Lend Those Excess Reserves!

Alan Blinder has written an editorial pressing the Fed to reduce or eliminate the rate it pays banks for holding excess reserves.  He believes if the Fed does this, banks will lend or otherwise invest in capital markets with the subsequent result that the economy will begin to grow again.

The Daily Bell has written commentary regarding this editorial.  Quoted items below are from The Daily Bell’s commentary:

Well known Princeton University academic and Keynesian economist Alan Blinder has written an article posted by the Wall Street Journal that urges Federal Reserve Chairman Ben Bernanke to stop paying banks so much money in interest on funds that the banks hold in reserve.

Of course, it does not help that the Fed is paying the banks fairly large amounts of interest on funds they have not lent. Very strange! Bernanke is determined to re-circulate money and has launched numerous "programs" to do so. But the biggest thing he could do would be to pay less interest on static funds.

The banks are being paid 0.25% for these excess reserves. This does not seem significant enough of a payment to cause the banks to hold reserves (as opposed to lend) unless there were other issues driving these decisions.  The Daily Bell cites one possibility:

Now, this still might not work. If there is nobody to lend to, then money will not circulate.

Certainly one reason that banks are not lending is because they find few credit-worthy borrowers.  This could very well be the primary reason.  Yet it doesn’t answer the question of why the structure is currently in place:

The Fed has greatly increased its balance sheet, with a good portion of the increase being held by banks (and not lent out) as excess reserves.  Why increase the Fed balance sheet only to have the banks hold the funds?  Why not limit the Fed balance sheet increase and not have any excess reserves at all?  Wouldn’t this keep the Fed in a somewhat more credible light, with a balance sheet not nearly as bloated as is now the case?

One begins to have the notion that either Bernanke does not want to ameliorate this endless recession/depression or he is determined to make the money flow in certain directions. His current policies have certainly enriched the "monied" class at the expense of the middle class.

That the monied class prospers by actions of the Fed is a given, and would be true with or without this payment of interest on excess reserves.  As to the banks, one outcome is that the banks are able to use the 0.25% to recapitalize at zero risk. However, they could earn more if they just bought Treasuries.  Why not do this?

Not reducing the amount of money that is being paid to banks for holding funds also is a most puzzling policy and one that Blinder rightly questions. Those of a suspicious caste of mind might well conclude from all of this that Bernanke has considerations he's not voicing.

I believe the reason the excess reserves exist are because the banks need the liquidity.  The other assets held on the books of the banks are not paying returns commensurate to the risks and are held at values above market for reasons of hiding bank insolvency.  In other words, the excess reserves are not excess.  This is one of the main considerations Bernanke is not voicing.

Another is the aforementioned need to recapitalize the banks.  This policy of paying interest on excess reserves is one tool of many being deployed to quietly achieve this objective.

Finally, Bernanke does not want significant price inflation.  He has devised a method to keep the banks liquid while avoiding getting beat about the head for causing price inflation.

It is not far-fetched to believe that Bernanke also has reasons to extend and even deepen the financial crisis he is supposedly working hard to alleviate. The easiest explanation is that the power elite itself, for whom Bernanke evidently and obviously works for, wishes to extend the crisis despite Bernanke's statements to the contrary.

This comment seems to imply that Fed-induced lending (and the subsequent inflation) is enough to alleviate the financial crisis.  As I know The Daily Bell does not believe such things, I am left to wonder the point of this suggestion.

Conclusion: The order they seek is world government. The methodology is to make people miserable, or worse. Bernanke's behavior is aligned with this sort of strategy, or seems to be. What are we missing?

Again, is DB suggesting that Bernanke can alleviate the crisis if he just chose different policies?  Policies of lending? 

The banks could buy short term Treasuries and earn more interest than the 0.25% now afforded to them by the Fed.  This would save the Fed the embarrassment of being the largest buyer and holder of US Treasury debt.  Why don’t the banks do this?  Why doesn’t Bernanke force this?  A minimal 0.25% payment is not enough to cause the banks to walk away from equally risk-free Treasury income, at a higher coupon.

The banks don’t lend because they don’t actually have excess reserves.  They are excess on the falsely inflated balance sheets, but not excess to the true liquidity and solvency situation. The balance sheet can lie; cash flow doesn’t.   I don’t believe the situation is more complex than this.