initial reaction was the same as the author but now I think it is not really a big issue.

    1. Matt

      The banks have less than 70 billion in required reserve deposits at the FRB for over 7 Trillion in deposits. Fractional reserve banking in the US is approaching Zero Reserve banking.

  7. Matt

    The picture of FRB actions is a lot simpler. Interbank lending has crashed since 2008 because of the risk of imminent default of big US banks. The FRB used the excess deposits to buy 1 Trillion in MBS from the banks, China, and the likes of Pimco.
    Because in the US “debt is money” the banks print 90 percent of the money by increasing debt while the FRB has only printed a few hundred Billion in bank notes lately.

    QE is a canard in the US because the FRB only prints banknotes. The real problems are the US deficit and trade imbalance which have in part been funded by US banks increasing deposits almost 2 Trillion to fund the deficit.
    Those increased deposits have been used by the banks to buy Treasuries, lend to the FRB, and lend to 3rd parties.

    The FRB already had 800 Billion in Treasuries in late 2007.
    The QE where the FRB holds additional Treasuries is misdirection of attention from the issues at hand. The banks have already eased 3 Trillion in deficits and need to do more.

  8. Lee Adler

    Banks are holding a trillion in excess reserves because they get 2 tenths of a percent interest from the Fed?

    C’mon! Really!

    The initial premise, that M1 is crashing, wasn’t true in March and isn’t true now–Especially since the Fed kicked off Quantitative Leveling QL1.5 in August. Growth of the aggregates may accelerate with QE2 intro.

    There are two reasons the banks are holding such great reserves. to start with, the Fed created them when it bought all the MBS from the banks. The banks are holding them rather than lending because business stinks and businesses have no desire to borrow. The other is that the banks are scared shitless and are holding astronomical reserves to hide the fact that they are insolvent. The Fed is simply trying to paper this over for as long as possible under the pipedream that the banks can repair their balance sheets.

    This is a zombie system. Ben’s gambit will not work.
    Why Bernanke’s Gambit May Be Checkmated

    1. Jim Haygood

      Finally, one commenter who gets it! Even if the economy were booming, lending out a step-function trillion-dollar increase in reserves would take years, recalling that at least $10 trillion in net new loans would be needed to absorb those reserves (and actually far more, thanks to overnight sweeps).

      But under current conditions, with lending standards tightening at the same time that qualified borrowers are becoming scarcer, there is neither the incentive on the lender side nor the demand on the [qualified] borrower side to put these reserves to work as loans.

      Everything else, including the interest paid on reserves, is a negligible second-order effect. It’s like attributing the huge drop in auto sales in 2008 to car makers producing too many silver cars and not enough blue ones. They may well have misjudged the color palette, but obsessing over such peripheral trivia ignores the main causative factor, the recession.

  9. bluffraise

    The FED is doing its job – keeping the US economy out of a deflationary death spiral. Although its weapons are currently limited to the creation of money (technology has saved more than a few trees) It’s still the largest gorilla in the room and can therefore throw its weight (money) around at will. Creating money fits in nicely with the currency war scenario while greasing the wheels of government spending on a practical level. The dollar carry trade can’t be all bad as liquidity is crucial for functioning markets but it’s a wild card for sure. Interesting times indeed.

  10. flow5

    Mitchell hasn’t ever said anything new. But even he doesn’t understand the basics, that for the federal reserve system, “the whole is not the sum of its parts”.

  11. flow5

    And it’s an ipsedixitism to say that the payment of interest on excess reserve balances offsets the FED’s expansion of their liquidity funding facilities on the asset side of the balance sheet & that the member banks also are not constrained by reserve requirements.

  12. Rick Halsen

    The Bernank wants an immediate spike in consumer spending? Ben, I’ll tell ya how to it toot sweet.

    Lower frickin credit card rates across the board to 3% for purchases, and allow the interest on that to be tax deductible. While you’re at it, then remove the 5% cash advance fee hits up front and lend that out at no more than let’s say 5%. Make that tax-deductible too.

    There, Ben. I just gave you The Solution on how to boost spending and promote inflation of which you’ve been clamoring for all this time.

    And there’s no charge for my brilliant approach either regardless of my esteemed non-Princeton pedigree. You can claim credit for it all for yourself, or IOW just follow Larry Summers style of patting himself on the back for a job well done too.

    Gads. Sometimes my it’s as obvious as the big nose in front of your face brilliance approaches that of a dim light bulb.


  13. Rick Halsen

    Oh and btw, then backstop everyone’s charges and cash advances to let’s say $10,000 max per individual. And there you go. It’s off to the inflation and spending races.


  14. Rick Halsen

    Hell I’m on a brilliant roll here and I can’t stop.

    Even better yet, Ben, you can control the probable inflation spike of all this resurgent consumer spending by let’s say limiting said 3% and 5% interest provisions through putting a maximum amount that can be charged/advanced. Any charges/advances above $10,000 gets the full Monte 30% BS rate currently promoted. And there you go, America back on its feet in no time.

