2 billion dollars is the sum of excess reserves of U.S. banks as a whole in July 2008 to cover more than 7000 billion dollars of deposits (M2), slightly more than $ 6 per capita. To give a clearer picture even though extremely simplistic, one American had an average of just over $ 23,000 in the bank in July 2008 but his bank had just $ 6 in cash available to meet withdrawal requests. On 14 September 2008 On the eve of the announcement of the bankruptcy of Lehman Brother lack of buyer, the banks of the eurozone as a whole had less than 15 billion euros of excess reserves to cover just under 8000 billion in deposits (M2) . A few days earlier, these excess reserves were nonexistent. These figures have a very specific meaning: The European and U.S. banks had almost no cash to weather the financial storm that would befall the world.
explain the meaning of the term "reserves surplus "so that we can understand how the banking situation was structurally fragile. Legally, banks are obliged to maintain a certain ratio of cash to cover the deposits they hold. For example, in the Eurozone, so in France, banks are required by law to maintain the cash equivalent of 2% of the amount deposited on current account and savings account with a term of less than two years. Each bank must deposit this money in an interest bearing account within the European central bank. On 14 September, the so-called 'reserve requirements "Amounted to 214 billion euro. In case of problems, each bank can draw on those reserves to meet withdrawals or transfers to other banks. However, they are required to have on average over a period of one month, at least 2% cash deposited within the ECB. If the bank fails to meet this obligation, it can simply be declared bankrupt. These "reserves" do not function as being a safety cushion. They function as stop the potential money creation by banks. With 2% reserve requirement, each euro base currency can potentially be converted to 50 euros credit money (ie the currency of our bank accounts). If this ratio was 1%, this could go up to 100 euros. The real cash cushion, are excess reserves. Now, as we have seen, they are virtually nonexistent.
So why these cash reserves were they too weak on the eve of a terrible crisis of liquidity. A superficial analysis would push us to say that bankers, greedy to pay every cent of their excess reserves, would recent tender to 0 to maximize their profit at the expense of the very security of the bank. The reality is more complex. While the banks have a financial interest to have very low excess reserves, but another actor as much interest to keep extremely low: the central bank. I created this blog to try to show in many ways the fundamental absurdity of our monetary system. Here we touch, I think one of the key points absurdity of this: if they want to control inflation, central banks should force banks to take risks dementia in terms of liquidity.
Each new euro issued by the European Central Bank will land in a bank account within the central bank. This issue is most often as a loan against collateral. The euro will be an additional excess reserves to a bank and therefore the monetary system as a whole. This additional euro, seemingly innocuous, has immense potential inflationary. It can become up to 50 EUR credit money on our bank accounts. By issuing a writ miserable euro, the ECB takes the risk that the deposits of residents in the euro area increasing from 50 euros. It's the fractional reserve system that allows such a miracle by allowing an even lent euro is up 50 times to different people or business. No need to be Nobel Prize in Economics to understand the following: if a central bank wants to have the upper hand on money creation, it must minimize the banks' excess reserves. It Clearly, if the banks had excess reserves of 500 billion instead of the billions they had before the crisis, the risk of bank money creation would become totally uncontrollable been more important. To have control of money creation, the central bank must ensure that banks have a minimal number of excess reserves, that is to say, ensuring that banks are taking a risk in terms of maximum liquidity. What I am trying to explain a theory is anything but silly. Limiting excess reserves is clearly displayed by the European Central Bank as a prerequisite for effective monetary policy.
In "normal times, banks manage their liquidity problems by paying them. Those with excess reserves lend to those who need cash. These are most often prepared daily. When Lehman Brothers went bankrupt, this type of loan has completely frozen and many banks found themselves short of cash. Cash without a bank is found in the same situation as a man without oxygen, she panics. It will sell its assets to find the cheap liquidity, it will demand repayment of certain loans overnight. In short, the destructive spiral of financial panic. If they had the cash, banks would not panicked that way. It is this lack of cash, lack structural organized manner, being with the monetary system as it currently operates, which is the cause. The violence of the events of September / October 2008 can only be understood if we do not notice the fact that banks had no cash, no safety cushion and that the shortage was a shortage organized.
Central banks have played their role last spring to provide banks the cash they needed to do business. Do they have injected enough cash fast enough? Obviously, I am not able to answer such a question, but the violence and suddenness of the decline suggests not.
We also see that during the period from September 15 to October 9, the strategy in terms of liquidity from the ECB was absolutely chaotic. During this period, the ECB injected and then removed by successive blow to the liquidity the banking system was badly needed to overcome the lack of an interbank market. This indecision is understandable given the exceptionality of the situation but the consequences of these have certainly been very important. Again, a bank without cash is total asphyxia. 20 days of panic are sufficient to cause a crash of the assets and put a large number of firms in difficulty by not renewing the credits, not to mention the investment that could not find financing. Show that during five days, between October 2 and October 6, the ECB could leave the banks with reserves below the minimum reserve even though the world was going through one of its most terrible crises of liquidity is still thinking about a serious professional misconduct. The lesson seems to have been understood since one year, these excess reserves ranged between 100 billion and 300 billion euro without ever falling back to numbers closer to 0.
Praise for Central Banks have been able to throw money at the right time, this is a joke. The real question is how can we accept a monetary system that forces banks to take such risks could cause liquidity the economy as a whole in its fall.
