Federal Reserve pushes for elimination of reserve funds requirement

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Federal Reserve pushes for elimination of reserve funds requirement

 

http://finance.yahoo.com/tech-ticker/bernanke-wants-to-eliminate-reserve...

 

'Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system".'

 

I love it when they use phrases like "distortions on the banking system" and do it with a straight face.  It really is a talent.

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Re: Federal Reserve pushes for elimination of reserve funds ...

This seems outrageous until you realize that banks are not actually required to hold reserves today.

The next move will make it illegal for banks to hold reserves......if that happens....goodbye deflation, goodbye country.

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Re: Federal Reserve pushes for elimination of reserve funds ...

 

Money is not working for the people, only the banks who loan credit (debt) to people and charge interest.  But YOU'RE FREE!!!!!  free to take orders and move on to believe the facade of America

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Re: Federal Reserve pushes for elimination of reserve funds ...

This just totally blows my mind! True story: I saw this post very briefly when I woke up in the middle of the night (my time) to see why the trade alarm on my brokerage account had gone off, then went back to bed. When I woke up this morning, I thought Wow! That was the most surreal, realistic feeling dream I ever had! I actually dreamt that I had read that the Fed wanted to eliminate the reserve requirement!" In other words, I find this story so completely mind-boggling that I was simply unwilling to believe it really existed. I am now thoroughly awake, have pinched myself several times, and still can't believe it.

I hope Chris Martenson will comment on the significance and meaning of this!

My own take is that this can only mean one thing: The banking system is so totally insolvent (i.e. if they actually took the write-downs that sound accounting practices would dictate) that Bernanke has concluded that the now year-old effort to give the banks free money won't be enough to repair their balance sheets to the point of (true) solvency. Eliminating the reserve requirement effectively means they don't have to be solvent.

I'm absolutely dumbfounded to understand how this announcement could even be made with a straight face, or that the blogosphere would not go absolutely balistic in reaction. I haven't seen anything else about it yet.

Erik

 

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Re: Federal Reserve pushes for elimination of reserve funds ...
Erik T. wrote:

My own take is that this can only mean one thing: The banking system is so totally insolvent (i.e. if they actually took the write-downs that sound accounting practices would dictate) that Bernanke has concluded that the now year-old effort to give the banks free money won't be enough to repair their balance sheets to the point of (true) solvency. Eliminating the reserve requirement effectively means they don't have to be solvent.

 

Mark to fantasy was absurd but it makes this believable. 

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Re: Federal Reserve pushes for elimination of reserve funds ...

If the banks are not required to have any reserves does that not imply that a bank could create as much money as it wanted by making any loan at all?

 

It seems to me that this would mean that your local neighborhood bank could be in an instant bigger (in terms of money creation)  than Citi, or B of A or for that matter the FED. This would start a competition to see who could create the  most money the fastest.

 

Step right up and get your Trillion Dollar Latte loan before Latte prices go up. Cool

I think that I will start my own bank and loan myself and my friends several Quadrillion Dollars. Too bad the name Goldman Sachs is already taken.

 

Ken

 

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Re: Federal Reserve pushes for elimination of reserve funds ...

And guess what they'll all be nudged-nudged, winked-winked into buying with their limitless credit?  If you guessed US debt, you are correct, Sir!!

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Re: Federal Reserve pushes for elimination of reserve funds ...
Farmer Brown wrote:

And guess what they'll all be nudged-nudged, winked-winked into buying with their limitless credit?  If you guessed US debt, you are correct, Sir!!

FB, please clarify this for me....I thought the bank reserves were already "invested" in US debt. If they eliminate the reserve requirement, aren't they attempting to force the banks to create private debt?

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Re: Federal Reserve pushes for elimination of reserve funds ...

Bank reserves are invested with the Federal Reserve, which pays interest above the US bill rate.  It's basically free money.  My guess is the Fed Reserve does not want to keep paying this interest and it would be better for both them and the US Gov for the banks to invest those reserves in T-bills.  Of course, I could be wrong.

 

JAG wrote:
Farmer Brown wrote:

And guess what they'll all be nudged-nudged, winked-winked into buying with their limitless credit?  If you guessed US debt, you are correct, Sir!!

FB, please clarify this for me....I thought the bank reserves were already "invested" in US debt. If they eliminate the reserve requirement, aren't they attempting to force the banks to create private debt?

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Re: Federal Reserve pushes for elimination of reserve funds ...
kenc wrote:

It seems to me that this would mean that your local neighborhood bank could be in an instant bigger (in terms of money creation)  than Citi, or B of A or for that matter the FED. This would start a competition to see who could create the  most money the fastest.

