Why the Fed Is Shooting Blanks

By Shlomo Maital   


   Britain is now officially in recession, and the US is on its way to the second ‘dip’ in its double-dip recession.  EU is hopeless, Asia is slowing and the world is in trouble.

  Facing this,  the Fed’s Ben Bernanke, a top expert on the Great Depression, is trying his best to prevent a repeat of the 1930’s Depression by pumping massive, truly MASSIVE, amounts of money into the American system.  And it just isn’t helping.  Why?

   Simple.  The Fed is shooting blanks.

   The Fed can pump money into the system. But it cannot (unlike China) force the banks to lend the money, nor can it force businesses to borrow it.  Banks have huge losses from asset price collapses and need the money on their balance sheets far more than they need the lending.  Businesses are desperately trying to reduce their debt, in the face of deflation, and there is no way they want to increase it by borrowing.  Small businesses who might like to borrow can’t, because banks are in a panic.  And banks have utterly stopped lending to one another, because, if the other banks are in as bad shape as they know they themselves are in, well – lending to them is a really bad idea.

    And the data:   From 2003-2008,  “excess reserves” (that is, cash banks hold as reserves against deposits and lending, beyond what the Fed requires) was ZERO.  Nada.  Zip.  Why? Because banks make money by lending money, and they want to lend as much as they can to make as much money as they can.

    In 2009, after the Fed’s “quantitative easing”,  excess reserves were $850 b.   Today, they are a staggering $1.5 trillion !   That’s almost a quarter of the entire M2 money supply.   The Fed is pushing on a string.

    Economists have run out of ideas. If interest rates are essentially zero, if money is almost free, if tons of money have been dumped on the banks, if the govt. budget deficit is massive… what more can be done?  

    Feel sorry for Bernanke.  He can see the train coming, he knows we’re on the rails…and cannot figure out what to do about it.  And neither can I. We are shooting blanks at a looming Depression, and cannot find any real ammunition.