Bernanke and the 2009/2010 Policies

Besides making people crazy wishing they had more of it, money does serve a global purpose. The purpose of money is to create a single acceptable means of exchange between individuals that is understood to have a determined value. It replaced the barter system in order to create more opportunity for individuals to trade on a universal level. Instead of exchanging a house for a yearly supply of tomatoes from the buyer, a person can accept money and put it aside, using it for whatever their needs may be at the time they need to be satisfied.

The entity responsible for overseeing the monetary system for the United States is the Central bank. They have a vast range of responsibilities, "from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort" (Investopedia). The "Fed" or the Federal Reserve is the central banking system in the U.S. It is comprised of 12 regional Federal Reserve Banks located in major cities throughout the country. "The main tasks of the Federal Reserve are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds and steer interest rates." Ben Bernanke is the current chairman of the Board of Governors of the Federal Reserve and makes many of the financial recommendations for our country.

According to Federal Reserve Bank of New York Staff Reports, "Why Are Banks Holding So Many Excess Reserves?" by Todd Keister and James McAndrews, (Staff Report no. 380), "Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. Almost all of the increase was in excess reserves." While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves. When the banks hold an excess of reserves, it is typically lending less and consumers and businesses can't made the additional purchases they want to make or need to make in order to grow their business which in turn creates economic growth.

The current direction the central bank has taken with monetary policy is to induce lending by the banks again in order to stimulate the economy. There are several ways in which they can do this. They can change the interest paid on reserves, create a tax on reserves, or loan money to the banks that are lending at their maximum capacity to increase the reserves of those who are lending and not holding reserves and denying loans to the internal banking market.

Bernanke said the dysfunction of our economy in large is contributed to "the pulling back of private liquidity" which has "threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit." Bernanke stated, "after reducing short-term interest rates nearly to zero, the Federal Open Market Committee (FOMC) provided additional monetary policy stimulus through large-scale purchases of Treasury and agency securities. These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth."

To help stabilize financial markets and to mitigate the effects of the crisis on the economy, the Federal Reserve established a number of temporary lending programs. The Federal Reserve believes that these programs are effective in supporting the functioning of financial markets and in helping to promote a resumption of economic growth. By using discount windows, emergency lending, and changing interest rates the Fed hopes to accomplish market stimulation. Furthermore in March of 2009, the Fed "expanded its purchases of agency securities and began to purchase long-term Treasury securities as well. They purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. The Federal Reserve's purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks. A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in private credit markets and put downward pressure on longer-term private borrowing rates and spreads." With an increase in the lending market, consumers can buy more goods and businesses can use borrowed money to grow their businesses, which will have an overall positive impact on the economy as a whole.

SOURCES:

Why Are Banks Holding So Many Excess Reserves. (2009). Todd Keister and James McAndrews. Federal Reserve Bank of New York Staff Reports, no. 380, July 2009. JEL classification: E58, G21, E51

Statement by Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System. (2010). Committee on Financial Services, U.S. House of Representatives.