This page has been archived and commenting is disabled.

The Fed Is Paying Banks Not To Lend

Tyler Durden's picture


Submitted by Michael Snyder of The Economic Collapse blog,

Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us?  We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system.  Instead, most of it is sitting at the Fed slowly earning interest for the bankers. 

Back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed.  This caused an absolute explosion in the size of these reserves.  Back in 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.  Today, they have more than 1.8 trillion.  In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.  This is utter insanity, and it will have very serious consequences down the road.

Posted below is a chart that shows the explosive growth of these excess reserves in recent years...

Excess Reserves

This explains why all of the crazy money printing that the Fed has been doing has not caused tremendous inflation yet.  Most of the money has not even gotten into the economy.  The Fed has been paying banks not to lend it out.

But now that big pile of money is sitting out there, and at some point it is going to come pouring in to the U.S. economy.  When that happens, we could very well see an absolutely massive tsunami of inflation.

Posted below is a chart that shows the growth of the M2 money supply over the past several decades.  It has been fairly steady, but imagine what would happen if you took the hockey stick from the chart above and suddenly added it to the top of this one...

M2 Money Supply

The longer that the Federal Reserve continues to engage in quantitative easing and continues to pay banks not to lend that money out to the rest of us, the larger that inflationary time bomb is going to become.

In a recent article for the Huffington Post, Professor Robert Auerbach of the University of Texas explained the nightmarish situation that we are facing...

One reason that the excess reserves grew to an extraordinary level is that in October 2008, one month after the financial crisis when Lehman Brothers went bankrupt, the Bernanke Fed began paying interest on bank reserves. Although it has been 1/4 of 1 percent interest, this risk free rate was not low compared to the Fed's policy of keeping short-term market rates near zero. The interest banks received was and is an incentive to hold the excess reserves rather than lend to consumers and businesses in the risky environment of the major recession and the slow recovery.


The Bernanke Fed is now facing a $1.863 trillion time bomb, they helped to create, of excess reserves in the private banking system. If rates of interest on income earning assets (including bank loans to consumers and businesses) rise, the Fed will have to pay the banks more interest to hold their excess reserves.

If interest rates move up dramatically (and they are already starting to rise significantly), banks will have an incentive to take that money out of the Fed and start lending it out.  Professor Auerbach suggests that this could cause an "avalanche" of money pouring into the economy...

Eighty five billion a month will seem tiny compared to the avalanche of the $1.863 trillion excess reserves exploding rapidly into the economy. That would devalue the currency, cause more rapid inflation and worry investors about a coming collapse.

So the Fed has kind of painted itself into a corner.  If the Fed keeps printing money, they continue to grossly distort our financial system even more and the excess reserves time bomb just keeps getting bigger and bigger.

But even the suggestion that the Fed would begin to start "tapering" quantitative easing caused the financial markets to throw an epic temper tantrum in recent weeks.  Interest rates immediately began to skyrocket and Fed officials did their best to try to settle everyone down.

So where do we go from here?

Unfortunately, as Jim Rogers recently explained, this massive experiment in financial manipulation is ultimately going to end in disaster...

I’m afraid that in the end, we’re all going to suffer perhaps, worse than we ever have, with inflation, currency turmoil, and higher interest rates.

The Fed and other global central banks have created the largest bond bubble in the history of the planet.  If the Fed ends quantitative easing, the bond market is going to try to revert to normal.

That would be disastrous for the global financial system.  The following is what Jim Willie told Greg Hunter of

Everything is dependent on Fed support. They know if they take it away, they’re going to create a black hole. The Treasury bond is the greatest asset bubble in history. It’s at least twice as large as the housing and mortgage bubble, maybe three or four times as large.

But even if the central banks keep printing money, they may not be able to maintain control over the bond market.  In fact, there are already signs that they are starting to lose control.  The following is what billionaire Eric Sprott told King World News the other day...

It’s total orchestration. And it’s orchestration because they might have lost control of the bond market. I find it such a juxtaposition that central banks on a daily basis buy more bonds today than they ever purchased, and interest rates are going up, which is almost perverted. I mean how can that happen?


They’ve lost control of the market in my mind, and that’s why they are so desperately trying to get us all to forget the word ‘taper.’ In fact, we probably won’t even hear the word ‘taper’ anymore because it has such a sickening reaction to people in the bond market, and perhaps even people in the stock market. They will probably do away with the word. But the system is totally out of control. And then we’ve got this quadrillion dollars of derivatives. It just blows blows my mind to think about what could really be going on behind the scenes.

Sprott made a really good point about derivatives.

The quadrillion dollar derivatives bubble could bring down the global financial system at any time.

And remember, interest rate derivatives make up the biggest chunk of that.  Today, there are 441 trillion dollars of interest rate derivatives sitting out there.  If interest rates begin skyrocketing at some point, that is going to create some absolutely massive losses in the system.  We could potentially be talking about an event that would make the failure of Lehman Brothers look like a Sunday picnic.

We are moving into a time of great financial instability.  People are going to be absolutely shocked by what happens.

Our financial system is a house of cards built on a foundation of risk, leverage and debt.  When it all comes tumbling down, it should not be a surprise to any of us.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 07/02/2013 - 16:56 | 3715212 unununium
unununium's picture

What?  Next you're going to tell us Fed buys defunct mortgage payment streams from banks, at full par value, to the tune of $85 billion monthly.


Tue, 07/02/2013 - 17:00 | 3715233 BadDog
BadDog's picture

That can't be. That would be like saying debt is money.

Tue, 07/02/2013 - 17:01 | 3715237 Xibalba
Xibalba's picture

And then theres this:


The United States has announced additional unilateral sanctions against Iran, in an attempt to force it to abandon its nuclear energy program. Much of the effort is to starve Iran of gold bullion, which it has been using in its “oil for gold” program in order to circumvent being locked out of the international banking system. The new measures target anyone selling gold to any Iranian agent OR private citizen, with repercussions up to exclusion from trading on the U.S. precious metals markets.

Turkey has been Iran’s biggest trading partner in the “oil for gold” scheme, and economic sanctions by the U.S. against its NATO ally could bring about a touchy situation. The U.S. is also counting on Turkey for support for the anti-government forces in neighboring Syria.

