The Reach For Yield, ‘Money Supply’ And The Source Of Financial Bubbles

The Federal Reserve under Alan Greenspan and then Ben Bernanke has escaped, largely, responsibility for the panic in 2008 mostly because there is no direct link between monetary policy and the housing bubble. The most stinging criticism that comes out of the era is Greenspan’s “ultra-low” interest rate setting for federal funds, but there is no smoking gun in the form of the “printing press” or bank “reserves.” In fact, bank reserves remain, somehow, the central focus of monetary policy even today when they should be taken for how big a mess the Fed created of the prior bubbles.

There is no printing press in the basement of the Marriner Eccles building or even at the Open Market Desk of FRBNY in NYC. That does not mean, however, that monetary policy is absolved from the center of the biblical expansion of “dollar” reach and debasement (in both definition and scale). When you look at bank reserves, the immediate reaction, often more visceral than cerebral, is that there should be an enormous bout of inflation by now; that was, in fact, the first public and expressed criticisms of the QE’s.

That view of “reserves” conflates what they actually represent. In the operational format alone, reserves are only what the Open Market Desk is doing of monetary policy at that time. In terms of the serial asset bubbles, they represent the onboarding of immense “money dealing” that took place in the latter 1990’s and early and middle 2000’s under the implicit but never-tested promises of monetary policy. In other words, the rise in reserves now was only to make explicit, in arrears, what was expected from bank balance sheets during the bubbles themselves.

In that respect, the increase in reserves post-crisis was not to unleash new inflation, consumer or asset, but rather to enumerate,

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