Bernanke wants to eliminate reserve requirements completely for banks
finance.yahoo.com
finance.yahoo.com
Capital requirements mandate how many assets banks must have relative to their liabilities. If a bank has $100,000 in deposits(=liabilities), their capital requirements mean they must have around $105,000 in assets (bonds, mortgages, etc.). There are also additional requirements about how much must be held in cash equivalents(T-bills, etc.). If a bank becomes too leveraged, or its assets decline sufficiently in value, then the FDIC takes the bank over.
Reserve requirements relate to how much of one kind of asset banks must have relative to their liabilities -- "bank reserves". "Bank reserves" are a special kind of currency issued by the Fed that only are used for accounting between the Fed and banks. Banks that are short of reserves overnight(say, because they got a bunch of deposits that day), must borrow them from other banks that have too many to maintain their reserve requirements.
Like Bernanke said, this overnight borrowing was a major issue during the crisis. Since any bank that was borrowing was at risk for going bankrupt overnight, there was immense counterparty risk generated by what was supposed to be payment clearing mechanism. The Fed wants to move towards having banks borrow from them overnight, instead of from other banks.
http://en.wikipedia.org/wiki/Federal_funds , http://en.wikipedia.org/wiki/Bank_reserves , http://en.wikipedia.org/wiki/Excess_reserves , and http://www.winterspeak.com/2009/12/banks-are-even-more-super... may be informative.
http://en.wikipedia.org/wiki/Reserve_requirement
This is not just some arcane rule, it is actually a very important requirement that prevents bank failures. That is it prevents a bank from running out of cash to pay its depositors. If a bank runs out of cash, even for a short time and even if it has large amount of long term illiquid assets, the bank will probably fail as people will panic, there will be a run on the bank, etc.
It is true that banks usually use something called federal funds to satisfy the reserve requirement. Federal funds are money held on account at the federal reserve. Thus, each banks has an account at the Fed, that has money in it, and that money is called the federal funds. The federal funds are considered to be the equivalent of cash for the reserve requirement, so most banks satisfy the reserve requirement using their federal funds (as holding large amounts of cash in their vaults is expensive and inconvenient).
Nevertheless, the reserve requirement is not some unimportant technical rule that emerged from the Fed lending system as your post suggests, but an important requirement needed to ensure banks stay solvent and are actually able to give your money when you go to an ATM machine.
Except that you can't control the amount of inflation by setting "the" interest rate. You can try to affect inflation with interest rates, but you can't control it.
Inflation is too much currency chasing too few goods. Interest rates paid by banks aren't the only currency supply drivers. Velocity matters, and so does govt spending, among other things.
You do realize that Bernanke's briefing explains alternate mechanisms for accomplishing the same goal without the drawbacks of the current system, right?
And you do realize that one of those drawbacks is that if banks are currently keeping a much higher level of reserves than the minimum, one of the dangers is that they might start opening the lending spouts and spur inflation, right?
This shows a complete failure to recognise that the current problems are from too much leverage.
It's like treating a hangover from drinking too much beer with a good shot of some grain alcohol.
The problems are excessive leverage and risk taking in the financial sector, and insufficient capital by the companies doing the lending.
Until someone realises this and changes course, the problems will continue. It will be possible to fan the flames and get the economy going again, but it will only crash harder next time. Same as hair of the dog - it will get you up and going again, but sooner or later you have to stop drinking, and that's when it is going to hurt, big time.
Is it still "fractional reserve" banking [ http://en.wikipedia.org/wiki/Fractional-reserve_banking ] when there's a zero in the denominator?
Of course, that would mean hyper inflation, but since when does Bernanke care one whit about the buying power of the dollar? The Fed is the biggest tax and spender of them all. Inflation is their tax, and it is not progressive. It steals the money of poor and rich alike, and in return the Fed provides the US Government nearly a blank check to spend that stolen wealth.
I honestly don't understand how anybody can be surprised at this.
Edit: here are the current minimums: http://www.federalreserve.gov/monetarypolicy/reservereq.htm They're indeed 10% for all but the tiniest banks.
Furthermore, the loans are not made at zero interest. The interest charged in the loan also serves as a break for monetary expansion. Of course, the issue here with a fractional reserve system of ANY kind is that it's impossible for the country to get out of debt without erasing the money supply. Without debt, there is no money.
But the point I am making is that the Fed has had this power since the end of the Bush administration. Bernanke does not need to ask permission. The directors can lower the reserve requirement whenever they wish.
