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Money Out Of Thin Air: Now Federal Reserve Chairman Ben Bernanke Wants To Eliminate Reserve Requirements Completely?

Up until now, the United States has operated under a "fractional reserve" banking system.  Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system". At least that is what a footnote to his testimony before the U.S. House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all?

That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website....

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

If there were no minimum reserve requirements, what kind of chaos would that lead to in our financial system?  Not that we are operating with sound money now, but is the solution to have no restrictions at all?  Of course not.

What in the world is Bernanke thinking?

But of course he is Time Magazine's "Person Of The Year", so shouldn't we all just shut up and trust his expertise?

Hardly.

The truth is that Bernanke is making a mess of the U.S. financial system.

Fortunately there are a few members of Congress that realize this.  One of them is Republican Congressman Ron Paul from Texas.  He has created a firestorm by introducing legislation that would subject the Federal Reserve to a comprehensive audit for the first time since it was created.  Ron Paul understands that creating money out of thin air is only going to create massive problems.  The following is an excerpt from Ron Paul's remarks to Federal Reserve Chairman Ben Bernanke at a recent Congressional hearing....

"The Federal Reserve in collaboration with the giant banks has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustainable economic growth has delivered this crisis to us. Instead of economic growth and stable prices, (The Fed) has given us a system of government and finance that now threatens the world financial and political institutions. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems that prevent the required corrections. Doubling the money supply didn’t work, quadrupling it won’t work either. Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile."

The truth is that the financial system that we have created makes inflation inevitable.  The U.S. dollar has lost more than 95 percent of the value that it had when the Federal Reserve was created.  During this decade the value of the dollar will decline a whole lot more.

That doesn't sound like a very good investment.

But that is what happens when you give bankers power to make money up out of thin air.

And things are only going to get worse.

Especially if Bernanke gets his way and reserve requirements are eliminated entirely.

The U.S. economy is a giant mess already, and we have got a guy at the controls who simply does not have a clue.

It's going to be a rough ride.

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  • http://economicdisconnect.blogspot.com/ GYSC

    Maybe he was kidding? Expect a huge jump in banking stocks on this.

  • Claude

    If there is one thing for sure, the policies and bail outs that have been implemented since the 08 crash have done NOTHING to solve our problem.

    To solve a problem, you must realize there is a problem. Up to now…no one really seams to think there is a MAJOR problem, not just here but around the world.

    Is there going to be a new system?? Has it been agreed to already ??? Or is there a financial war going on under our noses???

    Either way, WE THE PEOPLE ARE GOING TO FEEL THE PAIN. IF YOU CAN’T SEE THE FUTURE, YOUR STILL WATCHING MSM!!!

    Clue; watch for International events to take your focus of domestic affairs that REALLY MATTER!!!

  • Lunatic Fringe

    The U.S. economy is a giant mess already, and we have got a guy at the controls who simply does not have a clue.

    Do you actually believe Bernanke is that stupid? Everything done by the Fed was calculated, planned, and executed with precision. They rang up a debt we cannot pay. The game is over, they have all the chips. Most folks just haven’t figured that out yet.

  • http://theeconomiccollapseblog.com/archives/money-out-of-thin-air-now-federal-reserve-chairman-ben-bernanke-wants-to-eliminate-reserve-requirements-completely Geoffrey Marcus

    Just the opposite is needed. In fact, the Federal Reserve Board needs the ability to double or even triple the reserve requirements, as a mechanism to reduce the supply of money in circulation, during times of out of control inflation.

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  • http://www.whitehouse.gov Michael Kotov

    Bernanke is actually correct in what he is doing.
    He needs the system to take on more debt, but with securitization markets frozen the only channel is the conventional banking system. By getting rid of all the reserve requirements banks can begin expanding the money supply and if there is a problem, or they need to give money to depositors they can simply BORROW that money from the Fed.

    All in all: good job Ben, i think you finally GOT it.

    http://financialmarkets2007.blogspot.com/

  • http://freedomguerrilla.com Thomas Krenshaw

    “…impose costs and distortions on the banking system.”

    Oh Man, REALLY? Lord knows we don’t want major lending institutions with “distorted costs.” That would suck to have all these messy costs and stuff. I mean, that would be really unfair, right? We’ve got to make access to credit a lot easier in order to fuel prosperity for all.

    I hope there’s a special place in Hell for John Maynard Keynes.

    Time to say adios to this Economic Matrix. This experiment has failed. Pay your debts, never accept credit again, plant a garden in the shape of a middle finger. Good luck, All.

  • David Smith

    Calculated, planned, and executed with precision is correct to create peace on earth exactly like the type found in a maximum security prison. Do nothing and expect the new financial system soon, one which most who read this blog are not going to accept. When the leaders of the U.S. claim to have differences with governments of countries that historically have been our enemies due to our tradition of individual liberty I believe it is all an act and part of the calculated plan to buy more time. Our present banker leaders now are criminal mobsters just like the leaders of our traditional enemies have always been. Why wouldn’t they join forces? Nobody’s stopping them.

  • wacky pete

    If you go back and take a look at the laws that were pushed through during the crisis of 2008, I believe you’ll find that the reserve requirement was already legislated to nothing with the insertion of the phrase “or zero” into the sections regarding reserve requirements.

    Of course, it will have no effect in any case. Banks have plenty of money to lend right now – if they wanted to. As it stands, they don’t see many potential borrowers as being credit worthy.

  • joettt

    If you read the past Fed communications on this (it goes back two decades), their point is that reserve requirements don’t work. All that happens is that banks find a way around them (such as money market accounts).

