Another article here discussing how the Fed’s Quantitative Easing was a boondoggle – leading me to question whether or not this policy was just a stealth bank bailout.
The authors point is that all the money the Fed pumped into the economy ended up sitting at the banks as ‘excess reserves’. Why? because the Fed pays interest on excessive reserves, acting as a disincentive for banks to pump the money into the economy.
From the article:
“Although the Bernanke Fed has disbursed $2.284 trillion in new money (the monetary base) since August 1, 2008, one month before the 2008 financial crisis, 81.5 percent now sits idle as excess reserves in private banks.”
Here is a chart from the St Louis Fed on historical excess reserves held by banks:
This chart pretty much proves the point that all the money pumped into the economy by the Fed over the last few years has just ended up sitting at the bank. As of 6/27/13, the bank is paid 1/4 % on all interest reserves – which only seems like a lot when you see thats 1.8 Trillion in excess reserves.
From an investing point of view, it may be time to invest in banks that have the largest excess reserves. Again from the article:
The Bernanke Fed is now facing a $1.863 trillion time bomb, they helped to create, of excess reserves in the private banking system. If rates of interest on income earning assets (including bank loans to consumers and businesses) rise, the Fed will have to pay the banks more interest to hold their excess reserves. At the current level of the time bomb, raising interest paid to banks on excess reserves would give the banks $18.6 billion a year at 1 percent interest, $55.9 billion a year at 3 percent interest and $93.2 billion a year at 5 percent interest. Because of concentration in banking, it is unlikely that much of the interest would be passed on to depositors. Bank stockholders would receive much of these large bonuses from the government.
In retrospect, knowing that the public would have no part of continuing to bailout the banks – was the Feds ‘Quantitative Easing’ a stealth bailout under the guise of growing the economy? I will let the reader decide.