Friday, April 16, 2010
Will the Fed's exit from the mortgage markets bring inflation?
This is a good article on the high reserve that banks are holding and how it could affect the money supply. It talks about if all banks were to suddenly start lending out money, at a ratio of 10:1, we could see the money supply rise by $12 trillion. Obviously the banks wont wake up one morning and decide to lend out $12 trillion, but it does demonstrate how much potential there is for high inflation.
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Well of course they will not wake up one day and decide to do this but the real question here is why have they stocked pile this large money supply? Is it because of the high risk borrowers, the lack of solid investment plans, or do the banks have some plan to release this money back into the market at a slow pace? Does the banks have the right to withhold bailout money from the people when in the long run it is the peoples money they are withholding?
ReplyDeleteThe credit market got out of control and that is one of the biggest reasons the economy is in the hole that it is right now. The high reserve requirements of banks were and immediate and adequate response to the massive bank failures. If the reserve requirements are lowered in order to increase lending and therefore the money multiplier it should be done slowly and carefully.
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