
Bernanke wants to eliminate reserve requirements completely for banks - Flemlord
http://finance.yahoo.com/tech-ticker/bernanke-wants-to-eliminate-reserve-requirements-completely-yftt_444354.html
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jplewicke
There are two different types of requirements that banks have to maintain:
capital requirements and reserve requirements. They are very different things,
and reserve requirements aren't the important or binding one.

Capital requirements mandate how many assets banks must have relative to their
liabilities. If a bank has $100,000 in deposits(=liabilities), their capital
requirements mean they must have around $105,000 in assets (bonds, mortgages,
etc.). There are also additional requirements about how much must be held in
cash equivalents(T-bills, etc.). If a bank becomes too leveraged, or its
assets decline sufficiently in value, then the FDIC takes the bank over.

Reserve requirements relate to how much of one kind of asset banks must have
relative to their liabilities -- "bank reserves". "Bank reserves" are a
special kind of currency issued by the Fed that only are used for accounting
between the Fed and banks. Banks that are short of reserves overnight(say,
because they got a bunch of deposits that day), must borrow them from other
banks that have too many to maintain their reserve requirements.

Like Bernanke said, this overnight borrowing was a major issue during the
crisis. Since any bank that was borrowing was at risk for going bankrupt
overnight, there was immense counterparty risk generated by what was supposed
to be payment clearing mechanism. The Fed wants to move towards having banks
borrow from them overnight, instead of from other banks.

<http://en.wikipedia.org/wiki/Federal_funds> ,
<http://en.wikipedia.org/wiki/Bank_reserves> ,
<http://en.wikipedia.org/wiki/Excess_reserves> , and
[http://www.winterspeak.com/2009/12/banks-are-even-more-
super...](http://www.winterspeak.com/2009/12/banks-are-even-more-super-
than-i.html) may be informative.

~~~
Retric
They are both important but they do different things. Reserve requirements is
how you avoid infinite inflation.

~~~
dfranke
Right, you beat me to it. Captial requirements are there to prevent banks from
going insolvent. Reserve requirements are there to prevent the money supply
from spiraling out of control. These are completely different objectives.

~~~
jplewicke
Thanks for pointing this out. Our problem now is that even with reserve
requirements, banks can use securitization to expand the money supply
infinitely: <http://arxiv.org/abs/0904.1426> . Reserve requirement aren't
normally the binding constraints on banks, but they might have helped prevent
some pathological situations in the past. The rise of shadow banking has shown
that they are no longer a sufficient constraint.

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brc
I'm speechless.

This shows a complete failure to recognise that the current problems are from
too much leverage.

It's like treating a hangover from drinking too much beer with a good shot of
some grain alcohol.

The problems are excessive leverage and risk taking in the financial sector,
and insufficient capital by the companies doing the lending.

Until someone realises this and changes course, the problems will continue. It
will be possible to fan the flames and get the economy going again, but it
will only crash harder next time. Same as hair of the dog - it will get you up
and going again, but sooner or later you have to stop drinking, and that's
when it is going to hurt, big time.

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tjic
Attempt at a facetious / humorous semantic quibble:

Is it still "fractional reserve" banking [
<http://en.wikipedia.org/wiki/Fractional-reserve_banking> ] when there's a
zero in the denominator?

~~~
DougBTX
I there's a zero in the _denominator_ we're all done for. <http://j.mp/duDfHO>

~~~
jhancock
Not done for, we just become undefined.

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teilo
And since when is this news? Congress lowered the minimum reserve requirements
to 0 during the Bush bailout bill. The current minimum, as set by the fed,
last time I checked, was around 8-10%, depending upon the type of reserve, but
there is nothing stopping the Fed from dropping the rate to 0.

Of course, that would mean hyper inflation, but since when does Bernanke care
one whit about the buying power of the dollar? The Fed is the biggest tax and
spender of them all. Inflation is their tax, and it is not progressive. It
steals the money of poor and rich alike, and in return the Fed provides the US
Government nearly a blank check to spend that stolen wealth.

I honestly don't understand how anybody can be surprised at this.

~~~
jackowayed
Actually, inflation is progressive because the rich in general have more in
savings than the poor.

But it also punishes behavior that is "good" (though worse for the economy).
For 2 people of the same income, if one saves a lot of his money and the other
spends most of his, thus getting tangible assets (maybe a nicer house) instead
of money, the spender will be a lot less affected by inflation than the one
who has a lot of money in savings. (Though if most of his money is in stocks,
it should roughly grow with inflation.)

~~~
teilo
That is non sequitur. A tax is not progressive simply because some people pay
more takes than others. Inflation lowers the value of any give dollar in a
wealthy man's bank account as equally as the same dollar in poor man's
account.

~~~
jackowayed
The definition of a progressive tax is that as one's income goes up, the
percentage of one's income that one pays in that tax goes up.

This tax isn't perfectly progressive because it depends on people's exact
behavior and by investing rather than just having it in a savings account, the
rich can sort of have their wealth increase in value with inflation, but it is
the case that extremely poor people with no savings barely feel it, while rich
people will see some of their money (money in checking accounts, savings
accounts, etc) lose its value.

~~~
teilo
Yes, you are correct on your definition. But arguing that the rich get taxed
at a higher percentage by inflation than do the poor is silly. If the poor
have no savings at all, then you are correct in they have nothing to lose but
incorrect in that this equates to a progressive tax. That's like saying that a
man with no money has a lower tax rate. He has no taxes at all. By your
definition ALL taxes are progressive, but of course that's not true.

Many poor people do save, and inflation causes what they save to lose value at
exactly the same rate as the money saved by the rich. If anything, by your
definition, inflation is a regressive tax, meaning that the poor are taxed
more than the rich. The rich tend to be good at profiting from inflation, as
you noted.

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anigbrowl
Dreadful article...but I admit to sharing the author's bewilderment at
Bernanke's statement
([http://www.federalreserve.gov/newsevents/testimony/bernanke2...](http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#f9)).
I am not at all sure what mechanism he envisions for limiting banking leverage
absent frequent random auditing or some other blunt regulatory instrument.

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j_baker
Seriously, all these libertarian articles are all the same. They start off
making sense, but then they come to the most ludicrous conclusions. The
solution to the fed wanting to do away with reserve requirements... Do away
with the fed? It's a bit like curing the disease by killing the patient.

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philwelch
For once, I would love to read economics articles on this site which aren't
just goldbug Ronulan screeds.

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brown9-2
This is obviously a biased article and should be taken with a large grain of
salt when the eighth paragraph states _The truth is that Bernanke is making a
mess of the U.S. financial system._

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jackfoxy
Is this possibly an April Fool's story that was released too soon?

Seriously, this is way bad. Without any way of justifying this feeling I have,
it just "feels" like the beginning of the end of a financial system with
players who have any independence at all, and the beginning of a system with
only one player.

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mark_l_watson
Just ask yourself: what would be best for the super rich? What would be best
for the banks? And then you can make an accurate guess what Bernanke will do.

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startuprules
I would love to become a bank so I can borrow with no money down.

or be a greedy credit card company/investment company and 'become' a bank like
chase/goldman sachs