    Everybody’s happy and just in time for the holidays.


  15. Rick Halsen

    C’mon guys! Everybody here points out all the obvious problems with Ben’s approach but I hardly ever see any solutions being offered.

    I just gave one. Surely some of you likewise brilliant commenters can offer some insights on how to get this economy rolling again expeditiously instead of just bitching and moaning ad nauseum about all the mistakes being made.

    Anybody here got solution? Mr. Spicoli, how about you?


    1. Maju

      The Fed could give away/lend that money to consumers or business directly, bypassing the bloodsucking dinosaurs… erm the private banks. That would certainly boost the economy and would cause inflation, as Bernie claims he wants to do.

      1. Rick Halsen

        He’s not known as Helicopter Ben for nuthin.

        I’m just postulating one way for him to do it – and do it fast.

        Credit cards and the like equal money velocity equal inflation.

        Use it, Ben!


    2. 1whoknu

      I heard an idea thrown out ~ flame away or whatever…

      What if the Fed were to lend directly to the states at same interest they are charging banks? States would inject the funds into the local economy immediately through loans to small business, maintaining public sector jobs, infrastructure projects, grants, direct homeowner loan mods, unemployment, retraining etc. Payback could be same as long term bonds. I don’t think the interest cost would blow a hole in anyone’s budget and the (hopefully) resulting economic lift would create the revenue stream to pay off the bond in the future.

      Of course some of the Governors we have in office right now are idiots, but I doubt they would turn down cheap money if it got them re-elected. They all took stimulus funds, even though they claimed they wouldn’t.

  16. Billygoat

    I agree with Lee Adler.

    0.25 percent interest shouldn’t prevent banks from making good business loans. Maybe the banks are simply as incompetent at lending to business as they are to homebuyers and have no confidence anymore

    1. Rick Halsen

      Well since it’s horribly bankrupt as you say what about my solution above? What do we have to lose if it’s as bad as you say?

      What’s your solution, btw?


      1. Blurtman

        Please precisley define the problem to which you are requesting a solution. Until then, I offer the solution of executing investment bankers, which couldn’t hurt.

  17. mock turtle

    ok you asked for a solution…. here’s a solution

    the president immediately declares an energy national emergency under some presumed presidential authority during dire times…war powers act or what ever…they haven’t let law stop them thus far why start now

    then the president announces that as a matter of national security the usa must become energy independent in less than 10 years and as such he is instituting a commission composed of business , scientific and governmental leaders, who will form a public private not for profit corporation which will begin work on a 21st century energy apollo project (i refrain from calling it a n energy manhattan project for obvious potential pejorative reference to the bomb and war)

    the president announces to the american people that as nearly half of our current account deficit is “fueled” (pun intended, by the purchase of foreign oil, our energy independence will have a direct impact on the trade imbalance.

    the president directs treasury to issue “energy independence bonds”…like victory bonds, and as such, declares they may only be sold to american citizens, us corporations and the social security trust fund.

    then the country begins on a fast track to employ americans to build the nuclear power plants, solar, wind, tidal and geothermal, electrical generating facilities and associated infrastructures including electrical transmission systems and transportation systems necessary to move the country off of its dependence on fossil fuels

    such a program would move the country toward full employement, expand aggregate demand and the economy would grow its way out from under the present crushing public and private debt load

    i have written about this proposal before…. both here and at “big picture” and “calculated risk” and i sent emails more than a year ago to the president followed up more recently with a hard copy letter

    one can only hope…

    1. Paul Repstock

      Mock turtle; You are a recationary peice of dung! Why would you propose to put control of the solution into the people’s hands? The whole point of the exercise is to disenfranchise the electorate not to give them a sense of ownership!

      The debt and the dependancies are control mechanisms and here you would upset the apple cart which has been so carefully constructed.

      If that had been the government’s aim: they would long ago have taxed fuel so hard that alternatives would be competitive, and being competed for, would have become progressivly cheaper. Then they would have forced the reconciliation of debts by imposing heavy taxes on earned interest.

      1. Rick Halsen

        Now we’re making progress.

        I like some of the approaches. Perhaps it’ll have to be more multi-tiered as it were than a new age – new deal solution. Now my solution in combination with your’s may be workable, no?

        If not, why not?

        Solutions people!!!!

        Give us some!


    2. 1whoknu

      1st problem, Fox News screams bloody murder at

      “the president immediately declares an energy national emergency under some presumed presidential authority during dire times…war powers act or what ever…”

      Oh wait…

    3. mannfm11

      They already have. March 9, 1933. It has never been lifted and is the basis of most executive orders. Read 12USC95A, then read the language of 95B. Go to 50USC5b and read the same. Reference Senate document 93-549. Do you really think all this crap is Constitutional? Not a damn bit of it.

