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Bernanke wants to eliminate reserve requirements

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March 18, 2010 – Comments (16)

Has anyone seen this Tech Ticker

In sum, it says that Bernanke wants to eliminate minimum reserve requirements because it "impose[s] costs and distortions on the banking system". Heres an excerpt:

Up until now, the United States has operated under a "fractional reserve" banking system.  Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system". At least that is what a footnote to his testimony before the U.S. House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all?

That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website....

I don't even want to fathom what would happen if Bernanke succeeded in removing minimum reserve requirements.

16 Comments – Post Your Own

#1) On March 18, 2010 at 12:26 PM, binve (< 20) wrote:

... WHHAAAAAA ???!!!??

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#2) On March 18, 2010 at 12:43 PM, binve (< 20) wrote:

The other option, of course, is the banks are free to just make up a number, and say our reserves are (pull something from Bernake's ass). In fact, I am pretty sure that's where all the new money is coming from in the first place.

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#3) On March 18, 2010 at 1:14 PM, PeteysTired (< 20) wrote:

What bank needs a minimum reserve requirement with insurance like the Federal Reserve and the Federal Gov't?  Why worry about a run on the bank with the same insurance?

Everything is free right?  Right? 

 

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#4) On March 18, 2010 at 1:38 PM, davejh23 (< 20) wrote:

The other option, of course, is the banks are free to just make up a number, and say our reserves are (pull something from Bernake's ass). In fact, I am pretty sure that's where all the new money is coming from in the first place.

I'm pretty sure this is what's going on already.  Who knows what anything on the bank's books are worth?  I've seen estimates that banks have over $2 trillion worth of loans in default that they'd be lucky to only take 50% losses on.  No wonder we have a massive shadow inventory in real estate...collectively, banks are looking at over a trillion dollars in losses that should have been recognized already.

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#5) On March 18, 2010 at 2:17 PM, Melaschasm (53.29) wrote:

This is the exact opposit of what I recommend.  I think that banks should be required to have much higher reserves, particularly during good economic times. 

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#6) On March 18, 2010 at 3:25 PM, binve (< 20) wrote:

Further: I think all the restrooms at the Federal Reserve are being renamed: FRN Manufacturing Facilities.

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#7) On March 18, 2010 at 4:07 PM, Tastylunch (29.25) wrote:

Please say this is a joke or a misunderstanding.

please. :(

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#8) On March 18, 2010 at 4:57 PM, neutrinoman (< 20) wrote:

Well, it *is* true that during the Greenspan era, the big money center banks were allowed to operate at too-low reserve requirements.  That was the single most important bad thing Greenspan and the bank regulators did. (They specifically lowered - drastically - the reserve requirements for mortgage debt.) It raised leverage and profits at the banks, and grew the supply of credit, for a while, but made banks fragile and needing repeated rescue, while the Fed and taxpayers ate the bill.

However, the panic on this page is based on a misundersanding.  A key sentence in the testimony is: "The Federal Reserve anticipates that it will eventually return to an operating framework with much lower reserve balances than at present and with the federal funds rate as the operating target for policy."  The Fed has been inducing banks to maintain higher reserves during the crisis, by paying banks interest on reserves they keep at the Fed, to serve as a cushion against more losses.

As a reversal of the emergency policy, the Fed anticipates winding this policy down, to push reserves back to the banks.The issue will then be, what reserve ratio will the banks be required to operate at in the future?

The critical (misinterpreted) sentence is: "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

It means *reserves the banks keep at the Fed, that the Fed pays them interest on.*  it *doesn't* mean reserve requirements for the banks to keep on their own books and on their own account.

Calm down :)  BTW, I'm a big Fed critic myself, esp of Greenspan.  I think Bernanke did a good job during the crisis, but he and Greenspan helped to create it in the first place.

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#9) On March 18, 2010 at 4:58 PM, oldfashionedway (35.68) wrote:

"Change you can believe in..."

The 'minimum reserve requirements' have been replaced by electronic funds transfers and the printing press.

Heaven help us.

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#10) On March 18, 2010 at 5:13 PM, PeteysTired (< 20) wrote:

How does one get access to the Fed Funds window?  I need to create a bank, so I can have access to this window....a window of opportunity :)

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#11) On March 18, 2010 at 5:22 PM, oldfashionedway (35.68) wrote:

After reading the next to last paragraph (and footnote #9) in the above linked statement by the Fed, it appears that neutrinoman is correct.

Banks no longer need to loan money to businesses or individuals when they can get paid to let the Fed hold their 'reserves' for them?

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#12) On March 18, 2010 at 5:41 PM, scoobamang (< 20) wrote:

I would like to see what Jakilla, one of the most ardent supporters of central banking on the Motley Fool, has to say about this move.

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#13) On March 18, 2010 at 5:56 PM, Tastylunch (29.25) wrote:

neutrinoman

whew, that makes a lot more sense.

given the insanity we've over the last decade,I don't take anything for granted anymore.

thanks for saving me a nervous read. :)

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#14) On March 18, 2010 at 7:31 PM, outoffocus (22.91) wrote:

neutrinoman

Yea it does makes sense.  The big banks have such a sweet deal with the Fed they don't even want new deposits (of real money).  If thats not a sign of trouble I dont know what is.

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#15) On March 18, 2010 at 11:39 PM, awallejr (83.78) wrote:

neutrinoman excellent response, + rec to you heheh.

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#16) On March 19, 2010 at 11:12 AM, RookieQB (28.75) wrote:

+1 to outoffocus

+1 to neutrinoman

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