It is possible that Turkey, which also borders Iran, may give up access to U.S. commodities markets and go elsewhere for the gold it needs to purchase direly needed Iranian natural gas. It is also possible Turkey could launder the gold through Dubai, which has become a major regional precious metals hub.

Tue, 07/02/2013 - 17:17 | 3715276 francis_sawyer
francis_sawyer's picture

"The Fed Is Paying Banks Not To Lend"


Cheesepopes are counterfeitting money out of thin air & handing it out to their TRIBE... [who then, besides stuffing it in their pockets, CONTROL asset prices with the VIG]...


Tue, 07/02/2013 - 17:19 | 3715291 Divided States ...
Divided States of America's picture

Yup the cheesepopes are basically funnelling the money from the cheesepope operated financial cartel known as the Federal Reserve to the cheesepope dominated Financial industry on Wall Street...basically its a one way wealth transfer of epic proportions going on right underneath our noses.

Tue, 07/02/2013 - 17:24 | 3715310 HowardBeale
HowardBeale's picture

" way wealth transfer of epic proportions..."

I recall it being about $83B/year--which represents most of, in not more than, the total profits of the circle of thieves. Anyone else recall whether that number is about right?

Tue, 07/02/2013 - 17:36 | 3715357 malikai
malikai's picture

Can somebody please tell me what a cheesepope is?

Tue, 07/02/2013 - 17:43 | 3715376 ZerOhead
ZerOhead's picture

There are some questions that are better off not being asked here at ZH... and that is one of them.

You may however feel free infer away at your own risk...

Tue, 07/02/2013 - 17:44 | 3715386 malikai
malikai's picture

Maybe I'd just rather not know..

Tue, 07/02/2013 - 17:49 | 3715404 dick cheneys ghost
dick cheneys ghost's picture

The 'cheesepopes' are the 'Bangladeshi's'

Tue, 07/02/2013 - 18:20 | 3715533 francis_sawyer
francis_sawyer's picture

'ELITE' Bangladeshi's...

Wed, 07/03/2013 - 00:33 | 3716740 prains
prains's picture

here i thought it was an orange chip

Wed, 07/03/2013 - 14:42 | 3719054 fallout11
fallout11's picture

Oi Vey!

Tue, 07/02/2013 - 17:52 | 3715419 kito
kito's picture

im a cheesepope...hes a cheesepope....wouldnt you like to be a cheesepope too??????????????

Tue, 07/02/2013 - 18:15 | 3715502 Colonel Klink
Colonel Klink's picture

In a word, no FUCKING way.  Ok that was 3.

Tue, 07/02/2013 - 18:23 | 3715543 francis_sawyer
francis_sawyer's picture



You're more like a "blintz"...

Tue, 07/02/2013 - 21:27 | 3716180 Umh
Umh's picture

They are talking about those of some sort of Jewish persuasion. They are a bunch of cowards who think that 2% of the worlds population control the rest of us. I'm not really sure if they are talking about ethnic Jews, religious Jews or some idealized Jewish superman, but they obviously fear them.

Tue, 07/02/2013 - 17:38 | 3715361 nope-1004
nope-1004's picture

US Economic foreign policy is a bunch of wet band-aids trying to stick to a speeding locomotive.  The foreign nations are sick of US exported inflation and are simply taking matters into their own hands by using another form of money:  Gold.  Is there anything wrong with that?  Apparently there is, which is why the US is finished soon and will be shunned by all other nations who will give the royal middle finger to Obama and all his cronies.  Since the US won't get with it and do the same, they are stuck in the old mold of threatening military force against someone who chooses to survive and pay bills in an alternative form.

Watch the big banks invest in foreign treasury bonds as this goes further, the ultimate form of insubordination to the Fed..

US economic foreign policy is in such shambles, it's almost comical to read stories like these.


Tue, 07/02/2013 - 17:28 | 3715323 fonzannoon
fonzannoon's picture

We are all going to make pretend that the italians have nothing to do with it?

Tue, 07/02/2013 - 17:31 | 3715337 kito
kito's picture

no fonz, its ALL my are your ilk are exonerated.......................

Tue, 07/02/2013 - 17:36 | 3715356 fonzannoon
fonzannoon's picture

Hey listen, what's up with your avatar? He folded like a cheap suit. I was bummed out to see that. Truly.

Tue, 07/02/2013 - 17:51 | 3715411 kito
kito's picture

rumor has it that correa was getting annoyed and growing weary with meddling by assange......that assange leaked (irony) the unsigned ecuadorian travel letter that wouldve allowed snowden safe passage to their embassy.......i believe that if snowden had actually made it to the ecuadorian embassy on his own, correa wouldve kept him................there is also a sizeable part of ecuador that does not want to risk their export status with the u.s.......................who knows.......but yeah, im a bit disappointed as well...........................

Tue, 07/02/2013 - 17:22 | 3715278 YuropeanImbecille
YuropeanImbecille's picture

What pisses me off about this, is that it is clearly stated in the protocols of zion (and no, i don't care who wrote them or whatever).


"Economic crises have been produced by us from the goyim by no other means than the withdrawal of money from circulation. Huge capitals have stagnated, withdrawing money from States, which were constantly obliged to apply to those same stagnant capitals for loans. These loans burdened the finances of the States with the payment of interest and made them the bond slaves of these capitals" (Protocol 20). 


The above was written in 1903

Tue, 07/02/2013 - 17:28 | 3715322 Jackagain
Jackagain's picture

Exactly what they did in the Great Depression...

Wed, 07/03/2013 - 02:16 | 3716835 Flagit
Flagit's picture

Much of the effort is to starve Iran of gold bullion, which it has been using in its “oil for gold” program in order to circumvent being locked out of the international banking system.

and there, you have a motive to tank the gold price. if the fuckers are gonna sell, make sure they get the least amount possible. any correlation to their purchases with the dips in the gold price?

