Friday, October 17, 2008

Money is plentiful (2)

Wow, the Fed really means business. According to data released yesterday, in the past few weeks the Fed has pumped about $132 billion worth of high-powered reserves into the banking system. As a result, bank reserves, which must back up a fraction of the deposits and checking accounts held by our banking system, have increased by a staggering 135%. If most of those extra reserves were not sitting idle because banks are trying to shore up their balance sheets, they could support such a massive expansion of the money supply (e.g., by allowing banks to make new loans) that it would make Bernanke's analogy of dropping money out of helicopters in order to fight deflation seem tame by comparison.

This is so far beyond any precedent that it's pointless to wonder what it might mean. It's enough, however, to know that the Fed is deadly serious in its fight to keep the banking system afloat. I've learned over the years that you can never underestimate the Fed's ability to achieve its objectives. After all, it has a monopoly on controlling and creating the world's reserve currency.

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