Handling The FED’s Bad Policies

April 18, 2015

The FED (Federal Reserve) controls money and credit within the United States. While the President nominates the FED Chair and a few other officers, the FED is NOT part of the US government. To be sure, Congress can abolish the FED, just as the previous US National Banks were, so the FED tends to be “responsive” to what the politicians want.

Over the last 10 years, starting during Bush Jr’s 2nd term, the FED has taken up the slack in buying US Treasuries, since almost nobody else wants those Treasuries. In the process, the FED has swelled its balance sheet to around $4½ Trillion, a jump of 5 times during just the last 6½ years.

As the FED buys those Treasuries, it “prints” brand new Dollars which eventually make there way into various bank deposits. When money is deposited with banks, the banks are required by the FED to keep 10% as reserves, either in their vault or on deposit with the FED. The effect is that, overall in the banking system, the banks may lend out 10 times as much as their deposits.

This “Fractional Reserve” process can expand the US Money Supply greatly. But, since the US Economy stinks, and prospective borrowers are not necessarily good credit risks in today’s world, banks are hesitant to be as accommodative with their lending practices.

When you add in the charges from lawmakers, that banks caused people to borrow money they couldn’t afford to repay, and the FED paying interest to the banks on unloaned money, the banks are sitting on a mountain of reserves which have not, as yet, ballooned the money supply.

So, how much are we talking? The banks’ required reserves come to about $150 Billion, which means that their deposits are around $1.5 Trillion. Bank “excess reserves” – the amount they keep that could have been lent out – is over $2.5 Trillion! These excess reserves, if they were to be lent out would cause the money supply numbers to surge to over 16 times what they are today. Prices would zoom!

As it is, the FED is keeping those reserves from being lent out by paying interest to the banks. Since FED “profits” get sent back to the Treasury, that interest reduces what goes to the Treasury, which means that the interest is costing the US Taxpayer money.

As the FED eventually starts raising interest rates – they have not gone up now for 10 years – the banks will have a huge incentive to tell the FED to “Keep yer stinking ¼%” and lend those reserves out. That is not something that we should want to happen.

But, we also shouldn’t want the FED to pay the banks more to keep the reserves unlent. And, we also don’t want to have the FED keep interest rates for the US Economy at these stupidly low levels. These rates cheat seniors and others who have saved money. These rates encourage spending and discourage thrift.

These rates reduce the level of real capital available for the economic growth that has made the US rich, and could make us rich again. These rates screw up the economic decisions of everybody in the US Economy, which means everybody in our country.

The FED should be shut down and put out of OUR misery. Their ability to manipulate interest rates should be ended. All those reserves that the FED wished into existence – which could cause hyper-inflation in the US – should be dealt with in a way that won’t cost the taxpayers money.

While getting federal spending under control by replacing the nitwits in Washington, who only know how to spend, is a long term requirement, the immediate problem for all Americans is getting from here to there. So, phasing out the FED is a big enough problem to deal with right now.

Action Item: Phase-out of the FED in several steps:

  • Raise the Reserve Requirements, in very small, very frequent steps, so that all the banks have a chance to adjust without being thrown into chaos. One possibility would be to raise the requirement from 10%, by 1% every week or two, until they reach at least a 50% reserve requirement. This still would allow the banks to triple the money supply – some would argue that I’m not being strict enough, and I’m open to being convinced.
  • Eliminate the interest which the FED has been paying the banks for leaving those reserves unlent. It’s only a recent phenomenon, so the banks can live without the ¼%. At the same time, as the reserve requirement schedule for increase is unveiled, the banks will not decide to rush to lend.
  • Require the FED to raise interest rates to Free Market levels, on a strict schedule that everybody will be told in advance. I suggest the following – While rates are:
    • Below 0.50%, allow rates to rise by 0.01% 1 day a week
    • Below 1.00%, allow rates to rise by 0.01% 2 days a week
    • Below 2.00%, allow rates to rise by 0.01% 3 days a week
    • 2.00% and up, allow rates to rise by 0.01% 4 days a week
  • Once rates do not rise for 1 month, all government activities designed to influence rates – up or down – will cease
  • The 1913 Federal Reserve Act shall be declared Unconstitutional, and all valid functions of the FED shall be taken over by the US Treasury Department

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is http://us-issues.com

Fed has done all it can to fix US economy's non-structural issues, now it must hike rates