CovenantNews.com

The FED versus the Banks

Robert Higgs / The Independent Institute:
During recent months, the Fed has flooded the banking system with reserves, which the banks have chosen to accumulate as (legally) excess reserves, rather than using the funds to add to the volume of their outstanding loans and investments. The Fed’s recently adopted policy of paying a small rate of interest on bank reserves accounts for some of this accumulation, but the amount is so gigantic that it seems much more likely that the banks have greatly increased their assessment of the risk involved in lending and investing as usual and therefore have chosen the lower yielding but less risky alternative of accumulating more and more reserves. Since August, the amount of excess reserves has risen from $2 billion to $559 billion. A graph of this astonishing development shows an abrupt transition from a virtually horizontal line (approximately zero excess reserves for decades) to a virtually vertical line (a quick jump of $557 billion in three months).

Posted by Editor at December 29, 2008 10:01 AM