The nation’s largest financial institutions continue to sit on more than $1 trillion in excess reserves, a fact that has stymied economic growth during the recovery and that now poses a serious dilemma for the Federal Reserve
. These are reserves beyond those that the financial institutions are required to hold.
It was the Fed that allowed banks to accumulate such an enormous amount of money, after loaning hundreds of billions of dollars at near zero interest rates to teetering institutions during the financial crisis. The public was told that this was necessary so that the banks could start lending, but instead of lending, they kept the bulk of the money. On September 1, 2008, the banks’ excess reserves totaled $1.9 billion. By February 2, 2011, their hoard had grown to $1.2 trillion. And, since October 2008, the banks have been allowed to collect interest on the excess reserves. At a rate of 0.25%, they gained $2.7 billion from taxpayers in 2010.
Now Federal Reserve chairman Ben Bernanke
is advocating raising the interest rate on reserves. What’s needed, writes Professor Robert Auerbach at the University of Texas at Austin, is the opposite. He suggests that “The interest paid to banks could be lowered and eventually eliminated making the banks invest in loans and other income earning assets that benefit the economy and employment.”
-David Wallechinsky, Noel Brinkerhoff