I don't think this is the case.  In order for a bank to lend it still has to have the deposits made at some point to be able to lend them.  It just means that the system as a whole has no limiting factor.  That is the reserves sucked just a little bit off the amount that could be lent with each successive loan.  This would ultimately result in all existing money being held in reserves with the maximum number of loans outstanding (the multiplier effect).

Without reserve requirements it means the bank system as a whole can lend out as much as they want without having to wait for the Fed to create new money on occasion, but for an individual bank it's still limited by the deposits they receive.  Remember, banks don't actually "create money", although we say that all the time.  They can only lend what they have taken in desposits, it just those deposits can be relent multiple times within the context of the entire Federal Reserve System.

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Re: Federal Reserve pushes for elimination of reserve funds ...
rhare wrote:
kenc wrote:

It seems to me that this would mean that your local neighborhood bank could be in an instant bigger (in terms of money creation)  than Citi, or B of A or for that matter the FED. This would start a competition to see who could create the  most money the fastest.

I don't think this is the case.  In order for a bank to lend it still has to have the deposits made at some point to be able to lend them.  It just means that the system as a whole has no limiting factor. 

...

Remember, banks don't actually "create money", although we say that all the time.  They can only lend what they have taken in desposits, it just those deposits can be relent multiple times within the context of the entire Federal Reserve System.

I agree with rhare, but would take it even a step farther: Your local neighborhood bank has neither the sophistication nor the lack of moral integrity required to engineer a scam where banks lend back and forth to one another, creating an indefinite amount of money by consciously and intentionally re-lending the same funds over and over and over again. Big Wall Street banks do.

Erik

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Re: Federal Reserve pushes for elimination of reserve funds ...
Erik T. wrote:

I agree with rhare, but would take it even a step farther: Your local neighborhood bank has neither the sophistication nor the lack of moral integrity required to engineer a scam where banks lend back and forth to one another, creating an indefinite amount of money by consciously and intentionally re-lending the same funds over and over and over again. Big Wall Street banks do.

That got me to thinking.  This is probably just a push the can down the road a bit farther game.  After all, if banks can swap these loans, that means they can borrow to cover any liability such as bad loans.  How long until we see the big banks agree to "interest free loans" to each other to help insure liquidity in the system.  Isn't this a way to permanently keep the bad loans (defaults) on the banks balance sheet at full value?

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Re: Federal Reserve pushes for elimination of reserve funds ...

It has only been a self- interested lack of total cooperation that has kept this from happening thus far,  but now it is only in self-interest that they attempt to keep each other artificially alive by playing an endless game of hot potato.  As long as they keep cooperating with each other under the pretense that they are competitors there is nothing to stop them.....

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Re: Federal Reserve pushes for elimination of reserve funds ...

Isn't this the equivalent of giving a junkie a speed ball?

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Re: Federal Reserve pushes for elimination of reserve funds ...

 

By eliminating  the reserve requirement  you eliminate the market for Fed funds (overnight loans between banks for reserve money)   making it faster  to expand bank credit.

 

 

 

 

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Re: Federal Reserve pushes for elimination of reserve funds ...

Either I'm missing the point, or this story has been ridiculously under-reported. I haven't even seen anything on ZH about it yet, although I haven't caught up with Friday's posts yet.

If my understanding is correct, this means two banks can write a computer program in 5 minutes that lends money back and forth over and over again, and create an unlimited amount of money in the money supply by doing so. At will, with no governmental supervision or control.

If this really has the ramifications I think it does, it seems like it should be the big story of the year. Maybe I'm missing something, but without a reserve requirement it seems to me that banks effectively have an unlimited license to print an unlimited amount of money. What am I missing?

Erik

 

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Re: Federal Reserve pushes for elimination of reserve funds ...
Erik T. wrote:

Either I'm missing the point, or this story has been ridiculously under-reported. I haven't even seen anything on ZH about it yet, although I haven't caught up with Friday's posts yet.

If my understanding is correct, this means two banks can write a computer program in 5 minutes that lends money back and forth over and over again, and create an unlimited amount of money in the money supply by doing so. At will, with no governmental supervision or control.

If this really has the ramifications I think it does, it seems like it should be the big story of the year. Maybe I'm missing something, but without a reserve requirement it seems to me that banks effectively have an unlimited license to print an unlimited amount of money. What am I missing?

Erik

 

 

Hi Erik,

I am sure that you know a lot  more about banking than I do but that was my take also. It seemed that there was no limit on how much money could be created.

 In spite of the earlier comment from someone else that only Wall Street Banks would do what you are describing I think the smaller banks would soon fiqure out out to play the game.

It also seems to me that  What Bernanke Wants- Bernanke gets. So, it would not surprise me if the politicos actually do something like this.

