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Bernanke Prepares For Congressional Grilling
As Bernanke heads to Congress to defend the Fed's Independce, he releases this WSJ Op-Ed:
The depth and breadth of the global recession has required a highly
accommodative monetary policy. Since the onset of the financial crisis
nearly two years ago, the Federal Reserve has reduced the interest-rate
target for overnight lending between banks (the federal-funds rate)
nearly to zero. We have also greatly expanded the size of the Fed’s
balance sheet through purchases of longer-term securities and through
targeted lending programs aimed at restarting the flow of credit.
These actions have softened the economic impact of the financial
crisis. They have also improved the functioning of key credit markets,
including the markets for interbank lending, commercial paper, consumer
and small-business credit, and residential mortgages.
My colleagues and I believe that accommodative policies will likely
be warranted for an extended period. At some point, however, as
economic recovery takes hold, we will need to tighten monetary policy
to prevent the emergence of an inflation problem down the road. The
Federal Open Market Committee, which is responsible for setting U.S.
monetary policy, has devoted considerable time to issues relating to an
exit strategy. We are confident we have the necessary tools to withdraw
policy accommodation, when that becomes appropriate, in a smooth and
timely manner.
The exit strategy is closely tied to the management of the Federal
Reserve balance sheet. When the Fed makes loans or acquires securities,
the funds enter the banking system and ultimately appear in the reserve
accounts held at the Fed by banks and other depository institutions.
These reserve balances now total about $800 billion, much more than
normal. And given the current economic conditions, banks have generally
held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to
lend out their reserves. That would produce faster growth in broad
money (for example, M1 or M2) and easier credit conditions, which could
ultimately result in inflationary pressures—unless we adopt
countervailing policy measures. When the time comes to tighten monetary
policy, we must either eliminate these large reserve balances or, if
they remain, neutralize any potential undesired effects on the economy.
To some extent, reserves held by banks at the Fed will contract
automatically, as improving financial conditions lead to reduced use of
our short-term lending facilities, and ultimately to their wind down.
Indeed, short-term credit extended by the Fed to financial institutions
and other market participants has already fallen to less than $600
billion as of mid-July from about $1.5 trillion at the end of 2008. In
addition, reserves could be reduced by about $100 billion to $200
billion each year over the next few years as securities held by the Fed
mature or are prepaid. However, reserves likely would remain quite high
for several years unless additional policies are undertaken.
Even if our balance sheet stays large for a while, we have two broad
means of tightening monetary policy at the appropriate time: paying
interest on reserve balances and taking various actions that reduce the
stock of reserves. We could use either of these approaches alone;
however, to ensure effectiveness, we likely would use both in
combination.
Congress granted us authority last fall to pay interest on balances
held by banks at the Fed. Currently, we pay banks an interest rate of
0.25%. When the time comes to tighten policy, we can raise the rate
paid on reserve balances as we increase our target for the federal
funds rate.
Banks generally will not lend funds in the money market at an
interest rate lower than the rate they can earn risk-free at the
Federal Reserve. Moreover, they should compete to borrow any funds that
are offered in private markets at rates below the interest rate on
reserve balances because, by so doing, they can earn a spread without
risk.
Thus the interest rate that the Fed pays should tend to put a floor
under short-term market rates, including our policy target, the
federal-funds rate. Raising the rate paid on reserve balances also
discourages excessive growth in money or credit, because banks will not
want to lend out their reserves at rates below what they can earn at
the Fed.
Considerable international experience suggests that paying interest
on reserves effectively manages short-term market rates. For example,
the European Central Bank allows banks to place excess reserves in an
interest-paying deposit facility. Even as that central bank’s
liquidity-operations substantially increased its balance sheet, the
overnight interbank rate remained at or above its deposit rate. In
addition, the Bank of Japan and the Bank of Canada have also used their
ability to pay interest on reserves to maintain a floor under
short-term market rates.
Despite this logic and experience, the federal-funds rate has dipped
somewhat below the rate paid by the Fed, especially in October and
November 2008, when the Fed first began to pay interest on reserves.
This pattern partly reflected temporary factors, such as banks’
inexperience with the new system.
