Monday, November 8, 2010

The Federal Reserve's Grand Plan to Save the Economy by Destroying It.

The Federal Reserve recently announced its plan to purchase up to $900 billion in government debt as a means of stimulating the economy by driving up inflation, thereby increasing prices.  What is manifestly absurd about the plan is simple enough: energy prices will rise as a result, and no one needs higher energy prices in an economy that's already reeling.  Moreover, how does the 16.5% of the population that's already unemployed adjust to higher prices when they can't afford current prices?  How about the fact that many of the employed can't afford to make ends meet with their current incomes, and by driving up inflation, you're essentially increasing the prices they pay on staples like bread and milk?  


It's just a dumb idea.  What's more, it makes no sense in the context of getting banks to lend: banks have $981 billion in liquidity sitting in the twelve regional Federal Reserve banks.  They have the money to lend, but they aren't going to because it's more profitable to sit that money in the Federal Reserve and collect interest rates specially designed to motivate banks to sit on their money.  The Federal Reserve is paying banks interest rates on their deposits comparable with that of the return you'd earn on a short-term Treasury.


You can forget all the bullshit about banks not lending because of an uncertain regulatory environment or because they don't like Obama's stance on issues.  When a president bails out two industries to the tune of over $23.5 trillion loans and guarantees, he can't get any more business friendly.  When a president guarantees the health insurance industry over $350 billion as a byproduct of his healthcare reform plan, the Chamber of Commerce ought to be giving him a medal.  The banking industry's failure to lend is a direct legacy of the Federal Reserve's decision to pay out rates of interest which dis-incentivize any lending by one bank to another bank, or to the market at large.  Since the Federal Reserve began paying out interest on deposits, the excess reserves have gone from $2 billion to $981 billion.  This is not an accident. 


For our economy to begin to recover, we need the equivalent of a complete banking revolution whereby the Federal Reserve is stripped of its power, or its board of governors is removed in toto and replaced.  Or not.  I see no real reason for the Federal Reserve to be allowed to continue its charlatanism at this rate.  The real reason we aren't already in an economic recovery is their policy of paying interest rates which provide a direct incentive for banks to withhold their gargantuan liquidity reserves which would otherwise be loaned out to businesses in order to kickstart the economy.  It's time to recognize this and put a stop to it.  


You don't need to print up another $900 billion in money to kickstart the economy. You just need to stop paying interest on the $981 billion in deposits already on hand at the twelve regional Federal Reserve banks.   Oh, and by the does the Federal Reserve pay interest on those deposits?  I know, printing up money.  Asinine.  

Posted via email from momus1978's posterous