Thursday, February 11, 2010

Bernanke Blows Smoke in His Attempt to Blow More Bubbles

Author: The Golden Truth Blog
Banana Ben Bernanke released a transcript of his scheduled testimony to Congress regarding his plans for removing the trillions he's printed and injected into the system (the appearance was cancelled due to the blizzard hitting DC). In his remarks, Bernanke outlines a few policy tools he plans on rolling out if and when he decides monetary policy needs to be tightened. Since he missed forecasting the housing bubble and the ensuing economic collapse, I'm not sure why anyone would trust him to determine the appropriate time to drain the system in order to prevent hyperinflation. Here's a link to the Bloomberg article on Bernanke's remarks: LINK
Bernanke's first proposal would be to raise the discount rate. The discount rate is the rate charged by the Fed when banks borrow directly from the Fed. Raising the discount rate is meaningless right now as a tool to regulate systemic liquidity because the banks have plenty of money to lend out in the form of excess reserves. Excess reserves are bank deposits kept at the Fed in excess of reserve requirements. As of 12/31/09, banks had around $1.1 trillion in excess reserves. Here is a graphic portrayal of the amount of excess reserves being kept at the Fed right now: Excess Reserves. The banks thus have no need to borrow money from the Fed. As of Feb 3, Discount Window loans were an insignificant $14.7 billion. As you can see, the discount window is not even a source of bank liquidity in comparison to the liquidity the banks already have on deposit at the Fed. Raising the discount rate would be about as useful as taking away ice machines in Antartica. In Banana Ben's own words today: raising the discount rate is “not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy." So why even bother mentioning this unless Banana Ben's intent is to remain consistent with his unstated policy of blowing smoke?
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