On Bernanke's Understanding of Central Banking - Let's Consider the Facts

Marshall Auerback has written a thoughtful article, but we should pause for a a minute to consider the facts. Bernanke is saying that there are a bunch of reserves at the bank. He is saying that if the economy and demand for loans picks up, it will be necessary to take those reserves away from the banks. Otherwise, if lending becomes too intensified, the Fed will be forced to raise interest rates.

The Fed, coming out of a bubble crash, and likely knowing that we are in a bear market rally, wants to go slow. Heating up too fast will cause the need for much higher rates. Housing needs to go way down, because when interest rates are raised, housing will decline further.

As far as the BIS is concerned, that bank wants to look like the good guy but the BIS is not the good guy. They plan to raise capital requirements in 2012 or some time after, and the banks need capital to withstand the assault on their bottom lines.

History shows that after the crash in Japan, Basel 1 raised capital requirements, making it difficult for banks to lend in Japan. Then in Basel 2 in 1998 the BIS and the central banks allowed low capital requirements coupled with off balance sheet banking. We have seen what happened there.

We are on the other side of the crash now, and the BIS is acting towards our banks just as they looked toward the Japanese banks after their crash. Bank lending in Japan was very much constrained after the capital requirements were raised.

If any big bank listens to the BIS, knowing what is coming in the form of elevated capital requirements, they will not be ready and there will need to be massive government bailouts again. But of course, that means more profit for the international banking cartel, of which the BIS is the champion.

Disclosure: No positions in any banks.