What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by more than 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent.
Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? It is partly because, after the wild bubble years, many financial institutions returned to the more-traditional creditworthy benchmarks for extending loans to potential borrowers. That has slowed down the approval rate for new loans.
But more important, the excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health-care costs, the burden of the federal debt, and other government unfunded liabilities (Social Security and Medicare), as well as other political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle, first under Ben Bernanke and now under Janet Yellen, has seemed the more profitable way of using all that lending power.
—Richard M. Ebeling, “Federal Reserve Policies Cause Booms and Busts,” in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.
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