Tuesday, August 4, 2009

Excess Reserves, the Federal Deficit and Fed Manipulation

Amazing statistic: excess reserves in our banking system are up to $744 billion. This is from an average of $1.7 billion from 2002-2007. That is an increase of 43,645 percent! Excess reserves are defined as cash kept by banks on deposit with the Fed, above the minimum reserve requirements.

So, there is a ton of money sloshing around in our banking system. Where did the excess reserves come from? An increase in the personal savings rate, combined with all the federal stimulus money given to banks.

But the banks aren't putting it out in loans! What are they doing with it? Investing in paper securities, esp. government bonds. “Government financing needs are extraordinary right now,” said Tony Crescenzi of Pacific Investment Management Co., which oversees the world’s biggest bond fund. “At some point banks will shift from investing in securities toward making loans, but we haven’t seen that yet.” [quote from Bloomberg here]

Do you see the circularity in this? Banks are bailed out by the Fed. The banks then use that money to purchase government debt. You increase your savings rate, which the banks then use to fund the expansion of the federal deficit. Federal spending is sucking in capital.

Meanwhile, our economy is continuing to grind down from deflation. Commercial and industrial loan growth is decreasing at an anual rate of 4.5%, mirroring the collapse in economic output. Consumer prices fell 1.4% in June from a year earlier, the biggest drop since 1950.

And here is the Fed's role in this scam: the steepness of the yield curve, or the difference between short- and long-term rates, is giving banks incentive to borrow for almost nothing in the overnight lending markets and invest the proceeds in Treasuries.

Keep in mind, while the long-term rate is somewhat market driven, the Fed directly controls the short term rate. In other words, the Fed is intentionally manufacturing the financial flow into government debt.

Listen to this quote from William Dudley, the president of the New York Federal Reserve Bank: a recovery “will be considerably slower than usual,” and “credit availability will be constrained for some time to come.”

Ok, explain me this: with a massive amount of excess cash sitting in bank vaults, why is credit availability constrained???

Do you see what is going on here? Banks are simply hoarding the cash, watching the real economy collapse in a deflation, as they stay liquid and highly profitable by recycling government debt.

Banks love the guaranteed results of government debt during an economic collapse when real investments are liquidating. Cash is king during a deflation, so banks want to be as liquid as possible, to be able to scoop up cheap assets when the markets bottom out. So they are hoarding cash! It is that simple.

The Fed, the federal government, and the banks in general, are sucking the lifeblood out of the real economy, engineering an economic collapse, while guaranteeing banking profits through government debt which is paid by the citizens. The citizens' real economy is royally screwed, and the citizens get to pay for the destruction.

At this point, I am forced to agree with Obama's racist pastor Jeremiah Wright: "God damn America!" This is the devil's work, nothing less.


John Regan said...


Honestly, you're 95% right but you're missing something.

A central bank system cannot get money directly out into the economy. That is, Ben Bernanke's famous "helicopter" comment was just a joke.

The central bank can get it into the banking system, or it can loan it to the government. But "money" never leaves the control of the central bank system until it is LOANED

The only way around this restriction, sort of, is what they are doing. The government is going to go on a spending spree, with $2 and $3 TRILLION deficits as far as the eye can see.

Think about the numbers. $1 trillion can get about 10 million people employed at a cost of $100K per year each. Those 10 million people will then be able to borrow 5-10 times their annual income - about $5-10 trillion. That gets $5-10 trillion out of the banking system and into the economy. The price is huge government debt, but we'll worry about that later, just like we always have.

There are problems with this plan, of course. But that's the plan, no doubt about it.

Justin said...

Nice analysis, John, very true. The other option is to just give the money directly to the people, like my People's Bailout.

There is no legal or practical reason for the government to loan out money, when they could just give it away for free.

The whole system is choking and dying because of the overly-high debt level. People don't want more loans, and the banks aren't lending anyway since they need the money for their rapidly eroding balance sheets.

Anonymous said...


I strongly believe we need a federal reserve audit. The recent stock market action suggests to me the federal reserve is intervening in a free and open market. I believe the biggest beneficiary of this TRILLION DOLLAR stock market move in a couple of weeks was Goldman Sachs. Goldman Sachs sells derivatives in our equity markets its apparent that Goldman Sachs Has Total Control Over our stock market using the unlimited capital available from the federal reserve. I believe Goldman Sachs doesn't have the best interest of our markets. They are misusing the federal reserve to manipulate the stock market and making huge 100 BILLION DOLLAR profits THIS IS ILLEGAL people expect our government to obey the laws just like citizen. Also this manipulation without regards for cost continues to put our government and the people more and more in debt




Imagine controlling the Federal Reserve portfolio of commodities and equities. TO DO WITH AS YOU PLEASE!!!!!!!

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