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Source link: http://archive.mises.org/8680/massive-pumping-by-the-fed/

Massive Pumping by the Fed

October 2, 2008 by

In the week ending October 1, the Federal Reserve Balance Sheet (Total Assets) increased by $284.7 billion from the previous week. The yearly rate of growth jumped to 70% from 14.4% in September. Note that since September 15 the pumping by the Fed pushed the fed funds rate to around zero. Bernanke seems to us doesn’t care any longer about the official target of 2%. Pumping by the Fed is not going to work unless the pool of real savings is still ok.

The latest data for the w/e September 22 indicates that commercial bank excess cash reserves stood at $68.8 billion against $2.2 billion in the w/e September 8. We suspect that in w/e Sep 29 excess reserves have increased further, perhaps to $90 billion. Banks it seems prefer to sit on large surpluses of cash rather than lend it out.

{ 14 comments }

Ryan October 2, 2008 at 6:38 pm

“Banks it seems prefer to sit on large surpluses of cash rather than lend it out.”

I was saying something similar today to my office mates as we looked over the bloomberg headlines stating banks are not lending and the markets are frozen. It makes sense to me that, if I were running a bank, I would not take it on the chin and borrow from another bank at a percieved too high rate when the government may turn around next week and buy up all my junk assets. If the bailout failed for good and everyone knows that they must make due, then I suspect lending from bank to bank would resume and those troubled banks would begin to formulate a plan to survive, or else perish in the proverbial gale of creative destruction. The rates would be relatively high, but these institutions would have to make due.

I attribute a significant amount of the recent problems to there being too much uncertainty in what the government may or may not do. Hopefully they determine whatever course of action they choose soon so we can all get on with our lives.

Alvaro October 2, 2008 at 7:45 pm

I am no economics expert, but there’s also a consumer side to credit. Given the current environment, who will get more indebted?

It is time to be thrifty, not to borrow and spend!

Stanley Pinchak October 2, 2008 at 8:48 pm

Ryan,
Your comment about the uncertainty reminds me of the work that Robert Higgs has doen on the Great Depression. He has shown that the depression didn’t end until the death of FDR. Using polls that were available he seems to have found a link that it was uncertainty about nationalization and governmental intervention in addition to the institution of the command and control economy which gave entrepreneurs pause when contemplating new businesses and expanding existing ones. The more the government acts, or insinuates that it acts, the less freely the market is able to act.

Bruce Koerber October 2, 2008 at 8:58 pm

Grasping at air! Since the pool of savings is meagre, declining, and elusive since the real economic signals are buried in the morass of interventionism – the banks are ‘forced’ by the underlying forces of equilibrium to hold onto something (grasping at air).

I am convinced that the Federal Reserve Chairperson does not need any economic background nor do the ‘targets’ have any meaning. The only criteria for the job is the willingness to serve the unConstitutional coup. This is becoming more and more evident and blatant. The fact that Congress is handed mandates in various forms, and the fact that Congress simply agrees to go along is another ominous sign of the magnitude of the power-grab of the unConstitutional coup.

The puniness of this vain attempt to harness the economy is laughable and is about to be slapped around mercilessly by equilibrium forces.

Krazy Kaju October 2, 2008 at 9:29 pm

What? Is this for real?

Wow, so “Helicopter Ben” really, really plans on living up to his nickname?

Joe Calhoun October 2, 2008 at 9:31 pm

Ryan,

From my article at RealClearMarkets on Monday:

Now markets are waiting on pins and needles as the politicians haggle over the details of the latest bailout attempt by the Fed and Treasury. This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties. If Hank Paulson is willing to pay an above market price for their bad loans, why should they dilute their equity now? Why not wait until they can offload the bad paper on the taxpayer and raise capital at a better price? Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?

http://www.realclearmarkets.com/articles/2008/09/in_times_of_crisis_trust_capit.html

Bill October 2, 2008 at 11:21 pm

Wow!

Does anyone have a comparison to what happened back in to 30′s?

Didn’t I read (or hear) somewhere that the Fed tried but failed to pump liquidity into the market? Might have been Frank’s podcast a couple day ago.

Nima October 2, 2008 at 11:23 pm

This is also already reflected in the growth of the true money supply as per the latest data provided for Sep. 22 08:

http://nimamahdjour.blogspot.com/2008/10/money-supply-watch-sep-22-2008.html

J Cortez October 2, 2008 at 11:54 pm

Those charts look like a heart attack waiting to happen.

Craig October 3, 2008 at 12:13 am

No, a heart attack in progress.

Mathieu Bédard October 3, 2008 at 1:14 am

It looks like Al Gore’s hockey stick… Beware the great credit warming!

Michael Smith October 3, 2008 at 8:59 am

Mr. Calhoun:

I saw your article several days ago and loved it. I found it very illuminating and informative. Thank you for helping to spread the truth about the real cause of this mess.

Francisco Torres October 3, 2008 at 1:27 pm

Guys, get ready for burning your dollars as firewood, because that is how much they will be worth.

Paul from Michigan October 4, 2008 at 1:08 pm

Whats the real money data suggest. Level 3 assets marked to market over time and we will never have the ability to invest in and you expected it? No, only further impoverishment awaits the Anglo-American free-market masses as in Favela living, it’s not only for Brazilians anymore as some have said. As compared to what in real time since there is no comparison to then and now. Face it, we are gearing up in a new market cycle and the broken dishes are being swept up. I was able to preserve capital and quality tho dented stocks. Move on…..
If they ever had any intention of giving them a raise they would never have gone to the trouble or risk of shipping the West’s industrial might, and with it its security, to China. The character of a people is as much made by the institutions as the institutions are made by the character of the people. The deficit and the national debt represent the subsidy the government has paid in its attempt to keep growth and unemployment at the level of social tolerance “Empire”. We are finally being forced to completely rethink our cultural ideas about how to organize our economy and distribute purchasing power. The promise of competing in the global economy is a hoax perpetrated upon the working and unemployed people of this country because over time a nation needs to buy and sell overseas in roughly equivalent amounts. The real point is they have no flag and cannot be stopped and the consumers do not care either since shoes are nice and so is a roof over there head. In 1978 their total debt came to 79% of total employee compensation (wages, salaries, pension contributions, etc.). Today, this figure has more than doubled to 174%.
All they are is inane empty vessels with no dam money. They do not care and it is just that simple so they move production. Hubbard, Hyak, Mises cannot make people think but they point to in the right direction. Long pain cycle in the states indeed.

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