Tue, 07/02/2013 - 17:14 | 3715271 Groundhog Day
Groundhog Day's picture

So your saying that the only form of real money is the real gold and silver you can place in your pocket?  ok got it

Tue, 07/02/2013 - 17:31 | 3715338 SilverIsKing
SilverIsKing's picture

Not entirely true.  You can place it in a safe, bury it in the ground, drop it in a lake, and much much more.

The only thing you can't do is eat it.

Tue, 07/02/2013 - 18:51 | 3715647 Scro
Scro's picture

Colloidal silver

Wed, 07/03/2013 - 09:08 | 3717355 marathonman
marathonman's picture

Money can be anything that we agree to exchange for goods of value.  Gold and silver just happen to be real commodities that check all the boxes of a good medium of exchange.  Debt can also be used.  It just has a half-life because eventually to keep it stable, the debt must expand exponentially to give lenders a chance at paying their loans back with interest.  In economics as the quantity of money approaches infinity the value approaches zero.  We are on the verge of take off on the growth of money as the Fed and government by hook and crook expand the debt.  Eventually people realize how screwed they are and quit wanting the money that loses value daily.  They trade it quickly for real goods.  Velocity takes off, hyperinflation erupts, and the currency fails.  It happens to every 'fiat' currency.  They don't really teach that stuff in school though.

Tue, 07/02/2013 - 18:42 | 3715616 XRAYD
XRAYD's picture

Worse. BAD debt is MONEY!

Wed, 07/03/2013 - 00:14 | 3716717 Boop
Boop's picture

Just like Soylent Green.

Tue, 07/02/2013 - 17:20 | 3715298 GVB
GVB's picture

Imagine some trillion dollars getting lent out in a fractional reserve system?

All these smartphones with huge screens, I now seem to understand they are recently brought in the market because all the zero's have to fit on the screen. I need to create an app that creates three zero's by clicking one time the zero button. I will be rich.

Tue, 07/02/2013 - 17:37 | 3715359 lordbyroniv
lordbyroniv's picture

Bbbut...what happens when everyone gets tired of living in their moms basement?!?!!?!?!?

Wed, 07/03/2013 - 07:30 | 3717105 ZeroPoint
ZeroPoint's picture

It is a little frightening that they have claims on all that real estate isn't it?

Tue, 07/02/2013 - 16:54 | 3715213 yrbmegr
yrbmegr's picture

Interesting.  Higher interest rates may actually cause inflation to accelerate.

Tue, 07/02/2013 - 17:01 | 3715235 Dr. Richard Head
Dr. Richard Head's picture

Mind = blown!  Never looked at it that way, but then again this in this perverted market anything is possible....aside from sustainability.

Tue, 07/02/2013 - 17:27 | 3715319 The Final Countdown
The Final Countdown's picture

It's the new normal. Bad news = good news, banks profit from not lending money, printing money causes deflation, higher interest rates cause inflation, and record demand for PMs makes their price go down.

Tue, 07/02/2013 - 17:45 | 3715391 Xibalba
Xibalba's picture

Peace is war and McDonald's is food

Tue, 07/02/2013 - 17:35 | 3715355 onewayticket2
onewayticket2's picture

"If interest rates move up dramatically... banks will have an incentive to take that money out of the Fed and start lending it out.


doesnt this assume the spread bw the fed rate paid and loan rates received by banks would be increasing in a way that would incent pulling money out of the fed and putting to work in the form of loans ?


Question:  why wouldnt this just be another lever for the Fed toy with....couldnt they raise interest paid on excess reserves in lockstep (zero spread change)?  or more?  or less?  depending on their objective? 





Tue, 07/02/2013 - 17:20 | 3715294 alangreedspank
alangreedspank's picture

Household debt is still very high. Not a lot of people will take out loans IMO.

Tue, 07/02/2013 - 20:15 | 3715956 yrbmegr
yrbmegr's picture

The same thing could happen if the fed stops paying interest on the deposits, AND if they stop buying paper from the banks.  So the fed is stuck in this infinite do-loop of inflating bank balance sheets to avoid having those deposits flood into the global economy.  If all that money starts coming out, the fed will have no choice but to mop it all up quickly with sky-high interest rates.  It will wreck the U.S. economy, but it will DESTROY the Chinese economy.

Tue, 07/02/2013 - 16:56 | 3715215 Dr. Richard Head
Dr. Richard Head's picture

"imagine what would happen if you took the hockey stick from the chart above and suddenly added it to the top of this one..."

Imagining an implied direct correlation I can say yes, I can imagine.  How about 11 Million Billions or 11 Quadrillion.  So that should about cover the derivatives then.

Tue, 07/02/2013 - 16:55 | 3715216 Rainman
Rainman's picture

Interest rate derivatives.....think I saw that black swan swimming around somewhere.

Tue, 07/02/2013 - 16:58 | 3715225 l1b3rty
l1b3rty's picture

But of course the banks will repay this, just like they repaid TARP.

Tue, 07/02/2013 - 16:58 | 3715226 q99x2
q99x2's picture

If even the bank of Zelienople, PA goes bankrupt and that trillion plus of re-hypothecated FRAUD would all be wiped out in seconds. FED, the Morgue and the Goldman Sach has everything all ice-9'ed up dude.

Tue, 07/02/2013 - 16:59 | 3715228 Divine Wind
Divine Wind's picture




The sums of money being discussed here are just staggering.




Tue, 07/02/2013 - 17:16 | 3715277 ZerOhead
ZerOhead's picture

A trillion here a trillion there... pretty soon it adds up to real money...

(except in Zimbabwe)

Tue, 07/02/2013 - 17:03 | 3715229 DormRoom
DormRoom's picture

Like the Latin American crisis where authorities denied rumors the banks were insolvent, then we discovered a decade later that the banks were indeed insolvent.  The lie allowing the banks time to repair their balance sheet.

I wouldn't be surprised if the TBTF banks have been insolvent, and the Fed has been helping them repair their balance sheet with QE, so they can come out of shadow insolvency a half decade from now.

 "When it's dire, you have to lie" -- some guy in the EZ.

Tue, 07/02/2013 - 17:14 | 3715257 Rainman
Rainman's picture

The other patch in the recovery tool kit was holding back diseased housing inventory from the market, thus hiking the liquidation prices for the banks. All that mortgage shit paper is held at par anyway or passed on to Chairsatan and F and F.

