It's probably not clear to most Americans how Fed Chairman Ben Bernanke has changed the rules of the game for the benefit of bankers since he has taken over as chairman. He calls these changes new Federal Reserve "tools".
One important example of Bernanke's new Federal Reserve "tools" is the paying of interest on deposits that banks leave with the Federal Reserve. It has resulted in over a trillion dollars accumulating at the Fed, as what is known as "excess reserves". The Fed is paying banks EIGHT times equivalent market rates when they keep the funds as excess reserves.
The money bankers deposit with the Fed is totally riskless and also does not require them to hold capital against the deposits. Prior to the Bernanke regime, interest was never paid on these deposits. Alan Greenspan never paid interest on deposits left at the Fed. Paul Volcker didn't. Arthur Burns didn't. In fact, no other Fed chairman in Fed history has done so. But because Bernanke is doing this, banks are racking up totally riskless earnings that no one else in America can get.
For example, Bank of America in its recent quarterly filing with the SEC reported that it earned $63 million dollars for the first quarter in this total riskless way. It's a total bizarre gift from the Fed to the banking sector.
Further, the rate paid by the Fed is more than eight times the rate on one-month T-bills. In other words, if B of A or any other American attempted to find equivalent safety in the marketplace, they would have to invest in one-month Treasury Bills which are paying 0.03%. At the same time, banks are earning 0.25%, if they just leave the money on deposit with Bernanke at the Fed.
If Bank of America placed the money they had with the Fed last quarter in one monthT-Bills, the interest they would have earned would been far under $30 million. (The exact amount would depend on the rate fluctuations in the market).
In total as of April 21, banks have sitting in the warm bosom of the Federal Reserve, as excess reserves, $1.474 trillion. Over a three month period, this means the Fed will be paying banks nearly $1 billion, if reserves stay at this level. If banks tried to get equivalent market rates that all other Americans and corporations get, for equivalent risk, the banks would be getting only $110 million. In other words, with this new "tool" of Bernanke's, he is gifting banks $890 million every three months. Or a total of $3.56 billion each year. It should be added that this $3.56 billion is money the Fed simply prints up, which has the potential to enter the system causing even more price inflation for the rest of us.
Although Bernanke would argue that the paying of interest on excess reserves is a necessary tool the Fed needs to conduct monetary policy, arguing against this point is the fact that no other Fed chairman has needed such a tool. And although, a point can be raised as to whether the Fed should be manipulating interest rates or money supply at all, the addition of this Bernanke tool suggests, if anything, more monetary volatility in the system. Since Bernanke has started paying interest on reserves and it has become clear the size of funds that have moved in this direction, he has started the process of testing even more new "tools" to control this paying of interest tool. This odd designing of new tools, when the old tools of monetary policy worked fine, suggest very odd behavior by the Fed chairman and could result in dramatic swings in the economy, if one of these tools has not been thought out properly and, thus, results in wild swings in money supply growth.
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