TJP

John B. Taylor's 2009 article, “The need to return to a monetary framework” is enlightening. He sets out to trace the increases in excess reserves created by the Federal Reserve (Fed) between mid-September 2008 and December 31, 2008. He showed that the increases were due to the Fed purchase of securities and providing loans to “certain sector and institutions.”

Taylor examined the Fed's balance sheet from the Federal Reserve Board H.4.1 release. He noted that the private facilities and the new loans to central banks showed the largest increases by the end of 2008. And, that loan to foreign central banks showed the greatest increase in that category.

Accordingly, loans to foreign central banks jumped from $40 billion in September 2008 to $600 billion in November 2008. It is interesting to ask, what if the $600 billion was used to support American consumers? It is likely that American aggregate demand and employment would have remained high.

A variety of reasons have been given for the increase in excess reserves, including the payment of interest on reserve (IOR) late in 2008. However, Taylor does not believe that the payment on IOR is a factor contributing to high reserve balances. He argued that reserve balances had reached $200 billions prior to the Fed announcing payment of IOR. Taylor also does not believe that the rise in currency and demand deposits contributed to the expansion in reserves, because they rose less rapidly that reserve balances, which led to a sharp fall in the money multiplier.

Thus, Taylor concludes that the rise in reserve balances was due to the increase in loans and security purchases by the Fed to assist specific firms and sectors.

Thus, the Fed, under chairman Bernanke, used its power to assist private financial institutions and foreign central banks. And, that is one reason why we, at The Jethro Project, argued against his reappointment. The other reason is that under Bernanke, the Fed has opted to trade low inflation for high unemployment, which is a bad and immoral policy.

Unemployment creates a loss of output, low wages, and psychological distress to families and communities. Therefore, it is clear that output is being delayed or wasted with unemployment. Inflation, however, does not lead to a loss of output and the public intuitively understand that the tradeoff between unemployment and inflation is contrived. However, many are not aware of the institution that contrives the tradeoff, and hence they often blame the administration.

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