Under New Management by Mike Kirchubel
Excess Reserves - What, me worry?
For the past two weeks, in this Daily Republic column, we've been examining Senators Elizabeth Warren and Bernie Sanders' four questions for the next Federal Reserve Chairman. This week's question is: "What would you do to divert the $2 trillion in excess reserves that financial institutions have parked at the Fed into more productive purposes, such as helping small- and medium-sized businesses create jobs?" Faithful Fairfield readers will recall that I've discussed this $2 trillion in excess reserves several times in the last two years.
When you buy a home in Fairfield and the bank lends you $250,000, they don't go to their vault, scrape together a bunch of cash, put it in a paper bag, and hand it to you; they simply create new money out of thin air. Banking regulations require them to have about ten percent in reserve to back-up that loan. In your case, $25,000 would be put aside as a "required reserve" for your home loan. A bank's "excess reserve" is the amount of money they have beyond the amount needed to satisfy their regulatory requirement to cover all their outstanding loans. As you might imagine, bankers looking to make as much profit as possible, would try to loan out all of their money and keep their bank's "excess reserves" at zero. Traditionally, that's what they've done. The Federal Reserve keeps track of our nation's bank reserves and publishes a report every other week showing the "excess reserves," how much bank money is sitting idle, available to loan. If you graph that number from 1960 to 2008, it is essentially a flat line hugging zero. Since 2008, however, it shoots up like a jagged lightning bolt into the sky, going from near-zero to $2 trillion. What this means is that American banks can loan another $20 trillion whenever they desire. To put this number into perspective, the bankers are holding onto twenty times the amount of "excess reserves" as they have in "required reserves" for all the loans they've already made, or twenty times the total amount of cash in circulation.
In 2008, to ease the banker-induced liquidity crisis, the Federal Reserve started buying bundles of toxic, mortgage-backed securities, from American banks. These purchases provided banks with cash, or "excess reserves," which eased the locked-down credit markets and kept our economy from spiraling-down into a full-blown depression. The $2 trillion "excess reserves" the bankers are sitting-on represents the Fed involvement in this banking crisis, but far from pondering an exit strategy for unwinding its massive mortgage and bond position, the Fed is still actively buying; $30 billion more mortgages just last week. Meanwhile, the banks are not investing their new-found fortunes in loans for deserving Americans, but in their own speculative trading in commodities, stocks, municipal bonds, utilities, and anything else that will give them a bigger bang for their bucks. This risky behavior is backed by the assurance, the "moral hazard," that we taxpayers will bail them out if they lose, because they are "too big to fail." In addition, thanks to the Republican-controlled House of Representatives, Senate, and President of 2006, we taxpayers are now paying the bankers interest on all of their reserves.
How does this $2 trillion banker subsidy affect us right here in Fairfield? It shows itself as a stubborn 8% unemployment rate, and higher prices for everything from aluminum cans to cars to electricity. The answer to the senators' fourth question is found in questions two and three: Break-up our too-big-to-fail banks and re-institute Glass-Steagall regulations, splitting staid bank loans from their casino operations. We must make banking boring again.