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?"

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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.     

Authors Website: http://www.amazon.com/Vile-Acts-Evil-Banking-America/dp/1448

Authors Bio:
Mike Kirchubel writes a weekly Progressive/Economic column for the Fairfield, California Daily Republic and is the author of: Vile Acts of Evil, a look at the hidden economic history of the United States.

Vile Acts of Evil almost wrote itself. With minimal prodding on my part, this long-buried story tenaciously clawed its way up to daylight through thick strata of rock-solid historic catechism and economic dogma. The words of Benjamin Franklin, Thomas Jefferson, Andrew Jackson, Abraham Lincoln, Theodore Roosevelt, Woodrow Wilson, Franklin Roosevelt, and about a hundred other notables seamlessly wove themselves together forming a web of intrigue. Each of these venerable men spoke the truth as he saw it in his day and their isolated patches of quotes spanning over two hundred years - formed a flowing, continuously consistent story quilt when sewn together. So, when you find your warm, well-worn, and comfortable convictions at odds with what you read, when you suddenly discover yourself angry, muttering or yelling at this book, when you absolutely refuse to believe what is written, don't get mad at me; take it up with these gentlemen, because it is his story, his story, history.
Newsworthy events are typically viewed through many eyes, from several angles, and refocused through the mental lens of each observer's personal predisposition. Every story has at least two versions: The one you are told and the others you must discover. What we have been taught as a child to believe is straightforward factual 'history,' is actually a complex mélange of personal opinions, usually written to bolster or undermine a person or cause; always to the detriment of truth. 'History is mostly guessing, the rest is prejudice' - According to Ariel and Will Durant, whose mammoth collection, The Story of Civilization, defined world history for generations. Writers invariably have a reason for writing and discerning their motive is the key to interpretation and understanding. I claim nothing more here, other than this honesty: You will find my feelings open and transparent, not disguised in twists or spin, or hiding behind the patently deceptive mask of 'Fair and Balanced.' Judge accordingly.

'We cannot understand the role of the people in history unless we also understand the historical illusions which misrepresent history in order to serve the interests of privileged classes.' 'Man cannot fully master his present without reconquering his own history, repossessing the hidden heritage of the past.' John Howard Lawson, The Hidden Heritage, 1950. Your history has been hidden from you. History is written by the winners and, as you will soon understand, these winners, these privileged few, do NOT want you to know their history. Our ignorance enhances their power and knowledge undermines. It is class warfare and truth is the weapon. Wealthy people control your money, mind, and future."

I invite all to review this work - I think you will find it answers many of your questions as to why the world is as it is today. Our current turmoil is not new, not happenstance, and it can be changed.