Banks Hoard $1 Trillion in Reserves…and the Federal Reserve "Solution"

Wednesday, December 30, 2009

American banks are sitting on nearly $1 trillion in reserves, holding onto money instead of loaning it out to homeowners and businesses which the federal government has wanted for the past year. Beginning in September 2008, when the financial crisis went super critical, banks went from $45 billion in reserves to more than $900 billion in just four months, thanks to Washington’s bailout efforts. The financial sector has continued to limit credit throughout 2009, reaching the point where the Federal Reserve is now proposing to sell term deposits to banks to absorb some of the banking system’s excess reserves. A term deposit is a short-term investment in which the investor receives a higher rate of return in exchange for an agreement to not withdraw the funds until the term ends.

Fed Chairman Ben Bernanke isn’t offering this program as a solution to free up credit to businesses and individuals, but to keep inflation from accelerating as the economy recovers.
-Noel Brinkerhoff
Why Are Banks Holding So Many Excess Reserves? (by Todd Keister and James J. McAndrews, Current Issues in Economics and Finance)


Brianna 14 years ago
The problem with term deposits to the Fed is that it doesn't take money permanently out of circulation, only temporarily. It might make people feel better for 6 months or a year. But when the bank gets its money back complete with its risk-free, 5% interest profits, not only will the money supply NOT be reduced, but the bank will be that much more likely to loan that money out, thus raising inflation. Incidentally, you should thank your lucky stars that the banks ARE being so conservative with lending. Right now the 900 billion in reserves is part of the MB money supply, the stuff in the bank vaults that has no effect on prices or circulation. It's 6-12 months after a significant portion of that money comes OUT of the vaults that we're going to start having serious problems.

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