The Fed ran up the monetary base to shore up banks in the face of the recession. Now, the worry is that these reserves will start getting loaned out, causing general price inflation. The Fed says they will mop up the excess by selling assets, but their assets may not sell because they consist of MBS’s and such that are worthless compared to their balance sheet value at the Fed.
Well, what if, instead of mopping up the money, they ran up the base until it was equal, more or less, to the current paper + bank credit money supply out there, and then revoked the banks’ rights to lend using fractional reserve practices?
I think this move would accomplish a couple of things:
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It would give the Fed more power to control and fine tune the money supply
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It would give the Federal Government more power to monetize its debt without inflation fears, because there’s no money multiplier
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It would actually make the money supply, and therefore the pricing system, more stable, even if the government printed more new money than it does now, for the same reason above.
Thoughts?
The Rev