All of it will continually point to fail < due to the natural laws of gravity > 

Tue, 07/02/2013 - 17:11 | 3715259 Colonel Klink
Colonel Klink's picture

Most if not all of the major banks are insolvent if they had to mark to market.  It's one big fraud since 2008.  Well really 1913 but CONgress has perpetuated it and shirked their constitutional responsibility.

Tue, 07/02/2013 - 17:25 | 3715282 fonzannoon
fonzannoon's picture

I thought that was exactly what the plan was.

I thought it was out in the open?

Tue, 07/02/2013 - 17:27 | 3715320 francis_sawyer
francis_sawyer's picture

"I thought it was out in the open?"


Well ~ Maybe in 'some' places... [that NEVER get published]

But remember:

- Banking


- political activism

- jurisprudence

By that measure, "OPEN" is only item #2... IOW ~ The 'raping' has just begun...


In other news... "LOOK!... JOS A BANK is having a 'Buy 1 get 7 FREE Sale"!'...

Tue, 07/02/2013 - 17:35 | 3715352 fonzannoon
fonzannoon's picture

I don't give a flying fuck anymore Francis. I have tried to explain the QE mechanism to everyone around me. The answer I get is "if it is good for the economy then we gotta do it". I asked them if they felt the economy would be better off if that money was given out to the public instead of to the banks..."they would never do that" is what I get. I ask them if they remember getting a check from Bush the 2nd. They all remember it. But still can't connect the dots. As Matt Dillon said...

Tue, 07/02/2013 - 17:51 | 3715413 Colonel Klink
Colonel Klink's picture

90+% of the people are too dumb to get it, are too busy with life, too wrapped up in video game or reality teevee to care.  Even when you try to line the dots up for them, they don't care to expend the brain power to comprehend or don't care.

Tue, 07/02/2013 - 18:01 | 3715448 Rainman
Rainman's picture

you just described my idiot brother-in-law.

Tue, 07/02/2013 - 18:03 | 3715449 francis_sawyer
francis_sawyer's picture



That's why you have to say "FUCK ALL U FUCKING FUCKS" to those people...

Move to the country... Grow some food & livestock...

I'm prepping "Jack Daniels Cherry Pineapple Whiskey BBQ glazed Baby Back Pork Ribs" & maybe some Buffalo Wings on the side, as well as Mustard Green potato salad & Swiss Chard Quesodillas for the 4th... Gonna do some boatin' & jetski'in... & there's not a cheesepope for 3 counties that skims a nickle off any of it...

Life is good...


Tue, 07/02/2013 - 18:07 | 3715462 fonzannoon
fonzannoon's picture

It's true, almost everyone around here, cheesepope or not, is complicit.

Tue, 07/02/2013 - 18:14 | 3715499 Colonel Klink
Colonel Klink's picture

I withdrew my productive capacity from the economy in early 2009.  I spend little and enjoy life as it should be.  I boat, travel, etc. on the cheap.  Only wished I could get away from fossil fuels but it's not practical.

As for the fromage religious leaders, I avoid their banking scams and do my best to avoid any transactions with them.

Tue, 07/02/2013 - 18:26 | 3715559 francis_sawyer
francis_sawyer's picture

It's easy if you try...


Tue, 07/02/2013 - 18:33 | 3715583 Colonel Klink
Colonel Klink's picture

Nice FS, I'll work on it.  My run rate is probably under a grand a month for everything, food, rent, ins, gas, and spending money.

Tue, 07/02/2013 - 17:56 | 3715428 Al Huxley
Al Huxley's picture

LOL, that clip pretty much sums it up. 

Tue, 07/02/2013 - 17:48 | 3715402 Al Huxley
Al Huxley's picture

It is, it's totally out in the open.  Bernanke wrote about it extensively before he became Fed chairman.  All he's doing now is exactly what he said he'd do - saving the banks so as to save the world.  His entire plan is contingent on keeping the banks alive.

Tue, 07/02/2013 - 17:50 | 3715409 fonzannoon
fonzannoon's picture

was this a refresher course? This is the foundation of our phony economy.

Tue, 07/02/2013 - 18:36 | 3715592 NotApplicable
NotApplicable's picture

Well, only if you consider the actions of zombies to represent living. They're nothing but the walking dead, with no future than to shuffle government paper around. That whole "aggregation of capital for investment" thing? Ancient history, it is.

Tue, 07/02/2013 - 17:07 | 3715234 buzzsaw99
buzzsaw99's picture

Old news and it's worse than that. Those are borrowed reserves. In other words the fed pays bankers to borrow money from the, er, fed. Those interest payments go straight into executive bonuses and dividends. It is blatantly criminal.

Tue, 07/02/2013 - 17:23 | 3715303 ZerOhead
ZerOhead's picture

Dividends? Some of the money actually makes it's way down to dividends?

Listen Buzzy I'm sure the executives are extremely pissed about that... but I seriously doubt that it's criminal...

Tue, 07/02/2013 - 17:53 | 3715422 Al Huxley
Al Huxley's picture

When you put it that way it sounds so, what's the phrase I'm looking for? - 'Obviously fucking criminal that why the hell does the country continue to put up with this shit?  Oh yeah, because the majority of the population has been so dumbed down by fake food, 24x7 propaganda and televised circuses that even if you explain this to them they won't get it or they'll blame the republicans if their democrats and the democrats if their republicans and meanwhile tiny sector of the population accumulates wealth that would make a Saudi prince blush without even having to pretend to work for it on the backs of 99% of the country that's gradually transitioning into a nation-wide Detroit'.  Yeah, that about sums it up.

Wed, 07/03/2013 - 09:25 | 3717423 marathonman
marathonman's picture

It was pretty tough for me to digest that our entire system of finance and government is built and maintained on massive lies.  It was quite unsettling. 

Tue, 07/02/2013 - 17:02 | 3715238 10mm
10mm's picture

"People are going to be shocked at whats about to happen".Fuck em and their shock.They never cared.

