Posted on 09/16/2009 8:32:06 PM PDT by sickoflibs
Given the recent, massive increase in commercial banks' excess reserves, many commentators are of the view that banks will sooner or later start employing these reserves in lending and thus cause an increase in the inflation rate.
Even former Federal Reserve Chairman Alan Greenspan is alarmed by the massive pumping by the Fed and other central banks. Speaking via satellite to a conference in Mumbai on September 8, 2009, Greenspan said that central banks need to defuse the large increases in their assets.
He stated that failing to shrink central-bank balance sheets could lead to very high price inflation: "I am not talking 3–5 per cent inflation; I am talking double-digit inflation in the US."
In August 2008, excess reserves stood at $1.9 billion. At the end of August 2009, excess reserves stood at almost $800 billion. By early September 2009, they had reached $823 billion.
Some other commentators hold that banks' decision to sit on their massive surplus cash rather than lend it out raises the likelihood that the Fed's loose monetary policy remains ineffective. They argue that if the policy had worked, banks would have used the pumped reserves to make loans by now.
But a view is emerging from academics, Fed economists, and Fed officials that the massive buildup in reserves points to a great success in Fed monetary policy.[1]
These proponents believe that the critics have overlooked an important change since October 2008 regarding the conduct of the Fed's monetary policy. This change, they claim, has not only saved the US monetary system from a severe calamity, but will also prevent the eruption of the inflationary menace. So what is it all about?
(Excerpt) Read more at mises.org ...
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Given the recent, massive increase in commercial banks’ excess reserves,
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I don’t buy the premise.
Classic bank lending to reserve ratios are about 12 to 1. what happpened over the last decade or so was that lending to reserve ratios went up to 30 or even 40 to 1. since last fall the fed has been forcing banks to increase their reserves to traditional lending to reserve ratio of 12 to 1.
while this is very deflationary— the process can in no wise be creating “excess reserves”
strange how prudence becomes “excess” in the minds of these idiots...
Inflation won’t be caused by the bank bailouts or bank reserves, because those can be quarantined, as the fed intends them to be. What will cause inflation is the massive obligations that the federal government has created for itself, from propping up mortgage markets, to social security, Medicare, unemployment insurance, etc. These are expenditures which will not be matched by taxes, or borrowing, but will be paid with printed money, and leaked out into the economy.
Great article!
I thought their assets swelled because of marking them to book value and not market.
That's a 20% rise since the Big Zero got appointed president. How long can he sustain a rate like that?
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