Exit Strategy

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed’s lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed’s balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.

The Fed is lending out money. The banks are then putting that money on deposit with the Fed instead of lending that out, because right now they’re afraid. The Fed is displeased that they’re not lending out the money so they’re are going to take that money the banks have lent them and LEND IT BACK TO THEM to try to stimulate lending, but the banks are just going to take that money and deposit it back with the Fed, because it would be financial suicide any other way right now. Free market and all that.

So this money isn’t going anywhere, it’s basically being made up out of thin air. The banks know they have more rotten loans, and are just hoping to be able to survive them when the next wave of implosions hit. That’s why they’re sitting on this money. They know there are more logs in the shit that hit the fan yet to impact. They don’t have to tell anyone though, so they’re busy saying they’re fine. If they really were fine, they’d just splurge with the money because the law allows them to.

This entry was posted on Tuesday, January 13th, 2009 at 16:22.