Toward the end of 2008 the Bernanke Fed administered the beginning of a huge money explosion to remedy the financial crisis and to reduce the ensuing massive unemployment. The very large spike in the monetary base -- cash and bank reserves -- pictured at the St. Louis Federal Reserve web site, is astounding.
Between August 11, 2008 and the end of 2011, the monetary base, which only the Fed can produce, almost tripled with a Bernanke Fed injection of $1.7 trillion dollars.
The total money supply, including all privately-held bank accounts in the U.S, did spurt up at 10.2 percent in 2011. Bank loans to businesses also rose, though they still are far below their height at the beginning of the recession. Most of the money issued by the Bernanke Fed is parked in banks as excess reserves that the banks are not required to hold.
The Bernanke Fed has been paying banks interest on these excess reserves since October 2008. This is an incentive to hold the cash. At the end of 2011 the U.S. banks were holding 88 percent of the monetary base issued by the Fed since August 2008 as excess reserves they are not required to hold. The banks held $1.5 trillion in excess reserves of the $1.7 trillion increase in the monetary base. The Bernanke Fed's interest payments on excess reserves reduces the banks' incentive to make loans to businesses and consumers, slows the recovery and increases unemployment. I described this policy and noted similar criticism from an economist at the Federal Reserve and it was implicit even in Bernanke's own remarks in my 2010 blog, "Malpractice at the Bernanke Federal Reserve," and in 2011.
The Bernanke Fed's newly-released policy to keep interest rates near zero for three more years means the Fed will have to pump in more money -- buy more bonds -- even if most of the money is parked as excess reserves at the banks drawing more billions of dollars in interest from the Bernanke Fed.
This Bernanke Fed's near-zero interest policy produces a huge reallocation of resources away from people and businesses who have their savings invested in bonds or bank accounts and to inferior investments that may fail when interest rates rise toward less manipulated market levels. A similar misallocation of funds occurred during the 1970's when the Federal Reserve increased the nation's money supply causing rapid inflation (over 13 percent in 1980) that resulted in the collapse of most of the savings and loan industry in the 1980's. The Bernanke Fed's planned continued rapid growth policy invites debasement of the U.S. dollar and widespread uncertainty about the continuation of the policy.
The Fed should stop paying banks interest on their excess reserves and allow market interest rates to rise slowly toward market levels so that the Fed can deflate the monetary bubble parked in the nation's banks.
The Bernanke Fed received very good press with its new attempt at openness not only by announcing near zero interest rate targets three years in advance but also by announcing its $76.9 billion transfer of its 2011 "profits" to the U.S. Treasury.
If the Bernanke Fed officials want openness and individual responsibility for their actions they should not make the country wait five years to read their transcripts and they should stop shredding their source transcripts, as I previously described in "Stop the Fed From Shredding Its Records."
The transcripts of the Fed's monetary policy committee, just released for 2006, show that the Bernanke Fed officials could not predict the recession at the end of the next year. This is not stupidity; it is reality in a fast moving international environment. It is deceptive to pretend to know with any precision what will occur in 2014 in order to proclaim that the Fed will keep the money explosion going to keep short term interest near zero until 2014. The January 20, 2012 widely-reported Bernanke Fed press release listed its 2011 income, expenses and net income (that means profit) of which $79.6 billion will be transferred to the Treasury, ostensibly to lower the government deficit.
For example, The Hill, an excellent paper covering the Congress, headlined: "Federal Reserve hands over $76.9 billion profit to Treasury Department."
Could you make a profit if you could print money? The Fed bought securities that pay interest. After deducting its expenses the Fed sends the remainder to the Treasury to reduce the deficit. This intergovernmental transfer is an accounting gimmick and has no economic effect. The Fed's profits are a bad joke as they monetize government deficits with trillion-dollar monetary explosions.
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