Forum Post: The Banks Are Sitting on a Trillion Dollars in Free Fed Money
Posted 13 years ago on Oct. 16, 2011, 2:39 p.m. EST by followthemoney
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You need a CAUSE, and here it is. Fed Chairman Bernake Testified earlier this year that the Banks were paying .25% to borrow money, and they are paid .25% for the excess reserves that they deposit with the Fed. Bernake stated that the Banks had over ONE TRILLION DOLLARS in excess reserves that the Fed is paying over 2.2 billion dollars in interest on. This means that the banks have socked away over a Trillion Dollars for free that they can release ofr loans and other purposes. Why are they not releasing it? Because they can wait until the Fed raises the discount rate and lend all of that free money out at a higher rate. This makes the bailout look trivial by comparison. You want to focus on something tangible? It's that TRILLION DOLLARS IN EXCESS RESERVES. This is obscene and needs to be brought to the forefront of our cause as an example of the moral misconduct by the Banks. The Banks can and will be shamed into taking action to start lending this money out.
One of the first lessons of basic economics is that incentives matter. There is no incentive for the banks to release this money, we call it a liquidity trap due to zero-bound monetary policy. There is no misconduct on the part of the banks in this case; it is basic economics. The proper response would be a change in fiscal policy, which is why the protests should be on Pennsylvania Avenue; not Wall Street.
You are totally correct. Bernake stated in February that he was considering on lowering excess reserve rate. There was rumbling on wall street that they expected him to lower it to .1% but he hasn't. I can't figure out what would be the downside to this. The Fed would save interest, and the bank would lose there incentive to wash money into excess reserves. Still, What the banks are doing is immoral and obscene talking about all they are doing to help the economy.
That would still not provide any incentive since there are zero-bound interest rates. Bernanke is not the problem. He is doing exactly what he should be doing. As long as they are in compliance with the law, their only concern should be good business, which means maximizing profits for their share-holders. It is Washington's responsibility to provide incentive for the banks to help the economy. Without incentive, why would they loan out money?
Economic thought, at any level, would dictate that the banks are not acting immorally. Economic thought actually began in the 16th century at the University of Salamanca in Spain, a Catholic university. This is where theory of money, value, and price originated. Before this, usury had been viewed negatively by the Church. This view changed during the Renaissance due to these advances in economic reasoning. Interest, under this theory, is the payment for the time the loaning individual is deprived of the money. It is a fee for a morally acceptable service. Right now, that "fee" is too low for the banks to do good business. There is no incentive.