However, this pattern appears also to have resulted from the fact
that some large lenders in the federal-funds market, notably
government-sponsored enterprises such as Fannie Mae and Freddie Mac,
are ineligible to receive interest on balances held at the Fed, and
thus they have an incentive to lend in that market at rates below what
the Fed pays banks.
Under more normal financial conditions, the willingness of banks to
engage in the simple arbitrage noted above will tend to limit the gap
between the federal-funds rate and the rate the Fed pays on reserves.
If that gap persists, the problem can be addressed by supplementing
payment of interest on reserves with steps to reduce reserves and drain
excess liquidity from markets—the second means of tightening monetary
policy. Here are four options for doing this.
First, the Federal Reserve could drain bank reserves and reduce the
excess liquidity at other institutions by arranging large-scale reverse
repurchase agreements with financial market participants, including
banks, government-sponsored enterprises and other institutions. Reverse
repurchase agreements involve the sale by the Fed of securities from
its portfolio with an agreement to buy the securities back at a
slightly higher price at a later date.
Second, the Treasury could sell bills and deposit the proceeds with
the Federal Reserve. When purchasers pay for the securities, the
Treasury’s account at the Federal Reserve rises and reserve balances
decline.
The Treasury has been conducting such operations since last fall
under its Supplementary Financing Program. Although the Treasury’s
operations are helpful, to protect the independence of monetary policy,
we must take care to ensure that we can achieve our policy objectives
without reliance on the Treasury.
Third, using the authority Congress gave us to pay interest on
banks’ balances at the Fed, we can offer term deposits to
banks—analogous to the certificates of deposit that banks offer their
customers. Bank funds held in term deposits at the Fed would not be
available for the federal funds market.
Fourth, if necessary, the Fed could reduce reserves by selling a
portion of its holdings of long-term securities into the open market.
Each of these policies would help to raise short-term interest rates
and limit the growth of broad measures of money and credit, thereby
tightening monetary policy.
Overall, the Federal Reserve has many effective tools to tighten
monetary policy when the economic outlook requires us to do so. As my
colleagues and I have stated, however, economic conditions are not
likely to warrant tighter monetary policy for an extended period. We
will calibrate the timing and pace of any future tightening, together
with the mix of tools to best foster our dual objectives of maximum
employment and price stability.
—Mr. Bernanke is chairman of the Federal Reserve.
Via the Wall Street Journal
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Wasn't ole BB saying the sub-prime debacle was contained and we need not worry??? When this guy's lips are moving he's lying.
Hey where's the red neck ranter??? I need to see him beat somethin' up.
These Congessional hearings are a joke. Instead of grandstanding for their respective voters back home, they should all turn over their five minutes of air time to a hard ass prosecutor for a full and complete grilling of the witness.
What BB says they'll do and what they're actually able to do are two very different things. Fed independence my arse!
I agree, during these "grillings" they need to take away time from those who simply pontificate without knowing anything about what they're talking about and give it to people like Grayson who actually go after people. A prosecutor would be good too!
I suggest everyone look at the Comerica (CMA) earnings release to see just how ugly life is for a regional bank right now.
Be kind to Bernanke, can you imagine Summers in that role particularly with the enhanced powers the Fed will soon be getting -
Bloomberg just now - the dipsh**t hostess betty looo asks the guest about Ron Paul - "Can you believe he wants to actually audit the fed???" "Well betty looo you might be surprised, there are actually a few members who are supporting this but I don't think it will pass."
Bernanke's is out, but that doesn't mean Summers is in. Negotiation 101 is to offer the extreme and work in from there. Bernanke has until January to wind down his Fed programs.
CIT can't make Aug. payment? Don't tell me it's halted again, this shit's too funny.
Why bother reading this shit. They saved the banks in order to save the people? My fucking ass. Fucking cronyism (sp?) is what they did and your president let 'em do it. Excuse me, should have been save the people/country first. I'd hate to have my wife and kids stuck on a sinking boat with this basterd and his GS cronies. They's get the first raft and then puncture holes in the rest. Survival of the fittest, I think not. Survival of the planet's largest fucking assholes is more like it.
CAPTCHA is screwed up.
By this time next year Obama will be adding Airlines to his portfolio.
... To reduce the threat of inflation and banks lending out their reserves (at a conservative 10:1), we will begin paying higher interest on those reserves.
