Immediately after the recession took a dramatic dive in
September 2008, the Bernanke Fed implemented a policy that continues to
further damage the incentive for banks to lend to businesses. On
October 6, 2008 the Fed's Board of Governors, chaired by Ben Bernanke,
announced it would begin paying interest on the reserve balances of
the nation's banks, major lenders to medium and small size businesses.
You don't need a Ph.D. economist to know that if you pay
banks ¼ percent risk free interest to hold reserves that they can obtain
at near zero interest, that would be an incentive to hold the
reserves. The Fed pumped out huge amounts of money, with the base of
the money supply more than doubling from August 2008 to August 2010,
reaching $1.99 trillion. Guess who has over half of this money parked
in cold storage? The banks have $1.085 trillion on reserves drawing
interest, The Fed records show they were paid $2.18 billion interest on
these reserves in 2009.
A number of people spoke
about the disincentive for bank lending embedded in this policy
including Chairman Bernanke.
***
Jim McTague, Washington Editor of Barrons,
wrote in his February 2, 2009 column, "Where's the Stimulus:"
"Increasing the supply of credit might help pump up spending, too.
University of Texas Professor Robert Auerbach an economist who studied
under the late Milton Friedman, thinks he has the makings of a
malpractice suit against Federal Reserve Chairman Ben Bernanke, as the
Fed is holding a record number of reserves: $901 billion in January as
opposed to $44 billion in September, when the Fed began paying interest
on money commercial banks parked at the central bank. The banks prefer
the sure rate of return they get by sitting in cash, not making loans.
Fed, stop paying, he says."
Shortly after this article appeared
Fed Chairman Bernanke explained: "Because banks should be unwilling to
lend reserves at a rate lower than they can receive from the Fed, the
interest rate the Fed pays on bank reserves should help to set a floor
on the overnight interest rate." (National Press Club, February 18,
2009) That was an admission that the Fed's payment of interest on
reserves did impair bank lending. Bernanke's rationale for interest
payments on reserves included preventing banks from lending at lower
interest rates. That is illogical at a time when the Fed's target
interest rate for federal funds, the small market for interbank loans,
was zero to a quarter of one percent. The banks would be unlikely to
lend at negative rates of interest -- paying people to take their money
-- even without the Fed paying the banks to hold reserves.
The next month William T. Gavin, an excellent economist at the St.
Louis Federal Reserve, wrote in its MarchApril 2009 publication:
"first, for the individual bank, the risk-free rate of ¼ percent must
be the bank's perception of its best investment opportunity."
The Bernanke Fed's policy was a repetition of what the Fed did in
1936 and 1937 which helped drive the country into a second depression.
Why does Chairman Bernanke, who has studied the Great Depression of
the 1930's and has surely read the classic 1963 account of improper
actions by the Fed on bank reserves described by Milton Friedman and
Anna Schwartz, repeat the mistaken policy?
As the
economy pulled out of the deep recession in 1936 the Fed Board thought
the U.S. banks had too much excess reserves, so they began to raise the
reserves banks were required to hold. In three steps from August 1936
to May 1937 they doubled the reserve requirements for the large banks
(13 percent to 26 percent of checkable deposits) and the country banks
(7 percent to 14 percent of checkable deposits).
Friedman and Schwartz ask: "why seek to immobilize reserves at that
time?" The economy went back into a deep depression. The Bernanke Fed's
2008 to 2010 policy also immobilizes the banking system's reserves
reducing the banks' incentive to make loans.
This is a bad policy even if the banks approve. The
correct policy now should be to slowly reduce the interest paid on
bank reserves to zero and simultaneously maintain a moderate increase
in the money supply by slowly raising the short term market interest
rate targeted by the Fed. Keeping the short term target
interest rate at zero causes many problems, not the least of which is
allowing banks to borrow at a zero interest rate and sit on their
reserves so they can receive billions in interest from the taxpayers
via the Fed. Business loans from banks are vital to the nations'
recovery.
The fact that the Fed is suppressing lending
and inflation at a time when it says it is trying to encourage both
shows that the Fed is saying one thing and doing something else
entirely.
I have previously pointed out numerous other ways in which the Fed is working against its stated goals, such as:
- Reinforcing cyclical trends (when one of the Fed's main justifications is providing a counter-cyclical balance);
- Increasing unemployment (when the Fed is mandated by law to maximize employment); and
- Encouraging financial companies to make even riskier gambles in the future (when it is supposed to stabilize the financial system).
And see this.
Postscript: If the Fed really wants to stimulate the economy, it should try Steve Keen's idea.
This guest post is by Roman from how this website makes money.
