The Fed Gave Wall Street A Bomb, And The Taxpayers Are Paying Ransom

Authored by Tho Bishop via The Mises Institute,

When Janet Yellen testified before the House Financial Services Committee last month, she faced grilling on a topic that hasn’t received enough mainstream attention: the interest being paid on excess reserves at the Fed. While the topic has come up occasionally since the program began in 2008, it is worth noting that Yellen was pushed by both Jeb Hensarling, the committee chairman, and Andy Barr, the chairman of the Monetary Policy Subcommittee.

While ending this taxpayer subsidy to Wall Street is important, it’s also important to understand the dangers posed by allowing these excess reserves to be lent out of major financial institutions.

To understand what is at stake, recall back to 2008 when many Fed observers were concerned about the inflation dangers posed by the policies of the Bernanke Fed.

In a six year period, the base money supply increased over four-fold.

fred monetary base.png

Understandably, this sparked grave fears about the devaluation of the dollar - fears that, to date, have yet to really present themselves in the CPI. While stock prices, real estate prices, and other types of asset-price inflation are likely being fueled by this monetary policy, the Fed isn’t facing political pressure from inflation concerns - but rather being grilled by misinformed legislators for not reaching their (unfortunate) 2% inflation target.

This is, in part, due to the fact that a lot of this new money has been kept sterile by being parked within the Fed itself as excess reserves.

fred excess reserves.png

Today, more than $2 trillion worth of these reserves are parked at the Fed, which means that only two thirds of the newly created money has actually been pumped into the “real economy.”

Now this policy should rightfully puncture the narrative that the Fed was at all concerned with providing liquidity to businesses on Main Street (i.e., not big banks). After all, if the aim of the various rounds of QE was to get banks to loan, then paying them not to is irrational. Instead, the Fed was using taxpayer dollars to subsidize the very same banks that they just bailed out. We are continuing, to this day, to pay banks to not make loans. 

While Bernanke repeatedly dismissed the problem of incentives posed by paying 25 basis points on these reserves, the reality is that this was a risk-free investment at a time of great market volatility. Considering that several important banks had issues passing the Fed’s stress tests - tests are designed to exaggerate the stability of the financial sector - it doesn’t require a great logical leap to suggest that the Fed misrepresented this program to public in the name of “stabilizing” the financial sector.

In 2016, this policy paid $16 billion to big banks, a number that will likely rise as the interest rate payments go up with every increase in the federal funds rate (we are now paying 1.25% interesthigher than the public can receive from their own banks.)

While both the public and Fed critics on Capitol Hill should be outraged at this clear example of cronyism, simply ending it is not enough. After all, the danger of refusing to pay ransom money is that the ransomer will follow through on their threat. If the Fed was to simply stop payment on these funds, and banks decided to lend it out — then $2 trillion would be injected into credit markets. Given the amplifying effects of a fractional reserve banking system, it’s easy to see how quickly this could unleash severe inflationary pressures.

So this is the true policy issue going forward, how do you stop the taxpayer subsidy to Wall Street while avoiding lighting the fuse to Bernanke’s inflation bomb? One way would be to increase reserve requirements. Currently banks with over $115.1 million in liabilities have to keep 10% at the Fed, by raising that number up you will not only serve to keep this expansion of the monetary base “sterile,” but will make the banking sector as a whole more stable.

Comments

shizzledizzle Thu, 08/03/2017 - 14:28 Permalink

You let the fucking bomb go off and take down the institutions that engaged in stupid/risky/unethical behavior and hold the people that ran those institutions accountable (I.E. JAIL TIME!)

Manthong auricle Thu, 08/03/2017 - 14:41 Permalink

 
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Pond scum do not understand how this banker scam works… So what percentage of the Fed does JPM own?

In reply to by auricle

Manthong Manthong Thu, 08/03/2017 - 14:57 Permalink

 
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Knock… knock… anybody in there ???? It’s  a freaking private bank…. And given a monopoly on currency in 1913. It is owned by the larger money center banks. ..and needs to go broke.

