Friday, March 19, 2010

Fed Chief Wants to Eliminate Bank Reserves

The link below is a transcript of Federal Reserve Chairman Ben Bernanke's Feb 10, 2010 testimony to Congress. The last line of the final note at the end of the letter has the pertinent statement that the Fed may eliminate reserves completely.

Here is my analysis:

With over a trillion dollars in excess reserves right now, the banking system is not limited by reserves. Since its founding in 1913 the Fed has steadily destroyed the public's understanding of real money. Therefore, eliminating reserves fits into the scheme of things as just another move away from any semblance of sound money.

Without reserve requirements, the banking system would have no limits to its manufacture of money; therefore, I see this as a step toward government allocation of credit--the government's ultimate goal. Because the banks would be in a position to expand credit without limit, the government could claim that only it has the foresight and the power to prevent another crisis. This is the banking system as it was practiced during the communist reign in Eastern Europe. I taught many East European bankers at the University of Wisconsin in the late '90's. They related that the role of bankers during the communist era was simply to implement orders from the government; that is, allocate so much credit to the steel industry, so much to agriculture, etc.

If sound money is eliminated and the banks are not required to hold any reserves, there hardly is any other way to conduct banking.

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