Bernanke's first proposal would be to raise the discount rate. The discount rate is the rate charged by the Fed when banks borrow directly from the Fed. Raising the discount rate is meaningless right now as a tool to regulate systemic liquidity because the banks have plenty of money to lend out in the form of excess reserves. Excess reserves are bank deposits kept at the Fed in excess of reserve requirements. As of 12/31/09, banks had around $1.1 trillion in excess reserves. The banks thus have no need to borrow money from the Fed - and thus will not be affected at all by a rising discount rate. As of Feb 3, Discount Window loans were an insignificant $14.7 billion. As you can see, the discount window is not even a source of bank liquidity in comparison to the liquidity the banks already have on deposit at the Fed. Raising the discount rate would be about as useful as taking away ice machines in Antartica. In Banana Ben's own words today (Feb 10): raising the discount rate is “not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy." So why even bother mentioning this unless Banana Ben's intent is to remain consistent with his unstated policy of blowing smoke?The fact of the matter is that Bernanke has two choices: he can raise real rates and try to drain liquidity from the system, which will lead to a rapid collapse our economy, OR he can play "poker" with the market and send out false signals. Judging from his inability to hide lies from his facial expressions when he's in front of Congress, he's a crappy poker player. He knows full well the consequences of both alternatives, but why not try to kick the can down the road and let his successor deal with it or hope for Moses to come down from Mt. Sinai and deliver another miracle? In the meantime expect Banana Ben to keep delivering a series of empty threats.
Thursday, February 18, 2010
I described in my post on Feb 10 Link, why Bernanke will do nothing more than bluff about draining liquidity from the system and raising short term rates. I mentioned that raising the discount rate was his loudest toothless tiger in this regard. Well, Banana Ben raised the discount rate, the rate which banks borrow directly from the Fed. Here's my description of why this act is meaningless, useless and ineffective - which means he really does not want to do anything other than give the impression to our massive foreign creditors that he's not really a fiat currency main-lining drug addict:
Posted by Dave in Denver at 2:41 PM