  18. dan

    “When the economy begins to recover”

    But what if it doesn’t? If we were successful today in creating 250,000 GOOD jobs a month, taking away the 125K that we need just for new entrants into the job pool every month,it would take 13 1/4 years to employ 20 million of the 30+ million unemployed or underemployed in our economy, getting us down to around 5% unemployment.

    And we have NEVER created 250,000 jobs a month, year in and year out, in the history of this country.

    So will that just sit and weigh on the dollar, with all the effects of that? What if the lack of industrial jobs and the over abundance of financial and home health care aide jobs continues to slowly degrade and undermine our economy?

  19. John Breek

    Fed member reserve banks are holding on and increase their reserves for one very strong reason: the only and final trump card the Fed holds, “an imminently planned overnight 35% plus USD devaluation”.

  20. windcatcher

    The privately owned Federal Reserve Central Banking system functions for the benefit of the multinational bank owners, not for the American public. Naturally, the Fed lies to imply that they function for the public economic good and well being. Ha. Ha.

    A Free (Free to whom?) Trade “jobless economic recovery” is laughable. Ha. Ha. Our government and economy is dominated by an Oligarchy of multinational corporations that are merely world banker assets. They are the ones who put America in the economic situation that we are in today.

    How can new industry grow in the USA with innovation of new technology when the emerging industry is whisk away to foreign countries for cheaper manufacturing and higher profits for the monopoly of multinational corporations?

    “Free Trade” instead of “Fair Trade” has been death to the American manufacturing economy. Remember, the American taxpayer developed computer and internet technology that would have sustained our American manufacturing economy for one hundred years by selling our technology product through out the world with Fair Trade?

    Free Trade hollowed out the American manufacturing economy base in favor of Globalization and world governance by the monopoly of multinational banks and corporations. The Fed has no stimulus plans to develop new technology and industry inside the United States of America; they want to maintain the manufacturing status quo and the advancement of world governance (power) and currency.

    Where are the unencumbered grants to stimulate inventors of new green energy technology that would move the world away from the use of fossil fuels? The Federal government has taxpayer developed electromagnetic advancements in technology that would spur new manufacturing but how would we keep the manufacturing and technology in the United States under Free (sic) Trade?

    I knew when the corrupt Congress passed new Currency, Bankruptcy and Patent laws that the citizens of the United States were destined to be Fascist controlled by debt servitude and that is what we have today.

    “Free (sic) Trade not Fair Trade” will be written on our United States of America epitaph unless there is a revolution today or tomorrow to change it. We need a list of names for prosecution, there is not that many of them, they are just high placed in government and central banking; these people need to be identified and replaced, and soon.

    1. Doug Terpstra

      Excellent comment. Fair trade, ending usury, nationalizing banks, etc. are demand-side “heresy” that must overthrow the self-serving, supply-side tyrants. Theirs is a false gospel and greed a false god.

  21. mannfm11

    I don’t believe this to be the case at all. I believe the market for Fed funds and the interbank lending that had been going on was destroyed by the Fed’s actions. The purpose of bank reserves is to pay other banks for outflows resulting from excessive lending. Thus, when bank A makes a loan, a good portion of this credit ends up in Bank B. Bank B basically lends the money back to bank A. Now, the Fed bought a pile of mortgages off bank A. The credit was debited and instead of a loan, cash went the direction of Bank B. Bank B, being more of a deposit bank than a lending bank, now had no customer for the money deposited in it, because the Fed destroyed the market.

    The real purpose of the loans was to allow the large banks to cover up their insolvency and remove the systematic doubt of their creditworthiness by cashing their assets. Anyone with a financial brain knows the huge losses the mortgage making banks are facing and wouldn’t in their wildest dreams lend them a dime at fed funds level rates. Bernanke is merely throwing another $600 billion out there, because the insolvencies that have been covered up can’t stay that way for long, especially since the bankers are looting faster than ever.

  22. Opinionated Bloviator

    Why the excess reserves?. Simple, All the TBTF banks are INSOLVENT and have been since Lehman collapsed in 2008. It’s called the Extend,Pretend,Bailout cicle jerk. Fortunately this is soon comming to an end. America’s slow motion economic collapse continues to quietly accelerate and when the TBTF banks put out their hand for another bailout late in 2011 then the entire house of cards will fall. The United States of Argentina – Change your getting.

  23. Rick Halsen

    Geez. More mental masturbation about ‘reserves’, the mechanisms thereto, why they’re there, etc., etc., ad nauseum. As if anything bloviating about the inner workings of what the Fed is doing, blah, blah, blah, is going to change one damn thing. It won’t. So what if you understand what 1% of the population already does too. We all get it by now. What the Fed is doing is smoke and mirrors.

    However while the ranch is burning down, in the meantime perhaps could you all take a little time from your erudite studies about current Fed machinations and do something constructive.

    Solutions? Ya got any?

    (Probably not. That takes real smarts.)


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