 

Ken

 

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Re: Federal Reserve pushes for elimination of reserve funds ...

Hey Erik-

   I just stumbled across this article, "Money Out Of Thin Air: Now Federal Reserve Chairman Ben Bernanke Wants To Eliminate Reserve Requirements Completely?" at: http://theeconomiccollapseblog.com/archives/money-out-of-thin-air-now-federal-reserve-chairman-ben-bernanke-wants-to-eliminate-reserve-requirements-completely.  (hat-tip to http://theautomaticearth.blogspot.com/2010/03/march-19-2010-bread-and-games.html).  Here's an excerpt

Up until now, the United States has operated under a "fractional reserve" banking system.  Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system". At least that is what a footnote to his testimony before the U.S. House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all?

That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website....

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

If there were no minimum reserve requirements, what kind of chaos would that lead to in our financial system?  Not that we are operating with sound money now, but is the solution to have no restrictions at all?  Of course not.

What in the world is Bernanke thinking?

But of course he is Time Magazine's "Person Of The Year", so shouldn't we all just shut up and trust his expertise?

Hardly.

   The article also has a number of comments.  Some "right on" (from my perspective), others from people still taking the blue pill ("everything will be just fine!")!!  Unreal!

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Re: Federal Reserve pushes for elimination of reserve funds ...

Forgive me if I'm missing something, but...

Suppose this goes thru. Then you go to your local bank branch and present a withdrawal slip, and say "Good Morning, I'd like to withdraw ten dollars, please."

What's to stop them from saying "Sorry, we don't have it".

But you better have it!!! I deposited $100,000 in cash just yesterday!

Yes, but we lent it all out, and we have no cash left.

But I want to make a withdrawal! You have to have some cash!!!

No, we don't. That was last week. Starting this week, we don't have to have any, and we don't. Sorry, come back tomorrow.

Am I totally missing the point here or something?

Erik

 

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Re: Federal Reserve pushes for elimination of reserve funds ...

I read the Federal Reserve's position and two things really struck me.  First, the intended goal is to remove lending restraints from the irresponsible banks.  Second, there is no explanation as to how the new mechanics might work.

In Europe, I don't think there are any "fractional" reserve requirements on banks and more to our situation, I don't think they have been in place in the U.S. either.  At least not in the way we have been led to believe (fractional lending money multipliers that allow a percentage of deposits to be lent out).  Take for example the big investment banks that have few deposits but yet create a good portion of money for their own accounts.

My understanding is that there are two key ratios that determine if and how much a bank may create as loans. It is up to regulators to ensure that banks maintain the required minimum ratios.

1. Capital Ratio - is the ratio of a bank’s capital (equity) to a risk-weighted sum of the bank's assets. I think the weightings are 0 for reserves, 0 for government securities, 0.2 for loans to banks, and 1.0 for ordinary loans. The BIS (Bank of International Settlements) has established a minimum capital ratio of 8% but I am not sure if it is currently used by the Fed.

2. Leverage Ratio - is the ratio of a bank's equity to the unweighted sum of its total assets. I think the required minimum is 3 - 10%, depending on the size of the bank. The reserve ratio is the ratio of a bank's reserves (deposits at the Fed plus vault cash) to its demand deposits, i.e. checking deposits.

If a bank is unable to maintain the minimum ratios, technically they cannot lend regardless of any "fractional lending" multipliers that might be used. If a bank loses money through loan defaults, bad investments, fraud, etc., their liabilities may exceed their asserts and they become vulnerable to a bank run. This is a major problem today as regulators have not done their job and subsequently, we have lots of insolvent banks.

So what does this new policy mean?  I think Erik hit it earlier when he wrote that:

"My own take is that this can only mean one thing: The banking system is so totally insolvent (i.e. if they actually took the write-downs that sound accounting practices would dictate) that Bernanke has concluded that the now year-old effort to give the banks free money won't be enough to repair their balance sheets to the point of (true) solvency. Eliminating the reserve requirement effectively means they don't have to be solvent."

But it gets worse...consider this...

Banks are allowed to create money for their own investment accounts.  In the past, commercial banks were separate from investment banks but that barrier was removed under the Clinton administration.  Commercial banks were the traditional bank down the street that made loans and provided checking accounts.  Investment banks acted as money centers, they created money via acquisitions, mergers, investments, etc.

More details are needed but it looks as though banks will become gigantic hedge funds with an unlimited ability to create free money.  And don't forget, we back up every dollar they create even if we don't borrow them.  They are creating money under our national credit for their profit while we, and future generations, assume the losses and get stuck with a monetary system that is becoming totally debauched.

What will they do with the new money?  They will lend what makes sense and use the rest to buy the country with our credit.  Welcome to fascism and debt slavery.