Tue, 07/02/2013 - 17:03 | 3715244 SIOP
SIOP's picture

I distinctly remember Bernanke saying years ago (2009-ish) that he planned to print money and he said he would avoid inflation by, quote... "taking the money off the table".

And I remember wondering how he was going to do that, and if he was going to take it off the table, why print it in the first place?

Tue, 07/02/2013 - 18:00 | 3715443 Savyindallas
Savyindallas's picture

Isn't that how the Fed prolonged the Great Depression? Milton Friedman wrote a piece on that.

Of curse when they needed the money to fight the enemy of the Baknsters-Germany  -there was plenty of money.

Tue, 07/02/2013 - 17:04 | 3715245 agent default
agent default's picture

If sitting on a pile of cash has zero cost why take the risk of lending it to you? QE and ZIRP are designed to save bankrupt governments not the real economy.

Tue, 07/02/2013 - 17:04 | 3715247 emsolý
emsolý's picture

I heard the Bernank can vaporize it all in less than 15 minutes.

Tue, 07/02/2013 - 19:36 | 3715807 unununium
unununium's picture

Bernanke: I can raise interest rates in 15 minutes, so don't worry

Bernanke: I promise to keep interest rates at zero for 6 years, so don't worry.

Tue, 07/02/2013 - 17:08 | 3715254 Colonel Klink
Colonel Klink's picture

The unconstitutional FED is the glue holding the house of cards together.

Tue, 07/02/2013 - 17:12 | 3715264 Charles Wilson
Charles Wilson's picture

This is Bernanke, "The Good Monetarist".  Keep those Reserves in case there is a, you know, Run on the Bank 'n stuff.

This was all baked into the cake since 2008.

Tue, 07/02/2013 - 17:13 | 3715266 Duc888
Duc888's picture

"Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us? "


Debt.  Yes, loan us some more debt please.


I hope they fukken choke on it.

Tue, 07/02/2013 - 17:14 | 3715270 starman
starman's picture

I got it ! Debt is a asset!

Tue, 07/02/2013 - 17:30 | 3715336 Jackagain
Jackagain's picture

Debt is is debt...

Tue, 07/02/2013 - 17:24 | 3715305 cougar_w
cougar_w's picture

"the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system"

The banks will never loan that money out, ever. Keeping trillions locked up and off the streets is how they are avoiding money-velocity-driven inflation. So long as stawks stay up they can play that game a while longer.

Probably The Fed is keeping that powder dry in the off-chance the country does spiral into deflation. The banks could be made to put that money back to work in very short order without seeming to do so, a trillion a quarter is probably not out of the question.

Tue, 07/02/2013 - 17:45 | 3715345 ZerOhead
ZerOhead's picture

The streets are getting drier than dust by the day.

No new debt creation (or alternative form of money injection) in the sheeple populated goods and services economy (AKA the real economy) and corporate earnings along with tax receipts will begin softening then tanking. Next risk assets will collapse bonds collapse and everything gets flushed down a gigantic sucking black hole.

That will not be allowed to happen and $1.8T is not enough to set off the inflation that will be necessary to crush the real value of the debt that is crushing everything else.

$30T -$50T is the minimum reset number. Globally it's going to have to be closer to $200T.


Tue, 07/02/2013 - 18:45 | 3715626 cougar_w
cougar_w's picture

Your overall observation is correct. $1.8T is a drop in the bucket of the sea of total liabilities. Of course they can do a lot better than that; the actual balance sheet The Fed could soak up (if they weren't worried about sparking inflation) may be closer to $5T. And that's just the US; everyone else out there can do nearly as much more in total. So there might be $10T the global CBs together could scramble up in a pinch without blowing up the world. Their target in that case is not the $200T in total liabilities you mention but probably the $20T (just to pull a nice number out of the air) that represents the upper-middle class balance sheet. All they need to do is prop up households in the top 10% of the world and they can probably keep the entire planet from advancing back to the Middle Ages.

Regardless I think it means we are headed into an era of very polarized class structures, where most people are in trouble all the time and having a hard time meeting basic needs, with a sizable few others not so much. Not so much the Middle Ages then, more like the 1600s.

Tue, 07/02/2013 - 19:18 | 3715718 ZerOhead
ZerOhead's picture

1600's with iPods has about the right feel... a near third world lifestyle coming to large (segregated) parts of the first world... which will also have an evaporating middle class still in descension...

It will be a very tricky manoeuver to pull off without totally crushing trust in currencies themselves and setting off the easy to create but difficult to control hyperinflationary event that they do not want.

Inflation (hyperinflation) is going to come from complete lack of trust in the currency itself... not necessarily that there may be too much of it in the real economy since a direct conduit from the Fed to the sheeple does not directly exist as it does for the financial elite and there is little apetite in Congress to spend more than they need to keep the wheels rolling...

We could always see a play for a new global currency if competitive currency devaluations cause too much of a stability problem with the global supply chain as well. It would be the best time to do it if that was ever part of TPTB gameplan. The Fed would almost certainly have to be the co-ordinating body for anything that large and fortunately it's mandate already allows it to engage in dispensing the massive currency swaps to foreign CB's...

Tue, 07/02/2013 - 19:40 | 3715826 Totentänzerlied
Totentänzerlied's picture

What you describe is the way most of the world exists right now. The west is an anomaly, and will almost certainly prove to be a short-lived anomaly.

Difference is, in the 1600s, Europe's population and civilization matched its energy supply and carrying capacity a hell of a lot more closely than the whole world does now.

Managing, let alone pulling off, such a regressive transition without massive numbers of violent casualties, war, collapse, and general chaos, in an ever more energy-scarce environment with the most fragile civilizations and hi-maintenance socieities the world has ever seen?

I don't think they have a chance in hell of doing this thing without untold immense misery for the majority of humanity along along way.

On the other hand, if they could somehow manage to bring oil demand back down to early 20th century levels, they might have a shot. But that would make the Holodomor look mild by comparison.

Wed, 07/03/2013 - 07:44 | 3717122 Disenchanted
Disenchanted's picture

re: "I don't think they have a chance in hell of doing this thing without untold immense misery for the majority of humanity along along way."

I think that's the plan...

