Ok, we all know the Fed has a big problem. Commercial banks are sitting on massive reserves. If allowed to lend them out we will experience hyperinflation. However, if the Fed tries to sell off its balance sheet it will no doubt cause a huge collapse in home prices, increase foreclosures, bank failures and bring about another recession. Of course this is where we should have been from the beginning so all the Fed did was kick the bucket down the road.
I’ve conjured up a “solution”, that on the surface seems a little to easy. Tell me what you think.
Basically, the government would have to pass a law mandating 100% reserves. Instantly, all the excess reserves in the system would be prevented from being loaned out solving the hyperinflation problem. Of course additional money would need to be printed to bring the reserve accounts up to 100%, but this money already exists (in the form of checking accounts) and all this is doing is printing currency to back each dollar already in checking accounts.
This would also save the Fed from having to sell off the assets on it’s balance sheet, preventing the housing industry from another collapse and sparing another recession. Once the economy recovers the Fed could slowly, over a number of years, begin to sell off the MBS’s on its balance sheet, possibly in a swap for gold with the intent of restoring convertibility of the dollar.
Of course this would never happen, but what do you guys think? Would that really serve as a relatively painless way of avoiding disaster?