So by this simple explanation: the underlying assumption is that the Fed must pay interest on reserves greater than the interest banks could safely acquire in the market. If short-term interest rates increase, the Fed will have to increase that reserve interest to prevent banks from flooding the market with money. That's the plan.
They're never going to sell assets back into the market to bring draw down on reserves. And who would want to own their assets, unless they're going to sell their gold? This whole scheme is incredibly risky.
BB's second point about Treasuries is incoherent. How would that work again?
What happens if there is a bank run? How do raising reserve rates help that situation?
Bank run ? It is possible only with finite money. We now have helicopter ben + Tiny Tim + Government Sachs expanding the money supply to unheard of levels. Bailouts exceeding 2 times GDP. WOW ! Debt nearing 100% of GDP. Dollar is an expensive charmin ultra with a security strip.
There can be a bank run, and there probably will at some point, but you are right, they can "cover" a bank run by printing money.
What happens after that is a "dollar run".
To prevent an increase in the money supply he is going to print more money to give banks for their reserves? Is this man insane?
Good point about pondering the consequences of short term interest rates rising. Unsustainable is certainly the word that best describes every aspect of our economy, and the thread that ties it all together is low short term rates.
Just following this to its logical conclusion: short rates increase and the Fed has to increase the interest it pays on reserves. It can only do this with printed dollars, right? Or if somehow they pay those reserves with proceeds from bonds of some kind (fed bonds heaven forbid or treasuries) then their cost of capital will be ever increasing. Either way there is a meaningful debasement of the currency.
So unless there is some complicated academic principle I'm missing here, even this novel approach of paying interest on reserves indirectly but powerfully contributes to rising prices that most decidedly would not help the struggling American.
Isn't this the Fed's whole point?
To inflate M1/M2/M3 ( i really don't know which) in order to preserve the value of the TARP/other loans, i.e. monetary stimulus to combat the deal-killing deflation we currently face?
Preventing dollar flows (at such a time the Fed deems necessary) from subverting Fed policy?
This seems to be the whole point of his statement...
First time I needed a calculator to handle the captcha...
It's a little funny that the group who decides what the value of our currency will be is called the "Federal _OPEN MARKET_ Committee." Well, I thought so.
This is just cannibals engaging in cannibalism. With the next election cycle just around the bend, Congress knows its gotta do something.
Ron Paul telling it like it is.
anyone have a link where the hearings can be watched?
Ron Paul Grills Bernanke:
http://www.lewrockwell.com/blog/lewrw/archives/030527.html
Bernake is a big fat liar.
One question just asked was 'would there be a possibility of the fed raising rates even with unemployment high' and he answered emphatically, 'oh yes, absolutely if the fed loses independence and thus credibility.' how is that for f@#$%^& blackmail!
I can't wait til all the shysters that are kissing his ring today and giving him the audience to brainwash and put out more lies, will be voted out of office.
I have to believe in an independent Central Bank, but also a transparent one, if such a thing is not mutually exclusive.
It is extremely important that the monetary policy of an economy be independent from political tentacles. The neccessity of independence, however, need not be exclusive of transparency.
(flag me if this doesn't make sense)
Sadly, the issue really isn't the independence of the Central Bank--that is a ridiculous red herring. The GOLIATH size of our country's Central Bank, the Federal Reserve, a monopoly and the power that this privately held corporation has on all policy and politicians. So, the real question is, with a monopoly this size and it's influence stretching to many affiliated organizations, is there any way to have any independent policy makers? The TENTACLES you refer to are the tentacles of the privately held federal reserve corp, and all it's affiliates.
Bernanke: "Many foreign banks are short dollars."
Best quote so far.
Bernanke is going down in flames, under questioning from Alan Grayson.
I think his Alzheimers may be about to kick in...
surprise surprise
It was hardly a grilling. More like a housewarning. What a bunch od do-nothings. BUt does this come as a surprise? nope.
"Bugsy Ben" is on the hot seat, and his a@# is on fire.
I can just picture him bitching our the newly hired x-enron lobbyist after today!
"Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate. Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed." (from BB's telestrator above)
Doesn't this imply that the FED will incrementally subsidize TARP and other crappy assetts until the banks earn their way out?
Please expound/disbunk as you see fit...