Sunday, September 6, 2009

Nobel Prize Winner Doesn't Get Bernanke's New "Tools"

Gary Becker is at at the Ambrosetti Workshop insider gig in Lake Como, Italy.

There are no direct quotes, but Ambrose Evans-Pritchard writes that Becker is concerned about the excess reserves currently existing in the U.S. banking system:
Nor can the US Federal Reserve be trusted to act with fortitude when the time comes to drain its massive monetary stimulus – and that time may soon be upon us, he says, if it isn't already. What worries him is some $800bn (£489bn) excess reserves sitting waiting to combust.
If Evan-Pritchard is interpreting Becker's comments correctly, and from those comments we conclude that Becker fears banks will start loaning against those excess reserves, then Becker finds himself in the position of economists who simply don't understand that Bernanke believes that he can suffocate any attempt at making loans against these reserves by keeping interest rates high enough on these reserves so that the most attractive alternative for banks will be to maintain them as excess reserves and not loan out against them

If Bernanke is successful in employing this untested tool, then fears that the current size of excess reserves will explode in a multiplied quantity of new loans is simply unjustified.


  1. Are you mostly upset when economists talk as if they aren't aware of what Bernanke thinks he is doing to contain the problem, or do you actually think it's not a problem (because of the new tool)?

  2. I am making two points:

    1. A lot of these so-called expert economists really don't know what is going on.

    2. Excess reserves need to be watched BUT Bernake thinks he will be able to control things via the interest rate on excess reserves.

    Will he be able to do so?

    Maybe. Given this is a new tool in a complex environment, where a zillion things could go wrong, I think he is insane for trying this method at this time.