Within the article, it states “Banks are required to hold a proportion of customers’ deposits in an account at the Fed. They also hold reserves in excess of their required balances to meet payments. If the Fed paid interest on excess reserves, banks would be less willing to dump them into the money markets, pushing the federal funds rate lower. ”

Does anyone have any comments on this? I’m confused.

This just looks like another mechanism (excuse) for the Fed to give banks more free money. It strikes me as really strange that its intent is to PREVENT banks from investing excess funds in the same financial system the rest of us use on a daily basis. I always thought they controlled the amount of money in circulation by the buying and selling of Treasury Bonds.

I never really thought it was such a bad thing if the Fed Funds rate dropped because there was excess money available for potential loans. Wouldn’t another bank that is needing funds bring the excess balance back toward the desired level? I mean the banks lend to each other all the time without the Fed ever getting involved at the Fed Funds rate! Wouldn’t this tend get the Fed involved in more financial transactions rather than less? I thought the Fed was supposed to regulate and let the banks do their thing and only come to the Fed when absolutely necessary at the discount rate.

I just see it as an excuse to give the banks more free money. Plus if it is coming from the Fed and not another commercial bank, isn’t it really coming out of taxpayer’s pockets instead of the accounts of another commercial bank?

I understand you wouldn’t want the Fed Funds rate gyrating all over the place; but, is that really what is going on here? I don’t know. This just looks suspicious to me.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEcNpHK8alWg&refer=home

http://www.thedeal.com/servlet/Satellite?pagename=hpa&p=M4YD5AR1&c=TDDArticle&cid=1210002281217

“For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.”

Actually gv, if you study your monetary history you might find out that the boom and bust cycle was discovered by Ricardo and identified as a result of credit expansion by one of the first central banks- The Bank of England (1694).

Fractional reserve banks have existed before that, but without central banking they tended to collapse rather quickly.

History proves price controls do not work.

The Fed will not intervene with bubbles. There is no choice left to the U.S. economy but bubbles – it comes with the FIRE economy. The only hope is discovering early the next mass bubble. It will have some indentifiers: 1) It will have to be a huge area of investement to recoup the trillions in lost asset value of houses 2) It will need to have government backing and sponsorship as in tax breaks and incentives. 3) It will need to be the “hot” topic of the day, the one on everyone’s lips.

A real good guess for the next bubble industry is alternative energy.

Forewarned is forearmed.

I don’t know what happened during the gold standard, but it seems to me pretty obvious that asset bubbles are much more likely to be severe when there’s too much liquidity in the system.

That’s exactly what happened. The FED and other central banks overprinted following the tech bubble crash. That money had to go somewhere. The central banks in general and fractional reserve lending are a big contributor to this mess.

It would be like replacing one faulty paradigm with another one. It won’t work. Regulators should do what they are supposed to do: enforce oversight (e.g. monitoring lending standards, adequate capitalization, proper stress tests..)

As I keep saying the problem with the Federal Reserve is its status as an independent central bank. I don’t think that anybody can still believe after what we have seen in the current episode. Preemptive actions in economics serves no one but a few on Wall Street.

The reason Tanta should be on the forefront of everyone’s mind is that her skills are what keep bubbles from forming. Loan prudently and you’ve got no bubble in anything.

Yes, it’s “no fun” living in a world where risk managers are the leaders. However, now we get to remember what it’s like to live out a bad recession.. one that was thoroughly avoidable, thoroughly preventable, and thoroughly unrequired.

Thank your local Republican!

“When we moved on February 4th, I think our expectation was that we would prick the bubble in the equity markets. What in fact occurred is that, as evidence of the dramatic shift in the economic outlook began to emerge after we moved and long-term rates began to move up, we were also clearly getting a major upward increase in expectations of corporate earnings. While the stock market went down after our actions on February 4th, it has gone down really quite marginally on net over this period. So what has occurred is that while this capital gains bubble in all financial assets had to come down, instead of the decline being concentrated in the stock area, it shifted over into the bond area. But the effects are the same. These are major capital losses, which have required very dramatic changes in the actions and activities on the part of individuals and institutions.

“So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System.” (emphasis ours)
– Alan Greenspan, Chairman of the Federal Reserve

Source: Federal Open Market Committee (FOMC) meeting minutes from March 22, 1994

There’s no hope to identify them and pre-emptively strike. However, if the Fed keeps its eye on the ball on maintaining a stable $, then perhaps there will be fewer of them, when they occur, they’ll be smaller, and perhaps cleaning up the mess won’t be quite as difficult. Or maybe not.