Wed, 07/03/2013 - 03:18 | 3716885 Flagit
Flagit's picture

Globally it's going to have to be closer to $200T.

they are really banking(pardon the pun) on a myan-comet extention event, arent they? 

Tue, 07/02/2013 - 18:05 | 3715464 Seize Mars
Seize Mars's picture



Tue, 07/02/2013 - 17:27 | 3715308 Big Ben
Big Ben's picture

Excess reserves are money that the Fed 'borrows' from the banks. So the Fed borrows $1.8 trillion from the banks while at the same time it loans money to home buyers by buying $85 billion in MBS per month. It used to be that the banks were in the business of making home loans. But now the Fed has somehow inserted itself into the picture. Why?

What a tangled web we weave ...

Tue, 07/02/2013 - 17:56 | 3715429 Savyindallas
Savyindallas's picture

Could it be that when they orchestrate the next big crash, the Fed will own all the assets(collateral)? The Fed won't fail like banks normally would  -they just print the money. The biggest conspiracy of all time?

Tue, 07/02/2013 - 18:10 | 3715487 Big Ben
Big Ben's picture

Those MBS that the Fed is buying must yield more than 0.25%. So why aren't the banks buying them? The banks must feel that they are too risky.

It seems to me that I first started noticing the "For Sale" signs all around the neighborhood shortly after the Fed started its MBS purchase program. It looks like the Fed wants another housing bubble but the banks were badly burned by the last one, so the Fed is forcing one by taking on the risk itself.

Wed, 07/03/2013 - 06:11 | 3717012 Flagit
Flagit's picture

It looks like the Fed wants another housing bubble but the banks were badly burned by the last one, so the Fed is forcing one by taking on the risk itself.


Tue, 07/02/2013 - 19:41 | 3715830 unununium
unununium's picture

> Excess reserves are money that the Fed 'borrows' from the banks.

NO.  They are reserves that the bank has borrowed from the Fed.


> it loans money to home buyers by buying $85 billion in MBS per month.

NO.  Fed purchases plug the hole left in banks' income stream by home buyers' failure to pay.  The home buyer gets nothing.

Tue, 07/02/2013 - 17:38 | 3715314 Jackagain
Jackagain's picture

They're afraid of inflation when this money hits the streets....they want to drive down gold & silver prices....their true enemy. They also are net buyers of gold, so they need the price driven down.


They also need the preception that bank balance sheets are OK or Wall Street would be toast....

Tue, 07/02/2013 - 17:29 | 3715330 Fuku Ben
Fuku Ben's picture

They're planning another magic trick like the missing 2.3 Trillion on Sept 11 & the missing 9 Trillion pointed out by the Fed IG



Tue, 07/02/2013 - 17:38 | 3715342 Jackagain
Jackagain's picture

The shell game....the money was under the WTC it's been moved elsewhere....under the bankster's shell...

Tue, 07/02/2013 - 21:48 | 3716238 el Gallinazo
el Gallinazo's picture

Actually War Criminal Rumsfeld announced the missing $2.3 Trillion in a press conference on September 10th.  But I am a coincidence theorist so I give the timimg no importance.  Just a coincidence that an announcement of  missing DoD funds equal to a quarter of the USSA GDP should get lost in the hubbub of the three WTC demolitions the following day  and all the accounting records should be destroyed by the cruise missile that hit the Pentagon.  

Tue, 07/02/2013 - 17:35 | 3715350 theprofromdover
theprofromdover's picture

Everyone and his dawg have known for 5 years now, that the derivatives bomb is the one that'll get us.

And yet they did nothing?

Tue, 07/02/2013 - 17:35 | 3715353 johngaltfla
johngaltfla's picture

I'm just surprised there hasn't been more commentary on the vast swaths of MBS downgrades, including paper the Fed holds. Now it's Jumbo from 1994-2005 and if anyone is paying attention, this runs counter to the running narrative that home prices are accelerating upwards and everyone had best go 120% into debt or more than they are capable of handling to buy now.


When the Fed cuts the spigot, which they are, it will pulverized MBS bond holders (soon to be us, the Taxpayers) and any foreign entities which did not liquidate.


It's going to be the fuckfest of the century which is the kind of event wars are started over....

Tue, 07/02/2013 - 17:42 | 3715379 kito
kito's picture

im starting to look at these articles in the same light as articles about asteroids.....they are menacing, dangerous to earth.............a sudden, acute collision will wipe out the population...................or perhaps volcanoes???...the mega one....that WILL explode.....the one in yosemite i will wreak havoc on the world..................someday perhaps.....someday..........or not.......................

Tue, 07/02/2013 - 17:52 | 3715414 Billy Shears
Billy Shears's picture

I think I understand the point but why would already broke and  overleveredged Americans borrow this money, especially at higher rates.  Isn't most of this money  un-loanable due to the atrocious nature of Americans already decimated balance sheet and income statement? 

Tue, 07/02/2013 - 17:54 | 3715425 ...out of space
...out of space's picture

so this must be a anthem of Fed.

Tue, 07/02/2013 - 17:58 | 3715434 CheapBastard
CheapBastard's picture
Paid via Card, Workers Feel Sting of Fees


A growing number of American workers are confronting a frustrating predicament on payday: to get their wages, they must first pay a fee.

For these largely hourly workers, paper paychecks and even direct deposit have been replaced by prepaid cards issued by their employers. Employees can use these cards, which work like debit cards, at an A.T.M. to withdraw their pay. 

But in the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards.

Tue, 07/02/2013 - 17:58 | 3715437 Minister of Bre...
Minister of Bread and Circuses's picture

Correct me if I'm wrong, but even if all of the two trillion were dumped on the money supply graph, it wouldn't be a catastrophic deflection - just under a 20% increase in the money supply (which is bad, but not a catastrophe, right?). More likely than a dump they would try to smooth out its distribution. Or am I missing something?

Tue, 07/02/2013 - 18:03 | 3715452 Seize Mars
Seize Mars's picture

No it would be a big deal, but not a catastrophe. Think of how much USD exists outside our borders. "World's reserve currency" and all that. So its not been that easy to ignite a ctaastrophe here in USD. Harder than the previous cases of paper money.

