Burce Bartlett: The Fed should stop paying banks not to lend

[Winehole23]

The Federal Open Market Committee (http://www.federalreserve.gov/monetarypolicy/fomc.htm), the policy-making arm of the Federal Reserve, meets Tuesday and Wednesday to discuss what, if anything, it will do to stimulate economic growth. There is widespread speculation (http://www.nytimes.com/2012/07/25/business/economy/fed-leaning-closer-to-new-stimulus.html?_r=1) that it will adopt further “quantitative easing (http://topics.nytimes.com/top/reference/timestopics/subjects/q/quantitative_easing/index.html)” and inject more money into the economy.


Perspectives from expert contributors.


It has done this twice before: between November 2008 and May 2010, and between November 2010 and June 2011. The expected new effort has been labeled QE3.


Many economists, however, are doubtful (http://www.nytimes.com/2012/07/26/business/economy/fed-sees-benefits-and-risks-in-new-moves.html) that more of what hasn’t worked already will do any good. Some suggest that it is time for the Fed to think “outside the box” and do something different.

In a Wall Street Journal commentary (http://online.wsj.com/article/SB10000872396390444873204577537212738938798.html?m od=googlenews_wsj) on July 22, Alan S. Blinder, the Princeton economist and former vice chairman of the Federal Reserve Board, suggested that lowering the interest rate the Fed pays banks on their reserves would force them to lend more and thus stimulate growth.
http://economix.blogs.nytimes.com/2012/07/31/the-fed-should-stop-paying-banks-not-to-lend/?ref=business

[Winehole23]

There is no consensus view on why market interest rates are so low. A lack of demand for loans by businesses is thought to be the key reason. With the gross domestic product growing at only a 1.5 percent rate (http://www.nytimes.com/2012/07/28/business/economy/us-economy-expands-at-1-5-rate.html) in the second quarter, businesses have no difficulty meeting the demand for goods and services without having to invest or expand capacity.


Moreover, nonfinancial corporate businesses have more than $1.5 trillion in financial assets available to them, according to the Fed’s flow of funds report (http://www.federalreserve.gov/releases/z1/Current/). This is money they could invest tomorrow if they saw any need to do so.


Another possibility is that the economy is experiencing de facto deflation; that is, a falling price level. While this is not evident in the consumer price index, economic theory nevertheless suggests that this may be the case.


That is because theory says that the real (inflation-adjusted) interest rate is relatively stable. A recent Federal Reserve Bank of St. Louis study (http://research.stlouisfed.org/publications/es/article/9338) says the “natural rate of interest” historically has been about 2 percent. So if banks are satisfied with a market interest rate of 0.25 percent or less, this suggests that the economy may be experiencing a deflation rate of about 2 percent. (The rate of deflation is added to the market interest rate to yield the real rate.)


If this is true, it explains why the economy appears to be suffering from tight money despite low nominal interest rates and a vast amount of excess reserves in the banking system. Deflation has a paralyzing effect on business activity because downward pressure on prices causes profits to be squeezed.


Indeed, the International Monetary Fund has lately warned (http://www.nytimes.com/2012/07/19/business/global/imf-warns-of-sizeable-risk-of-deflation-in-euro-zone.html) of the danger of deflation, and The New York Times reports (http://www.nytimes.com/2012/07/10/business/global/prices-tumble-across-the-chinese-economy.html) that China is now suffering from it. There is also evidence of deflation in the United States in daily price data (http://bpp.mit.edu/usa/) collected by the Massachusetts Institute of Technology.
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[boutons_deux]

QE is how the Wall St's FED pumps up only the profits of the banks. The profits are sucked from taxpayers.

The FED could lend directly to the US govt, but it lends Money For Nothing to the banks, essentially greedy middlemen, who then use it to buy T-bonds, with taxpayers paying much higher interest to the banks than to the Fed directly.

[Winehole23]

http://www.thedailybeast.com/content/dailybeast/articles/2012/07/31/stop-paying-banks-to-hoard/_jcr_content/body/inlineimage.img.503.jpg/1343747093453.cached.jpg

via David Frum (http://www.thedailybeast.com/articles/2012/07/31/stop-paying-banks-to-hoard.html)