" The Federal Reserve on Monday proposed selling interest-bearing term deposits to banks, a move the U.S. central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis.
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The Fed is already testing another tool, reverse repurchase agreements, in which the central bank sells securities from its portfolio with an agreement to buy them back later. Under the arrangement, the buyers move cash from banks to the Fed, removing reserves from the system. "
So when banks purchase these term deposits, the Fed is shrinking their balance sheet; sounds fine and dandy. However, then they just have to pay the banks this money plus interest and thus the effect of removing liquidity is undone at a later date and even made worse by the fact that now there is more money (because of the interest). Reverese repos will have a similar effect, because the Fed is agreeing to buy them back later which will just expand their balance sheet again at a later date. Aren’t these simply extremely short-term fixes that will accomplish nothing in the long run? Am I totally misunderstanding this, or are Bernanke & Friends really this stupid?
There is a great video of Bob Murphy explaining that the Fed does NOT have an exit strategy. None of these things will work. I would have copied the link here if I know how to!
You’re not misunderstanding this. Bernanke is not stupid. He is a central banker. Enough said.
The problem isn’t that Bernanke is stupid (he isn’t), the problem is that the mainstream media really is that stupid. They will report this precisely the way Bernanke wants it to be reported, thus ensuring a public relations win and assisting his reappointment.
Bernanke isn’t stupid. I’d bet he even knows about the Austrian Business Cycle Theory. He just chooses to ignore it because the political pressures placed upon him necessitate lying to the public.
This is correct. It’s just like in the Soviet Union. A Russian-language newspaper, which was not associated with Austrian Economics, nevertheless had an article called cleverly ‘Communism For Businessmen’ in response to the bank bailout, the new stimulus spending, followed by all the back and forth Fed monetary policy.
Remember: people at the FED or whatever aren’t stupid. They know perfectly well the Austrian Business Cycle theory is spot on; they know exactly what they are doing and they know it’s crippling the “real world” economy all at advantage of the “paper world” economy. They just plan not to be around when it will hit the fan.
I would take this a step further and say that it’s the general population that is that stupid/uninformed. The incentives for Bernanke and co are very much the same as for the media.
What makes you so positive that they don’t honestly believe in what they are doing and that they don’t believe that their methods are right and Austrian methods are wrong? Maybe they are simply that delusional and were just able to get themselves into a position to act out their beliefs on a large scale.
You couldn’t be more right. Bernanke pulled a fast one back in 2003/2004 when the returns on securities were falling below 3%. He visited Japan and made speeches about how the Fed would start paying securities back to inspire more people to buy them. Japan then bought 30 trillion yen worth which injected a huge amount of money into the economy causing massive growth. Japan ultimately benefited from this because of the increase in consumer spending, but Bernanke pulled the classic “psyche!” to create money without the process of voting or regulation.