But it will blow up. There is no escaping it. It will blow the fuck up. It always does. It was done by design, on purpose. Don't believe al that bullshit about mysterious sources of systemic risk, etc. It's a fraud that is designed to blow up and hurt us. America was destroyed. From the outside. Paper money and income tax is an import.

Tue, 07/02/2013 - 18:18 | 3715521 blindman
blindman's picture

stealing comes in a variety of forms, money creation
too. the multiplier associated with bank loans would
not selectively recapitalize the banks so, f.... you.
fraudulent induction strikes again mo fo.
it is the bankers universe, protons and electrons
merely perform their little dance for the banksters
amusement. we teach this as subversive reality to the
children, it may take 20-30 years to sink in but
eventually, the dumb f;;ers get it.

Tue, 07/02/2013 - 18:21 | 3715530 Nue
Nue's picture

This might sound long and rambling but i'm tired and my head is killing me.

The FEDS real mandate for the past 100 years has been to maintain the status qou. To do that they have created a monetary system that runs off ever expanding amounts of debt. The system keeps running so long as debt can keep expanding. When debt can no longer be created the system collapses. That's why the Federal Reserve is expanding it's balance sheet. If it did not the entire system would fold in like a chinese school in a snow storm. Sure the FED wants the banks to lend so it can shrink it's balance sheet. But the banks can't lend because the consumer is over extended and their income has stagnated. In short the system has reached it's end point. The only question now is do we have a somewhat orderly collapse of the system or do we have total chaos?

Tue, 07/02/2013 - 18:45 | 3715623 Debt Slave
Debt Slave's picture

Best description I have seen in a long time. +1

Tue, 07/02/2013 - 19:51 | 3715858 blindman
blindman's picture

did you say maintain? or is it create? power is
reducing the sphere of concern of influence, strategically
arranging events and probable outcomes, so that whether
there is order or chaos the benefits and spices flow in
a predictable direction, that would be toward the idealic and
dreamy "U". (them)
this is what is accomplished by the federal reserve act of 1913.
congress , head firmly in the colon of the money system, unable
to see beyond the steady stream of feces the political and financial
dis-system produces, is readily flushed, wiped away and disregarded or
composted as / and they are merely human. (owned as property as it is in this
fixed financialised cesspit)
pray for the mother ship to come I say !
the universe awaits ! there may be intelligent life, somewhere?
but then again life and intelligence may be incompatible or at odds
as matter and energy, there being a threshold of transformation that
is enigmatic and incomprehensible.
who would know?

Tue, 07/02/2013 - 18:26 | 3715558 TrustWho
TrustWho's picture

Been true for years and not one journalist has ask Bernanke to explain.

Second, if velocity of money ever rises off the floor, the Fed will pay the banks more than 0.25% to keep the money from getting into the market. This will be a major tool to fight future inflation. The criminals who played a significant role in creating this financial mess will continue to financially benefit from their crimes. Sick, Sick, Sick......but who fucking cares.

Tue, 07/02/2013 - 18:27 | 3715564 malek
malek's picture

Thanks for reiterating it!

Tue, 07/02/2013 - 18:36 | 3715591 Waterfallsparkles
Waterfallsparkles's picture

I remember with one of the hearings or testimony where one of the Senators or Congress persons suggested putting a bill forward that would eliminate the FED paying interest on the deposits from the banks.  Bernanke almost had a heart attack.  It appeared to me that if Bernanke did not have the Banks putting excess funds with the Banks that it would stop hisQE programs.

Plus, the only way to keep inflation down is to keep the Money out of the public system thru lending.  Otherwise people will borrow and buy things which will create inflation.

Bernanke and the FED has a lot to lose because if there is an increase in interest rates and inflation it has to change their policy and they are holding Trillions of low interest Bonds that will be worthless.  Or, at least diminished substancially in value.

Tue, 07/02/2013 - 18:40 | 3715613 Debt Slave
Debt Slave's picture

Everything is dependent on Fed support. They know if they take it away, they’re going to create a black hole

I think it might be successfully argued that the Fed has already created a black hole.

Tue, 07/02/2013 - 18:44 | 3715620 mumbo_jumbo
mumbo_jumbo's picture

who cares casue i got big news....I DO NOT WANNA BORROW, and neither do most people i know

Tue, 07/02/2013 - 18:45 | 3715625 Wanton1
Wanton1's picture

The FED is hoping you won't think, or read, either.


The mega tons of aluminum nanoparticles in chemtrails, not only create

drought, but eventually fall to ground and make forest fires a lot hotter.

Tue, 07/02/2013 - 18:47 | 3715631 indio007
indio007's picture

It's just a bullshit accounting game they have to play in order to have enough reserves not to be shut down. he fact is that cash is baked by very little other than blind faith. Unless of course you like Maiden Lane BS assets.

Tue, 07/02/2013 - 19:42 | 3715836 Catullus
Catullus's picture

No bank is holding money at the Fed because they're getting paid .25%.  They're holding money at the Fed because they're playing a regulatory capital game.

BUT the way the Fed is going to "control" inflation in the future is by raising this rate.  The target Fed Funds rate is meaningless.  There is no interbank lending.  Targeting it means nothing.  But every few weeks we have to listen to the "the Fed kept interest rates the same" garbage.  This interest rates on reserves WILL be the most important rate for future.  Even Bernanke spoke and wrote about it.  3 years ago.

Tue, 07/02/2013 - 20:38 | 3716025 blindman
blindman's picture

@" fed paying banks not to lend .."
fraudulent induction is imposed on the populations,
(money creation),
not upon the owners. get it?

Tue, 07/02/2013 - 21:35 | 3716210 g'kar
g&#039;kar's picture

The followers of Cloward/Piven are cheering. The believers in reinstatement of Glass/Steagall are grabbing another drink. Burp.

Tue, 07/02/2013 - 22:21 | 3716407 dark pools of soros
dark pools of soros's picture

they are waiting for the trigger... once they lend the inflation will kick in...  some crappy jobs will appear with seemingly good pay but costs fly up

Tue, 07/02/2013 - 23:25 | 3716617 The Merovingian
The Merovingian's picture

"at some point it is going to come pouring in to the U.S. economy.  When that happens, we could very well see an absolutely massive tsunami of inflation."