    To put it in perspective, after two failed decades of trying to *force* banks to hold 10% of their assets in reserve, during the 2008 financial crisis congress gave permission to literally *pay* the banks to do so (to pay interest on these reserves, in other words, so the banks don’t lose money when they in turn pay interest to their depositors).

    The idea is that close supervision and manipulation of the interest paid on bank reserves, will be far more effective then attempts at regulation that keep failing (the Fed basically has given up on trying to force banks to hold 10 percent reserves, instead it’s trying to make them *want* to do so).

  • http://www.learcapital.com/exactprice Hal (GT)

    It’s amazing to me. Jaw on the floor amazing and I’m afraid that in time we will find that the jaw on the floor is the America, TKO’d from all the debt and out for the count.

  • Jerry

    I hate to admit it, but Bernanke is right. In-house lending is DEAD right now. By eleiminating the reserve requirements, banks will start to lend again. This will boost the money supply, which is exactly what is needed to get us back on track.

    With small business actually able to get financing, jobs will follow and the aconomy WILL recover.

  • ejgej

    cool, if we eliminate any reserve requirement, even my person can lend money and become a banker, without a dime in my account.
    why should anyone of us work hard anymore? let’s be bankers!

  • Maynard

    Seriously, good thinking Ben!
    Until we can get this mountain of clogged currency flowing again, we will remain stagnant and the bubble will not bloat to the exuberant levels we expect or deserve.
    We must support these illusions if we expect to create opportunities before the reality of valueless money rears it’s ugly head again.

  • Bob Buffard

    I agree with this article in general but find at least two major points of disagreement:

    1) From the article: “Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.” Actually if one were to actually study the Federal Reserve System literature you would find that banks at least since 1913 have never actually lent the excess (other 90%) of cash on hand. Commercial banks create money out of thin air just as the Federal Reserve does. It has been a common misconception among the public that banks actually lend their own money or their depositor’s money. They never have in nearly the last 100 years nor will they ever unless we begin to wake up to the fact that we are being robbed blind.

    2) From the article: “The U.S. economy is a giant mess already, and we have got a guy at the controls who simply does not have a clue.” This is another common misconception among the people that we have people running our country that do not have a clue. Unfortunately it is we the people that do not have a clue. Most of our leaders, especially those with a financial background are far from clueless. In fact, they know exactly what they are doing.

    The idea that putting more money into circulation to get business moving will create prosperity is definitely true in the short-term. However, the biggest problem is that these economic cycles are well planned, are out of our control and in the long run only benefit the small group of people who are smart enough to create them. So if you are one who thinks that the FED pumping more money into the economy is a good idea better learn to enjoy the short seasons of prosperity cause calamity will surely follow. Just ask those who are without jobs and are homeless. Time to grow up and start studying before the final straw is played!!! Expansion and contraction of money is simply the game that they play to slowly erode what little wealth we the people still have.

  • Mark

    Reserve requirements don’t matter. It’s capital retirements that matter. Reserve requirements are for a banks liquidity, but that is simply not much of an issue in modern banking, where interbank loans are processed by computer in a microsecond. It’s solvency that is the main danger to a banking system, and that’s where capital requirements come in.

    And no, this will no lead to an explosion of the money supply. Again, capital requirements are the main determinate of that have have been for a long time. Your Econ 101 textbook “money multiplier” is pretty much nonsense.

    BTW, the reserve requirements if the US are very high. Eurozone is 2%, and Canada a several other countries don’t have one.

  • Matt

    We’re doomed, not a matter of IF, but WHEN. 2 years, 5 years, 10 years, 20 years – who knows. But its inevitable. EVERY fiat money system in history has failed. EVERY ONE!!!

  • Steve

    If you think Bernanke is right, might I suggest taking all of your cash out of the bank and hiding it under the mattress? If there are no limits, what’s going to happen when they “over lend” and you want to make a withdrawl? You all do realize that as of now if you withdrawl 10k or more out of your OWN account, you are flagged by the government, right? As in you WILL get a nice interogation phone call proding you for information of how and why you withdrew YOUR OWN MONEY from YOUR OWN ACCOUNT! Trust me, it just happened to a friend of mine. And to think, this is just the BEGINNING!!!!!

  • Small Time Investor

    Mish said: “There are no reserve requirements on savings accounts right now. So in regards to a savings account question: What has changed? The answer is “Nothing”.”

    Of course Bernanke & pals are not so stupid and they know exactly what they are doing: they have run out of suckers to lend to so are now trying to excite the hardened and indifferent high-saving segment of the public into their old trap of “borrow and burn”.

    Yawn. The Emperor’s runners are naked. Next circus trick please.

  • http://www.economiccollapsesurvival.com/ Cosmo

    It is astounding and yet NOT surprising ol’ Ben is proposing this incredulous abomination in economic policy. What is he thinking? I’ll tell you. He is thinking, “destroy the US dollar as the world’s reserve currency so we can usher in a new global currency held by the world banks.”
    There is a world govt coming into power right beneath our noses and it all relies on the death of the US dollar. And watch for staged terror attacks (could be ANYTHING – think, “who could profit from this?”)
    I’m glad Ron Paul is wise enough to make it known to the public that this policy is nothing but immoral garbage. I just hope we wake up and listen.

  • William

    I think what Bernanke meant by minimal is the lowest of the three tiers(not capital, just can’t think of a better word) of reserve requirements. The minimal requirement right now is 0% up to 11.5 Million in demand deposits but since the minimal requirement exists, but is nothing(0), it adds to the administrative procedures at a bank. I don’t think he would ever say get rid of RR, that would be suicidal!

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