In reply to by Manthong

shizzledizzle espirit Thu, 08/03/2017 - 14:54 Permalink

I gotta hand it to the FED though... Their ability to keep all the capital they have been spraying all over wallstreet and the banks contained has surpassed anything I thought possible and what better way to own everything than to inflate only your assets while the rest of the markets remain stagnate. 

In reply to by espirit

auricle Truther Thu, 08/03/2017 - 14:44 Permalink

Currently banks with over $115.1 million in liabilities have to keep 10% at the Fed, by raising that number up you will not only serve to keep this expansion of the monetary base “sterile,” but will make the banking sector as a whole more stable. Bullshit, you need to break the banks up to reduce systemic liabilities. An example is AIG. Increasing reserve requirements means nothing to fraudsters. Their derivitive books already dwarf their reserve requirements. Instead CON-gress has gone the opposite direction allowing the TBTF banks to get even larger by absorbing other TBTF banks. Unfortuntately the banks look at the FRN as 'theirs' not yours and they are free to do what they want with it. 

In reply to by Truther

scaleindependent Thu, 08/03/2017 - 14:30 Permalink

The answer to the question this article asks is by selling the Fed assets that the Fed bought with printed digital fake money.  In this way, the banks do not get the subsidy and you prevent inflation.

Pernicious Gol… Thu, 08/03/2017 - 14:32 Permalink

About 2 years ago I researched and calculated only 17% of the money that had been "printed" was in circulation. What happens to the price of Bass-a-Matics when the number in inventory at Macy's increases by almost 6 times?

idontcare Thu, 08/03/2017 - 14:34 Permalink

Actually the bomb was set 30 years ago when tax legislation caused most corporations to switch from Defined Benefit Plans to Contributory Benefit Plans basically putting every worker's retirement "plan" at the mercy of the financial markets.

Rebelrebel7 (not verified) Thu, 08/03/2017 - 14:49 Permalink

I'm more concerned with making our country, families, and small businesses more stable  than the banks. Lets just end the fed!

J J Pettigrew Thu, 08/03/2017 - 14:52 Permalink

The Bankers fill the Fed boards and they vote themselves money.Now this paying on idle reserves was to compensate for the suspension of the 6% dividend received on the banks Fed shares.BUT, the money they reap from this new arrangement likely DWARFS the dividend payments...and doest that 6% # look big?  That's because it was more in line with what NORMAL interest rates are / should be with the Fed out of the "beachball under the water" game....Is that why Goldman Sachs went from investment bank to commercial bank?   So they could get the goodies like this????Question the Fed.....denounce the Fed....who has kept interest rates below the inflation rate for 9 years.....and complains that there is not ENOUGH inflation?!!!For nearly the entire 20th century, interest rates were ABOVE the inflation rate.....now they wonder where the savings went,. 

WillyGroper Thu, 08/03/2017 - 14:56 Permalink

"it doesn’t require a great logical leap to suggest that the Fed misrepresented this program to public in the name of “stabilizing” the financial sector."imagine my surprise when i learned they were also propping up the likes of MCD, VZ, just to name a couple.:>O

Let it Go Thu, 08/03/2017 - 19:13 Permalink

Both Wall Street bankers and the government, including the Federal Reserve, hold great sway over the economy. This is true with bankers and central banks across the world. When forced to ask which is the worse of these two evils the answer is very troubling. Government wins hand down. We elect politicians to lead, protect and guide us, we do not elect or appoint bankers.Years ago President Eisenhower warned the American people about the Industrial Military complex, but nobody warned us an even more evil alliance that of the "Financial-Political Complex." The article below explores this beast and how it came to be. http://brucewilds.blogspot.com/2016/06/lessor-of-two-evils-wall-street-bankers.html

INTJ Economist Fri, 08/04/2017 - 09:38 Permalink

It's NOT taxpayer dollars, dumb shit.  The Fed spends money into existence.  Bernanke explained this in a 60 Minutes interview years ago.  The banks have accounts with the Fed.  They use the computer to mark up the account.  They are creating money via keystrokes.  QE has not been paid for by the taxpayers.  Remove head from ass and try to understand how modern money actually works.  https://www.youtube.com/watch?v=U_bjDAZazWU