Fed Short Term Solution Could End Up Blowing Up The Economy If It Is Not Unwound Correctly.

Texas Professor Robert Auerbach: Fed Has Built $2.58 Trillion 'Bomb' With Excess Reserves

Wednesday, 04 Jun 2014 07:38 AM

By Dan Weil

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The Federal Reserve's massive easing program has led to an accumulation of $2.58 trillion of excess bank reserves, and that's a ticking time bomb, says Robert Auerbach, professor of public affairs at the University of Texas.

"It will be six years in October 2014 that Federal Reserve officials started building the monetary bomb," he writes on The Huffington Post.


"Now that the bomb has reached $2.58 trillion, some reporters and broadcasters have found a problem. Fed officials are now talking about plans to dismantle the bomb with no troublesome side-effects. Some of their announced plans are ineffectual, harmful and ridiculous."

The problem started in 2008, when the Fed decided to pay interest on banks' excess reserves, Auerbach says. "Paying banks to hold excess reserves instead of using the money to make loans to businesses and consumers increased unemployment."

That interest rate is 0.25 percent. It should be cut to zero, Auerbach says. "The Fed must then start selling the securities it has bought from the public before the $2.58 trillion bomb explodes with trillions of dollars flowing into the non-bank private sector."

Peter Schiff, CEO of Euro Pacific Capital, says the Fed will ultimately reverse the tapering of its bond purchases.

"If the Fed actually did what it's threatening to do, completely remove all the monetary props beneath the [stock] market, to wind down QE [quantitative easing] to zero and eventually begin to increase interest rates, then I think the market will head substantially lower," he told Yahoo.

"But I don't believe they'll do that. I still think the Fed is going to end up aborting the taper."

 
Related Stories:

• Ron Insana: Fed's Worry About Housing Weakness May Spark Further Easing
• Fed's Lockhart: Economy Would Have to Move Sharply to Alter Tapering

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