April 3, 2020 By Joseph P. Farrell

While we're all sitting around contemplating our dwindling stocks of toilet paper and hand sanitizer, you might have noticed that there's an awful lot of financial finagling going on, or at least, indicators thereof (like German state finance ministers taking a stroll in front of a high speed train), or markets moving to all-electronic trading, or like this classic from The Federal Reserve (story courtesy of E.E., and C.A.F.):

Fictional Reserve Lending Is the New Official Policy

Now, the old joke used to be that the Federal Reserve was neither really federal nor really a reserve, and this little statement proves the latter, and that there's no lack of a sense of humor (or should that be, a sense of humours) at the Fed:

With little fanfare or media coverage, the Fed made this Announcement on Reserves.

As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.


I mean...really!?!?!?

Now, as the article goes on to explain in terms that you and I remember learning in elementary school (for those of us old enough to remember when America had real schools that taught real subjects back in the good old days of boys' and girls' toilets) how the fractional reserve system was supposed to work:

Amusingly, a few days ago yet another article appeared explaining how the Money Multiplier works. The example goes like this: Someone deposits $10,000 and a bank lends out $9,000 and then the $9,000 gets redeposited and 90% of the gets lent out and so an and so forth.

The notion was potty. That is not remotely close to how loans get made. Deposits and reserves never played into lending decisions.

The notion of the "reserve" was simply there, like Jimmy Stewart in It's a Wonderful Life to provide a little cash cushion for depositors who might want real cash; it wasn't there to backstop a bank run, for as Jimmy pointed out to angry customers demanding their deposits, they were all lent out.

But by taking the reserve requirement to zero, what happens. Well, once again, if you grew up at a time when they were steal teaching real mathematics in American schools, rather than teaching that mathematics was yet another preserve of "white male privilege" in need of "reform," you might recall that when the denominator in a fraction becomes zero, the resultant quotient is infinity.  Translated into "banksterese", that means that an infinite amount of money can be loaned out by... well, just about anyone calling themselves a bank. As the author of the article aptly puts it: "The only thing that's new is the official announcement that reserves are fictional."

And what does that mean?

Guess who is going to unload as much questionable junk as possible and guess who will buy it.

Banks know they have losses but hey will not admit them.

All it takes to mask them is a clever swap takes the assets off the balance sheet of the banks and temporarily hides them on the balance sheet of the Fed.

What About New Lending?

Hiding junk is not new lending. It is not new production. And it is not new hiring.

To achieve real growth we need new production, not hiding of losses.(Emphasis added)

Or as former German Finance Minister Wolfgang Schauble - who so far has managed to avoid walking on railroad tracks at inconvenient times - put it, the debt finance model is over. There's no way forward that is not a reform. Or as former Assistant Secretary of Housing and Urban Development Catherine Fitts has put it: we need real equity capitalism, not the fake capitalism of "finance capitalism."

See you on the flip side...