But it also punishes behavior that is "good" (though worse for the economy). For 2 people of the same income, if one saves a lot of his money and the other spends most of his, thus getting tangible assets (maybe a nicer house) instead of money, the spender will be a lot less affected by inflation than the one who has a lot of money in savings. (Though if most of his money is in stocks, it should roughly grow with inflation.)
However, I think that the rise of the variable-rate loan means that inflation no longer helps debtors nearly as much as it once did. Also, for those working for others (rather than selling commodities directly, as the farmers during the free silver movement) ones paycheque does not always keep pace with inflation.
The rich don't keep their assets in dollars, they keep them in things like stocks and realeastate, which tends to float with inflation.
Inflation hits the middle/upper middle class by bumping us up in income tax brackets. If you are fortunate enough to have skills that are in demand, you can expect your wage to rise with inflation, however, tax brackets move much more slowly, so you end up paying more in taxes.
As for the lower middle/lower class folks, people who aren't in high demand jobs, well, their pay quite often lags inflation by quite a lot. (in fact, some people see this as a positive of inflation. It's very difficult to issue pay cuts to employees without major morale issues. In inflationary times, simply not issuing raises does the same thing in an almost passive way. Good or not, it's no fun for the worker who sees his buying power shrink.)
Of course, inflation hurts those on fixed incomes the most. Who knows? this might be our way out of the social security mess? but yeah, it's going to suck for the people depending on that cheque.
So yeah, personally, I think that this idea that inflation helps the little guy is... outmoded.
This tax isn't perfectly progressive because it depends on people's exact behavior and by investing rather than just having it in a savings account, the rich can sort of have their wealth increase in value with inflation, but it is the case that extremely poor people with no savings barely feel it, while rich people will see some of their money (money in checking accounts, savings accounts, etc) lose its value.
Many poor people do save, and inflation causes what they save to lose value at exactly the same rate as the money saved by the rich. If anything, by your definition, inflation is a regressive tax, meaning that the poor are taxed more than the rich. The rich tend to be good at profiting from inflation, as you noted.
Poor people's wages don't necessarily increase as fast as the cost of things that they buy. If their wages fall behind, they lose.
BTW - "rich people" don't keep an appreciable fraction of their money in checking and savings. They keep their "cash equivalents" in things that have higher yields during times of inflation. (I think that TPS bond funds already exist, providing both liquidity and the inflation-protection of TPS bonds.)
Money market interest rates were fairly high during the last time of significant US inflation.
the rest of us have electronic 0s and 1s stuck in 401k and propped up real estate prices
Mind you, people who argue for abolishing the fed never seem to have an answer for this either, other than asserting that gold has mystical properties which can ward off fiscal Armageddon.
Rather it is this:
First, to eliminate fractional lending entirely. If money is to be loaned, then only that money may be loaned that has been deposited for the express purpose of loaning it out. In other words - think CD's as the standard mechanism for the funding of loans. Essentially, this would mean that banks have no more lending ability than any private citizen or institution. Currently, only a bank is allowed to lend money that does not exist. When an individual does this, it is a crime.
Second: To allow congress to create a fixed percentage of fiat currency in any given year. This would remove from the banks the ability to expand the money supply, and leave it in the hands of congress, and congress alone. They would accomplish such expansion, essentially, by printing money and spending it.
Isn't this a solution just as bad as the problem, though? It would destroy liquidity, and do little to alleviate risk, since bankers would not be assured of making sufficient income to offset the cost of bad debt. Furthermore, profits from banking would be so low as to fall below the level of transfer earnings, that is to say banks and bankers might well be able to make more money doing something else and would have no incentive to operate, and the economy would go the way of North Korea (unless this system were implemented and enforced globally).
Since people always want money to do stuff, the demand for credit would likely be filled by illegal lenders charging usurious rates (although there's a reason I cut up all my credit cards...), and profiteering would ensue. Such illegal lenders would probably not bank their gains starving the system further of liquidity - a case of bad credit driving out good, so to speak. I imagine the likely result would be that the government would become the biggest guarantor of loans and cronyism and other kinds of corruption would become endemic. Doubtless you don't intend for this outcome, but I can't help feeling your proposal would rapidly result in a soviet-style economy, which I can attest from first-hand experience does not work very well.
Incidentally, not only is it illegal for an individual to lend money that does not exist, it is illegal for them to lend more than a certain sum of their own money at interest, I believe under the same laws that require investor accreditation.
Edit: In other words, print money in order to pay the banks not to print money.
Seriously, this is way bad. Without any way of justifying this feeling I have, it just "feels" like the beginning of the end of a financial system with players who have any independence at all, and the beginning of a system with only one player.
or be a greedy credit card company/investment company and 'become' a bank like chase/goldman sachs