Hey Bill, *What* Is It?

There are those people who will remain convinced forever forward that the Federal Reserve is run by capable technocrats absolutely skilled at maintaining for the free peoples of the United States their financial freedom. At a general level, they are thought to do so by signaling to market and economic participants just how these should respond to monetary policy inputs. To create and sustain these signals, these central bankers are said to exhibit a high level of on-the-ground proficiency by being forceful participants in money markets.

This policy intervention revolves around Open Market Operations (OMO) whose ultimate end (not aim) is its own balance sheet remainder: bank reserves. We are all taught that it is the OMO which determines money market rates, all because of that whole printing press thing we are further taught to presume spits out digital bank reserves.

Given this, it was a huge problem for Ben Bernanke’s group of officials twelve and thirteen years ago when money market rates were quite clearly being determined by anything else besides the Federal Reserve’s OMOs. You can read more about it here – and I urge you to do so in order to understand why the policy response had been so fatally flawed so as to more clearly appreciate what really must have happened; suffice to summarize, Bernanke’s crew believed they had created a situation where, during the worst global monetary panic since the Great Depression, there were “abundant reserves.”

Straight away you have to ask, what good are reserves if they are abundant and the whole world melts down anyway? According to the doctrine, you aren’t supposed to ask that question.

Therefore, the episode teaches us two very important lessons. First, there’s obviously much more to the financial picture than bank reserves. The Fed talks about liquidity in regard to them, but they must be small issue to the wider world otherwise 2008 wouldn’t have happened at least beyond October.

There’s simply no way to reconcile a monetary panic with this absurd idea of too much money or liquidity. The level of bank reserves just doesn’t correlate to anything outside the immediate arena of bank reserves.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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