Federal Reserve pushes for elimination of reserve funds requirement

This seems outrageous until you realize that banks are not actually required to hold reserves today.

The next move will make it illegal for banks to hold reserves......if that happens....goodbye deflation, goodbye country.

Money is not working for the people, only the banks who loan credit (debt) to people and charge interest.  But YOU'RE FREE!!!!!  free to take orders and move on to believe the facade of America

This just totally blows my mind! True story: I saw this post very briefly when I woke up in the middle of the night (my time) to see why the trade alarm on my brokerage account had gone off, then went back to bed. When I woke up this morning, I thought Wow! That was the most surreal, realistic feeling dream I ever had! I actually dreamt that I had read that the Fed wanted to eliminate the reserve requirement!" In other words, I find this story so completely mind-boggling that I was simply unwilling to believe it really existed. I am now thoroughly awake, have pinched myself several times, and still can't believe it.

I hope Chris Martenson will comment on the significance and meaning of this!

My own take is that this can only mean one thing: The banking system is so totally insolvent (i.e. if they actually took the write-downs that sound accounting practices would dictate) that Bernanke has concluded that the now year-old effort to give the banks free money won't be enough to repair their balance sheets to the point of (true) solvency. Eliminating the reserve requirement effectively means they don't have to be solvent.

I'm absolutely dumbfounded to understand how this announcement could even be made with a straight face, or that the blogosphere would not go absolutely balistic in reaction. I haven't seen anything else about it yet.

Erik

If the banks are not required to have any reserves does that not imply that a bank could create as much money as it wanted by making any loan at all?

It seems to me that this would mean that your local neighborhood bank could be in an instant bigger (in terms of money creation)  than Citi, or B of A or for that matter the FED. This would start a competition to see who could create the  most money the fastest.

Step right up and get your Trillion Dollar Latte loan before Latte prices go up.

I think that I will start my own bank and loan myself and my friends several Quadrillion Dollars. Too bad the name Goldman Sachs is already taken.

Ken

And guess what they'll all be nudged-nudged, winked-winked into buying with their limitless credit?  If you guessed US debt, you are correct, Sir!!

FB, please clarify this for me....I thought the bank reserves were already "invested" in US debt. If they eliminate the reserve requirement, aren't they attempting to force the banks to create private debt?

Bank reserves are invested with the Federal Reserve, which pays interest above the US bill rate.  It's basically free money.  My guess is the Fed Reserve does not want to keep paying this interest and it would be better for both them and the US Gov for the banks to invest those reserves in T-bills.  Of course, I could be wrong.

I don't think this is the case.  In order for a bank to lend it still has to have the deposits made at some point to be able to lend them.  It just means that the system as a whole has no limiting factor.  That is the reserves sucked just a little bit off the amount that could be lent with each successive loan.  This would ultimately result in all existing money being held in reserves with the maximum number of loans outstanding (the multiplier effect).

Without reserve requirements it means the bank system as a whole can lend out as much as they want without having to wait for the Fed to create new money on occasion, but for an individual bank it's still limited by the deposits they receive.  Remember, banks don't actually "create money", although we say that all the time.  They can only lend what they have taken in desposits, it just those deposits can be relent multiple times within the context of the entire Federal Reserve System.

I agree with rhare, but would take it even a step farther: Your local neighborhood bank has neither the sophistication nor the lack of moral integrity required to engineer a scam where banks lend back and forth to one another, creating an indefinite amount of money by consciously and intentionally re-lending the same funds over and over and over again. Big Wall Street banks do.

Erik