Two years ago I stumbled across the concept of blogging for money. Instantly it hit me as the perfect thing: sit behind a computer, design a site, write, be my own boss, work from home, what could be better? I knew nothing about traffic, SEO, backlinks, Pagerank, or keywords. I knew nothing about how to make money with a website. So what did I do next? I registered the domain name howthiswebsitemakesmoney.
Looking back all I can do is laugh at my arrogance. Like thousands before me and thousands who will come after me, my first attempt at blogging was a site about making money online.
Two years later, I know how to start a site, I know how to write content, I know about SEO, I know about backlinks, I know how to add advertisements … but I still do not know how to make good money online. The site makes dimes a day, not dollars.
The site has been two years of disappointment. Two years of waking up in the morning and seeing the same green egg in AdSense. Two years of waiting for a four-digit affiliate check with my name on it. Two years of working without pay. Two years of scratching my head.
So I asked for advice, and every time the reply was the same: create a site about something else. Create a site about what you know and what you enjoy. Do not create a site with the intent to make money, create a site with the intent to help people by doing something you enjoy doing.
What happened when I changed my intent
Six months ago I created a new site. This time my intent was pure pleasure.
I live in Prague and I love it here. So I made a little site about how great Prague is and what people should do when they come for a visit. It was built in a month. In a gust of activity I designed the site and wrote the content.
It was so easy. I did not agonize over what to write about. The content flowed effortlessly from my head to the keyboard. I did not have to take long walks with the dog or waste water standing dazed in the shower coming up with new ideas. I just sat down at the computer and wrote about what I know. It was so easy I actually looked forward to it.
As an afterthought, I created a simple page where people can order a real postcard from Prague. Visitors select a picture of Prague and fill out a form indicating what they want written on the postcard. After they hit the Submit button I get the request by email. I grab a postcard and, like an ancient scribe long before computers, lick the tip of the pen and write. After pounding a Prague stamp on the postcard I toss it into the mailbox on my way to work. I charge $4.00 for this five minutes of work.
I created this site with no aspirations of becoming rich, no day dreams of shaking hands with Oprah, no imagined scenes of telling my employer to find some other donkey to kick around. I created the website because it was easy for me to do and I enjoyed it. I made it because I needed a break from my ‘real’ website. I expected nothing to happen.
Again, I was wrong.
My hand is ink blue from all the postcards I have written.
I wrote a postcard from a son playing a trick on his mother: “Hi, Mom! Sorry for not calling in last few days. But I am in Prague with friends. Having a great time and the beer is sooo cheap. Say hi to Dad.”
I have written postcards to countries all over the world. Some of them in languages other then English—I have no idea what I am writing. Fortunately, the order form does not allow Chinese characters!
I get emails from people thanking me for the information they found on the site, thanking me for the postcard, asking for more information.
I feel like I am making the world a better place. I made a website about something I know about and am interested in and people are thanking me. Emotionally it is a soft, warm, fuzzy ball.
And yes, I am making money.
Intend to enjoy and you might make money
I learned a lot about making money online not from my site about making money, but from licking postage stamps.
New arrivals to the make-money-online scene go through the same initiation—they start out with the intent to make money, then fail to make more then a pile of pennies. For some it means the end and they quit, but for others this brutal introduction teaches them that their intent needs to change.
Of course, making money is about traffic, clicks, affiliates, backlinks SEO, but it’s also about finding something you enjoy doing. If your intent is only to make money the odds are stacked against you: you will probably quit. But if your intent is to do something you enjoy then you will keep moving forward until one day, you will be surprised to find that you are making money.
What’s your intent?
Roman intends to figure out how this website makes money. He has been trying to do that for two long years, so when he needs a break and do something fun he goes onto his other website to send a real postcard to his mother who misses him very much.
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<b>News</b> And Notes: 11.29.2010 - Blueshirt Banter
News And Notes: 11.29.2010. ... News And Notes: 11.29.2010. Joe_2_tiny by Joe Fortunato on Nov 29, 2010 10:03 AM EST in Rangers Analysis � Tweet � 0 comments; Story-email Email; Printer Print ...
Fox <b>News</b> claims anti-fees protests were "rebellion against big <b>...</b>
Rupert Murdoch's Fox News has again been caught misrepresenting video footage, claiming the anti-fees protests were a rebellion against big government.
Simpsons Fox <b>News</b> | Simpsons O'Reilly | Simpsons Fox <b>News</b> Joke <b>...</b>
Last night, for the second week in a row, The Simpsons took a shot at corporate cousin Fox News. However, if you're clicking over to Hulu or Fox's websites to check out this week's helicopter gag, you're going to be disappointed.
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