Tuesday, January 5, 2010

What is the Fed up to Now?

Recently I read that the Financial Services Regulatory Relief Act of 2006 will give the Federal Reserve, for the first time, explicit authority to pay interest on reserve balances, beginning on October 1, 2011. [1] I wondered why this change was being introduced.

A clue came yesterday when I read that, at present, THE FED IS UNINTENDEDLY INCREASING BANK RESERVES by its lowering of long-term interest rates and directly supplying credit to borrowers who can’t get money elsewhere. The excess bank reserves created by this process are claimed not to be a spur on credit growth and inflation because “bank lending is constrained by customer demand and by capital [and] right now loan demand is moribund (in spite of a zero federal funds rate) and capital is in short supply.” The Fed wants to drain the ‘tsunami’ of excess reserves caused by its above intervention so that it can regain its capacity to set the Fed Funds rate.[2] It will want to raise the Fed Funds rate eventually and the author of this article hopes they won’t do this anytime in the near future.

However, according to Mark A Sadowski the Federal Reserve -for the first time in history– is already paying the banks interest on excess reserves [ER]. They can earn 0.25% “absolutely risk free on nearly $1 trillion.” This is more than the banks can earn on 1, 3 or 6 month T-Bills right now. “It is a highly deflationary policy that has sharply reduced the money multiplier and has probably rendered the current quantitative easing largely impotent…The IOER appears to be a tool to help prop up the financial sector while keeping long-run inflation expectations low…It is a tragic deflationary mistake.” [3]

It looks like banking has become an unviable business these days. With claims that there are insufficient borrowers at a time when real interest rates are negative [4]. The banks, in any case, don't generally want to lend because most of their customers are insolvent. The solution, therefore is to pay the banks money for doing absolutely nothing.

There is no broadly accepted modern definition of feudalism nor is there one for this more recent emergence of absolute financial nobility [5]. Therein lies our challenge. To find a more apt description for our new lords.

In the absence of any public control over events, self knowledge will at least give us a little power.

[1] Divorcing Money from Monetary Policy
Todd Keister, Antoine Martin, and James McAndrews

[2] The truth about all those excess reserves
Dec 30th 2009, 19:27 by The Economist | WASHINGTON

[3] Mark A. Sadowski commenting on Dec 31st 2009 3:50 GMT at:
The truth about all those excess reserves
Dec 30th 2009, 19:27 by The Economist | WASHINGTON

[4] Gold and Real Interest Rates. Mark Berger. 20th November 2009

[5] It could be easily argued that the financiers have always been part of the 'nobility' all along. This may be the first time in history, though, where all the pretense to banking has been abandoned by this class.


Suffern AC said...

Hmmm. A title. How bout Cash for Junkers?

Min said...

"Therein lies our challenge. To find a more apt description for our new lords."


Brenda Rosser said...

Suffern AC, the trouble is that the relationship between Government, big business (in general) and the finance industry was and is inseparable.

The Federal Government has implicitly given a long-term guarantee to the banks to bail them out for recycling petrodollars through unviable loans and other manoevres. But both Democratic and Republican administrations failed to inform the public of their future liabilities.

This is a story about collapsing institutions all round.

Min, "Sith"? Don't get your meaning.

Jack said...

"What can we say about this, I think this will need a lot of studies and conversation. Settling this kind of problem is not that easy."

What makes any of you think that "we" have any say in the matter? This has been the situation throughout human history. Occasionally the common people awaken, kill off the financial elites and soon there after find a new elite class has arisen to suppress their earning power.

The media is well under the control of the One Percenters. The congress and, it appears, the executive branch, is virtually bought and paid for via campaign financing and an elaborate lobbying industry which would be difficult to distinguish from the governing class. The revolving door between government and the financial industry and the lobbying industry makes a farce out of representation of the people in our government.

TheTrucker said...

All of this whining does no good. As we can see economics is simply trumped by politics at all times. The answer lies in politics or in outright violence. And I choose the politics.

I can see the headlines now "Middle Class Tax Cut reduces deficit by $700 billion dollars": In a startling move, the Democratic House of Representatives has introduced a bill to reduce and broaden the Medicare tax in such a way as to cut taxes on wages and to increase Medicare revenue by as much as 40%. The plan is to cut the current tax by 5% and to apply that flat rate Medicare tax to all income regardless of source. The Medicare roles will be increased by about 2% if the "earned income" test is done away with such that all LEGAL persons over 65 qualify for Medicare. But Medicare revenue is increased by about 40%.

Those numbers look right to me, but I'm not an economist. How many politicians can stand up to this in the Internet age???

Unlike Social Security, where benefits are based on paid in taxes, Medicare benefits are exactly the same for all Medicare recipients and always have been.

Min said...

"The Sith are portrayed in various Star Wars media as individuals who use the dark side to attain power at any cost."

-- Wikipedia

Suffern AC said...

Brenda, what I meant was if I am looking for a name by analogy for the new feudalism, why not choose Prussia's? If the state is not going to control the interests of the largest firms through governance, but instead allow them control over their vast estates, protected as "to big to fail", the Junkers seem like a good analogy. If a state is supposed to govern the interests between elite and between the elite and the masses, it seem as if certain corporations (not industry sectors, but key corporations) have made themselves exempt from having to subject themselves to governance.

Other interests still need to lobby and go through the process of balancing. Probably sooner rather than later the large banks, defense contractors, big agriculture won't have to. Were it not for the electorate turning down "drill baby drill" in the last election, global oil would probably join them.

Brenda Rosser said...

I'm not sure what you're getting at?

Thanks for the explanation.

There's a questionmark as to whether 'government' sees itself as such. I have my doubts. In America 'empire' looks like the dominant view and strategy. With no real view as to what sort of world there will be when everyone and everthing is subjugated completely. A matter of 'be careful what you ask for.'