Action Gamessys: Making Money Quickly

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.

'Tis the season... Argh.

The Senate Republicans have killed the bill that would provide support for Ground Zero workers who became chronically ill from the effects of their work in the rubble of the World Trade Center.

The workers, many of whom helped in the cleanup and rescue operations as volunteers, have now been twice betrayed by the government they tried to help.

The first time came at Ground Zero itself, when the Bush administration and Rudy Giuliani's City Hall assured them - and the world - that the air was safe to breathe.

Then-EPA chief Christine Whitman famously informed New Yorkers that "their air is safe to breathe and the water is safe to drink." Much later, EPA officials would concede that Whitman's statement only referred to outdoor air far from Ground Zero. And only to asbestos. And only to healthy adults - not children or the elderly. (EPA statements that were not sufficiently upbeat were revised by a White House panel.)

City Hall echoed these bogus claims and warned companies working at Ground Zero that any slowdown in the work could result in fines or termination. (A construction worker who asked Giuliani to give Ground Zero crews Christmas Day off was quickly rebuffed.)

You could understand why, in the crazed hours following the attack, rescuers were encouraged to do whatever they could, without regard to their own safety. But in the long days and weeks that followed, there was both the time and the public health information available to make safety precautions possible. In particular, everybody working anywhere near Ground Zero should have been required to wear respirators that would protect them from contaminants in the air.

The breathing apparatus was uncomfortable and slowed down work. People didn't like wearing all that bulky equipment and readily put it aside when their supervisors didn't insist. In their eagerness to get Wall Street - and the city - back to normal as soon as possible, virtually no one insisted.

I met some of the victims of that laissez-faire attitude when I was researching a book on the Giuliani administration and 9/11. Many of them were construction workers who had been eager to serve as part of the recovery operation. They worked around the clock, breathing in poison that would later corrode their insides, leaving them invalids, barely able to gasp for breath.

They seemed bewildered by what had happened to them. No one was celebrating them as heroes; they were all alone with their beleaguered families in their modest exurban homes, painfully making their way from bed to living room chair to bathroom to bed again in what was left of their continually narrowing lives.

Some of them joined a lawsuit that was recently settled, providing them with health care expenses and modest compensation for their lost livelihoods. (It's well worth asking why men and women who sacrificed so much were forced to sue to get their due.)

Other Ground Zero workers waited, either because their symptoms seemed manageable at first, or because they were in denial, or because they simply expected that the government would take care of them if the consequences of their public service became too great to handle.

They're the ones who were left holding the bag by Senate Republicans.

One of the messages of the death of the James Zadroga 9/11 Health and Compensation Act was that it makes sense to go to court. Not the message the trial-lawyer-averse Republicans might have wanted to send, but they sent it.

Another message is that New York bashing is back. One of the few bright spots in the post-attack landscape was the way the rest of the country rallied around our stricken city.

No more. We saw it during the campaign, when some Republicans tried to use the mosque controversy to make New York City a dirty word. Now it's official - the GOP line about the Zadroga bill was that it was too much money, and that too much of that money went to New York.

It was an uphill climb for the local legislators - particularly in recent months for Senator Kirsten Gillibrand, who labored heroically on this issue. But perhaps it was inevitable. The Senate Republicans have been killing bills all week - labor rights for firefighters, Social Security benefits for the elderly, a firewall against tax breaks for millionaires. You name it.

Thanks to the rule that requires 60 votes to get anything through the Senate, nothing moves without the support of at least two Republicans. The backers of the 9/11 bill thought they had two in Mark Kirk of Illinois and Olympia Snowe of Maine. The expectations about Kirk were reasonable, given the fact that as a member of the House he had voted for the bill earlier this year. Snowe, who's supposed to be a Republican moderate, had indicated support to a reporter earlier this week.

But both of them backed off, claiming they couldn't vote on anything until the Democrats passed the compromise tax bill President Obama worked out with their leadership.

In other words, they have to have proof that the Democrats are going into the tank on tax cuts for the rich before they'll help the men and women who ruined their health at Ground Zero.

The supporters of the bill are now hoping to attach it to that very tax giveaway. It's all too depressing for words.

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Thursday, December 9, 2010

Making Money Quickly

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