The plan being considered by the Federal Reserve to tighten monetary policy represents a giveaway to Wall Street, says economic guru Henry Blodget.
The Fed is planning to reverse its monetary stimulus by increasing the interest rate it pays on banks’ excess reserves.
The idea is to give banks an incentive not to lend in order to prevent inflation.
But already the banks’ excess reserve accounts are stuffed with cash, about $1.1 trillion, Blodget told Yahoo.
“The whole idea for saving Wall Street was to keep the banks lending. That didn’t work,” he said.
“So they have a massive amount of money on account at the Fed.”
And the interest paid by the Fed on that money “is a direct bailout from the taxpayer to the banks,” Blodget noted.
“What the Fed should be doing (to tighten) is selling all of that mortgage junk they bought from Wall Street back into the economy, taking out cash that way.”
But the Fed doesn’t want to go that route, in fear of pushing up interest rates and thus killing the housing market.
“So now the banks are going to get paid even more just to be banks.”
One alternative would be steady rate increases. But some say earlier use of that strategy led to the credit bubble.
“The predictability of the rate hikes was a problem for some of us,” Marvin Goodfriend, former research director at the Richmond Fed told The Wall Street Journal.
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