Technically speaking, the author is correct.  Factually speaking, however, the author has clearly not been into the bank (or anyplace else) for a loan recently.  That money is NEVER going to come pouring into the system for two reasons.  

1.  The banks are all insolvent, and QE was put in place to provide cover for their thievery and CON John Q. Public into thinking somehow the $$ was actually gonna make it's way down to him. LOL.  

2.  Anyone who has actually tried to borrow in the last 4 years knows that BANKS AREN'T LENDING; they are barely treading water.  They only want low hanging fruit, period.  Passing a kidney stone every minute is less painful than trying to get a loan approved by any bank, CU, or insurance company, in the country right now. Sorry, but we are soooooo fucked.  

On the bright side though, I did buy more gold and silver over the last week. BTFD.


Tue, 07/02/2013 - 23:34 | 3716643 Manipuflation
Manipuflation's picture

Derivitives exposure insurance policy courtesy of us.

Tue, 07/02/2013 - 23:36 | 3716651 nofluer
nofluer's picture

Snyder? You write an "economics blog"? Why?

I'd suggest you do some research before you post drivel like the above post.

First you say there is all that money just sitting at the FED... no. There isn't. There is no "money" anywhere. I'll try to explain it (once again) so that you can GET IT.

Due to the mortgage industry's deliberate deafness when Mr Li told them that "Li's formula" (look it up) wouldn't work in a declining market, the bundlers of the MBS' continued to use it because they were lazy and didn't want to go back to the tedious process of valuation that existed before Li's formula, which led to totally screwing up the valuation of the MBS'.

Since all of a sudden no one knew what the MBS' were REALLY worth or the risk that should have been assigned to each of them, they became "financial instruments of uncertain value" - which means that the banks cannot/could not list them as assets on their balance sheets. (It's an accounting thing - if you don't know what it's worth, you can't put it on the balance sheet.) This uncertaintly also made them unsellable to "investors". (ie the banks were stuck with them.)

So... periodically, the FED/US govt has to do "stress tests" of banks to ensure they are solvent. With the exclusion of the MBS' from their balance sheets, the banks would not have been solvent, and the mega banks, (remember the TBTF banks?) would all have had to be shut down.

So apparently Mr Ben figured out a way to make it all better - he went to Congress and asked them to pass a law authorizing the Fed to pay interest on "excess deposits" (deposits in excess of those required by banking rules), which congress did. (Only an idiot would hold "excess" deposits at the FED at less than a % when they can get 7 to 14% or more by lending it to consumers... unless they had no choice.)

Then Ben went to the banks and said something like "Sell me your MBS' and I'll make an entry in the FED's books saying that you have the value of them on deposit as "excess deposits" - which makes them iinto "interest bearing deposits" which would be the "same as cash" which made the excess deposits into cash "equivalents" - and thus the banks could enter them on their balance sheets and *poof* - suddenly the banks were solvent and everyone was happy.

But no one was as happy as the FED because they scooped up nearly $2 TN in securities and it didn't cost them a dime. (Although the entries were made in the FED's books, there was apparently no capacity on the part of the banks to actually access that "money" - probably beause there was no money involved.) And the FED is now collecting the mortgage payments for the (MOSTLY) AAA mortgages involved in the MBS'.

So... there is no "money", and there never was. It was all bookkeeping entries and accounting gimicks.

Wed, 07/03/2013 - 02:48 | 3716863 Trampy
Trampy's picture

Thank You for explaining this in simple language!

As I see it, the biggest downside to this unprecedented balance sheet expansion is that the debt market is being distorted because the biggest buyers of debt are central banks.

If the bond buying is kept up, the largest bond holders will be the central banks who are buying bonds to finance the budget deficits of their countries.

If central banks are the biggest buyers, and owners, of bonds, it seems to me that their prices are being artificially inflated.  When interest rates go up, bond prices go down.  If their holdings go down in value, what are the impacts of that decrease in "value"?

It seems obvious that if the massive bond buying is kept up or accelerated, eventually the only buyers of bonds will be central banks.  What effects will that have on broader markets?

And what could cause the central banks to sell their holdings, and what would that do to markets?

Wed, 07/03/2013 - 00:19 | 3716724 tom
tom's picture

The money does enter the system, but it doesn't generate income or spending.

QE creates broad and base money simultaneously. When the Fed buys an asset, it issues reserves to the seller's bank, which issues a like size bank deposit to the seller. The seller is always a broker dealer.

As the broker dealer replenishes its trading book, it passes the deposits around into general circulation. Reserves by nature constantly circulate. Every time anybody makes any kind of payment from a bank account, reserves move from the payer's bank to the payee's, unless they happen to be the same.

Bank deposits usually grow in line with bank credit expansion. Since '08 bank credit initially shrank and only recently started to slowly expand, but deposits have grown steadily at a clip that suggests strong credit expansion. That's the work of QE.

But money supply is not spending, hence little inflation.

Wed, 07/03/2013 - 00:41 | 3716754 GoldIsMoney
GoldIsMoney's picture

Well some of the banks are not that dumb. In the end they may hope to survive or at least get over the coming bankrupts. And they surely do well, denying another round of credit excess to everyone. And they would do even better, if they sold all the bonds of any state, land or country.

But see the balance sheets and you'll see there is 10 to 50 times more credit then there are assets. The crash will come - sooner or later. 

Wed, 07/03/2013 - 07:47 | 3717120 PT
PT's picture

Half the people don't want to borrow money.
The other half will take "borrow" whatever the banks give "lend" them, but now the banks have learnt ... learnt???
The banks are desperately looking for new immigrants customers who have at least a fifty percent chance of making one or two repayments.

"I'll provide the cheap workers, you provide the rich customers."

The disconnect between prices and wages is being totally ignored because the US has traditionally always had a few rich people laying around somewhere ...

EDIT:  Okay, okay, why doesn't strike-through work?  It works in the editor.

Do NOT follow this link or you will be banned from the site!