There are two different types of requirements that banks have to maintain: capital requirements and reserve requirements. They are very different things, and reserve requirements aren't the important or binding one.<p>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.<p>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.<p>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.<p><a href="http://en.wikipedia.org/wiki/Federal_funds" rel="nofollow">http://en.wikipedia.org/wiki/Federal_funds</a> ,
<a href="http://en.wikipedia.org/wiki/Bank_reserves" rel="nofollow">http://en.wikipedia.org/wiki/Bank_reserves</a> ,
<a href="http://en.wikipedia.org/wiki/Excess_reserves" rel="nofollow">http://en.wikipedia.org/wiki/Excess_reserves</a> , and
<a href="http://www.winterspeak.com/2009/12/banks-are-even-more-super-than-i.html" rel="nofollow">http://www.winterspeak.com/2009/12/banks-are-even-more-super...</a> may be informative.
I'm speechless.<p>This shows a complete failure to recognise that the current problems are from too much leverage.<p>It's like treating a hangover from drinking too much beer with a good shot of some grain alcohol.<p>The problems are excessive leverage and risk taking in the financial sector, and insufficient capital by the companies doing the lending.<p>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.
Attempt at a facetious / humorous semantic quibble:<p>Is it still "fractional reserve" banking [ <a href="http://en.wikipedia.org/wiki/Fractional-reserve_banking" rel="nofollow">http://en.wikipedia.org/wiki/Fractional-reserve_banking</a> ] when there's a zero in the denominator?
And since when is this news? Congress lowered the minimum reserve requirements to 0 during the Bush bailout bill. The current minimum, as set by the fed, last time I checked, was around 8-10%, depending upon the type of reserve, but there is nothing stopping the Fed from dropping the rate to 0.<p>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.<p>I honestly don't understand how anybody can be surprised at this.
Dreadful article...but I admit to sharing the author's bewilderment at Bernanke's statement (<a href="http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#f9" rel="nofollow">http://www.federalreserve.gov/newsevents/testimony/bernanke2...</a>). I am not at all sure what mechanism he envisions for limiting banking leverage absent frequent random auditing or some other blunt regulatory instrument.
Seriously, all these libertarian articles are all the same. They start off making sense, but then they come to the most ludicrous conclusions. The solution to the fed wanting to do away with reserve requirements... Do away with the fed? It's a bit like curing the disease by killing the patient.
This is obviously a biased article and should be taken with a large grain of salt when the eighth paragraph states <i>The truth is that Bernanke is making a mess of the U.S. financial system.</i>
Is this possibly an April Fool's story that was released too soon?<p>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.
Just ask yourself: what would be best for the super rich? What would be best for the banks? And then you can make an accurate guess what Bernanke will do.
I would love to become a bank so I can borrow with no money down.<p>or be a greedy credit card company/investment company and 'become' a bank like chase/goldman sachs