Larry

Note, just to be more clear about the fractional reserve (money multiplier) myth, here is a chart from the Fed.  The "money multiplier" fell below 1.  I don't think deposits have grown this much.  I think it is because the banks are insolvent under the ratios I described above.

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Re: Federal Reserve pushes for elimination of reserve funds ...

I'm especially curious as to how this will impact the banks on the troubled list. I.E. will it positively effect their perceived solvency? 

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Re: Federal Reserve pushes for elimination of reserve funds ...

Larry, perhaps this is the reason the Fed has changed the rules. The economy is contracting. The slowing down of the economy and the fact that they can't get anyone to buy the treasury bonds is dictating creative financing.

http://www.netcastdaily.com/broadcast/fsn2010-0320-2.mp3

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Re: Federal Reserve pushes for elimination of reserve funds ...
Erik T. wrote:

Forgive me if I'm missing something, but...

Suppose this goes thru. Then you go to your local bank branch and present a withdrawal slip, and say "Good Morning, I'd like to withdraw ten dollars, please."

What's to stop them from saying "Sorry, we don't have it".

But you better have it!!! I deposited $100,000 in cash just yesterday!

Yes, but we lent it all out, and we have no cash left.

But I want to make a withdrawal! You have to have some cash!!!

No, we don't. That was last week. Starting this week, we don't have to have any, and we don't. Sorry, come back tomorrow.

Am I totally missing the point here or something?

Erik

 

Don't worry Erik, I heard that Helicopter Ben has ordered small scale printing presses for each bank.  They are really fast machines.  Your wait should be short.Laughing

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Re: Federal Reserve pushes for elimination of reserve funds ...

I am on board with the idea that this is the fed's manner of dealing with the essential insolvency of the banking system.  You take the addict and give him one big ole monster shot of speed to jolt him back to life.......     

Clearly this has to collapse,  but what they're doing is zapping more life into the shambling zombie that is our economy.  So how long will this little fraud keep the zombie walking??  How long before the body parts start falling off?

And is there any way for the average Joe to make any money off it before it crumbles??

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Re: Federal Reserve pushes for elimination of reserve funds ...

I have a feeling this probably has to do with encouraging more banks to buy more treasury debt. Just a hunch - that's what the Fed needs now is more treasury buyers.

Is there a way that this change makes it possible to churn more and more money into treasury debt?

Erik

 

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Re: Federal Reserve pushes for elimination of reserve funds ...
Erik T. wrote:

Forgive me if I'm missing something, but...

Suppose this goes thru. Then you go to your local bank branch and present a withdrawal slip, and say "Good Morning, I'd like to withdraw ten dollars, please."

What's to stop them from saying "Sorry, we don't have it".

But you better have it!!! I deposited $100,000 in cash just yesterday!

Yes, but we lent it all out, and we have no cash left.

But I want to make a withdrawal! You have to have some cash!!!

No, we don't. That was last week. Starting this week, we don't have to have any, and we don't. Sorry, come back tomorrow.

Am I totally missing the point here or something?

Erik

Erik,

You know it doesn't work that way. Banks don't make loans from deposits,  deposits are made from loans.

Mish's Global Economic Trend Analysis: Fictional Reserve Lending ...

This is a situation where the law is simply catching up to reality. 

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Re: Federal Reserve pushes for elimination of reserve funds ...

"This is a situation where the law is simply catching up to reality."

 +1 ..

 Can't remember if it was Mish or Steve Keen that described the lend first, find reserves later idea..

 Along with mark to fantasy, ( don't ask, don't tell   ?) it's another qualitative nail in the woodworm-infested coffin of BAU..

 Reserves ? We don't need no steenkin reserves!!

 As Bill Hicks  (god bless) might say.. "Is this real ? Or is this just a ride !?"

 

ps No reserves.. hmm, wouldn't that imply for any depositor with an IQ above say room temp.. = BANK RUN !

 

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Re: Federal Reserve pushes for elimination of reserve funds ...
plato1965 wrote:

 Can't remember if it was Mish or Steve Keen that described the lend first, find reserves later idea..

 

I first read it in Steve Keen's paper The Roving Cavaliers of Credit, but the observation was first made over thirty years ago:

This first major paper on this approach, “The Endogenous Money Stock” by the non-orthodox economist Basil Moore, was published almost thirty years ago.[4] Basil’s essential point was quite simple. The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

No need for a run on the bank (FDIC)....but your money market account may be a different story.

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Re: Federal Reserve pushes for elimination of reserve funds ...

U.S. Bank Reserve Levels: Excess, Prudent or Insufficient?

http://seekingalpha.com/article/195805-u-s-bank-reserve-levels-excess-pr...

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