The Fed's Anti-Inflation Exit Strategy Will Fail

WSJ ^ | January 27, 2010 | Allen Meltzer

[Diana in Wisconsin]

(Sooner or later the pressure to lend out excess bank reserves will be unstoppable...)

Federal Reserve Chairman Ben Bernanke has explained his exit strategy to prevent future inflation. The Fed recently began to pay interest to banks on the reserves they hold in their vaults. Using this new tool, it claims the ability to get banks to keep the money instead of lending it out, thus containing the money supply and inflation.

I don't believe this will work, and no one else should.

The exit strategy is incomplete. Proponents are guilty of practicing economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question.

The efforts to reduce inflation during the 1970s failed because they ended prematurely. And they ended prematurely when business, unions, Congress and the administration objected loudly to the rising unemployment accompanying higher interest rates. Today's high current and prospective unemployment rates pose a similar dilemma.

No economist doubts that the Fed can induce banks to hold some more reserves by paying interest. But how much?

[Cheap_Hessian]

Thanks for the interesting read!

[Diana in Wisconsin]

My pleasure. I’m off to start drinking and playing ‘0bama Bingo’ with my friends. :)

[eyeamok]

I am getting sick and tired as well as angry at all the niceties Everyone is affording these people, especially the WSJ.
OUR ENTIRE BANKING SYSTEM IS BASED ON FRAUD AND DECEIT. and everybody here knows it as well as the WSJ.
We need to go back to CONSTITUTIONALLY AUTHORIZED LEGAL TENDER. as long as we allow the Government to just print money in order to fund a loan, we are SCREWED. If we were following the Constitution, 90% of what the Government Does would not be POSSIBLE. They would actually have to live WITHIN THEIR MEANS just like You and I. So enough with all the CRAP. Stop Being afraid of Calling a Spade a Spade.They are LIARS<CHEATS<FRAUDS, plain and simple.

[steveab]

I don't people understand. There will be hyper inflation.
How else can “Elected Elites” pay off the debt they put us in?

[eyeamok]

“The efforts to reduce inflation during the 1970s failed”

Out and Out LIE, ONLY THE FEDERAL RESERVE has the POWER TO INFLATE THE CURRENCY, anyone else would be GUILTY OF COUNTERFEITING. That is their SOLE function, to Steal Our MONEY THRU INFLATION.

[Hawthorn]

Thanks for posting! Now that Milton Friedman is gone, I’d say Allen Meltzer is the world’s top monetary expert, and we ignore his advice at our peril.

[catnipman]

So, the Fed is PAYING banks NOT to lend money? Is this really true? And does this make any sense whatsoever to anyone here? If so, would you please explain it to me?

[stevie_d_64]

You know...I may sound like an amature, or offer an elementary, possibly an insane solution to this...

But what the hell, the insanity may not lie in the proposed solution, but in not doing something that might just shock the system enough to correct it...

Take away the printing presses, and have a freeze on printing more money for the next 5 year...Heck, why not ten years...

I bet you’d see some things change...

[Diana in Wisconsin]

The Fed is giving (our) money to the banks. Always remember that Government HAS NO MONEY. It is OUR money. Government produces NOTHING.

The banks can then loan it out to us schlubs at ZERO percent interest, OR they can turn around and buy Treasury Bonds from the Fed and the Fed (meaning You & Me!) pays them interest for buying the treasuries.

Banks are in the business of making money off of other people’s money. Now, what would you do? Make money and keep your bosses happy or not make money and get fired yourself?

THIS is why NONE of that money is flowing back into the economy in the form of capitol so small businesses can expand, create jobs and hire workers.

It IS insanity, isn’t it? It’s a total Ponzi scheme and it’s going to have dire consequences for us all.