All the Fed’s cash can’t put Humpty back together again in this economy

They’re putting cash on the table again. But to no effect.

Chair Jay Powell and members of the Federal Open Market Committee hope to rescue the U.S. economy by providing lots of cash to banks. And more than just that, they want to do the same for all corporations.

At their most recent meeting in April, FOMC members stated that the current crisis has “impaired the flow of credit to U.S. households and businesses.” Thus, these government policy makers believe we need a more accommodative monetary policy.

Historically, the FOMC would do this simply by lowering short-term bank rates, thereby increasing the banks’ incentive to provide credit. However, since the 2008 financial crisis the Fed has gone well beyond the banking system and now operates in all sectors of the economy.

The Fed’s new Secondary Market Corporate Credit Facility and Main Street Lending programs provide for the direct purchase of US corporate bonds and loans. Along with these new market interventions the Fed is expanding its purchases of federal government debt and mortgage-backed securities.

A big problem for the Fed is that no matter how much cash they bring to the banks or offer to corporations, they need you and me to help. It takes real purchases and new borrowing to actually create more money in the economy and generate real activity.

While the monetary base — cash available from the Fed — has increased dramatically since last year (50%), the quantity of money supplied to consumers and businesses has grown more slowly (21%). Despite the Fed’s efforts, banks and households continue to hold lots of cash.

Banks are holding far more reserves than required by regulators and not lending much. Consumers and investors are helping – leaving their money in cash or short-term bank accounts.

Total reserves at U.S. banks are now nearly $3 trillion in excess of required reserves. Before 2008, U.S. banks never kept more than $2 billion in reserves above what the law requires. Idaho banks exemplify this trend. According to the most recent data from the Federal Deposit Insurance Corporation, banks in Idaho hold 23 percent of their assets in cash or government debt.

There is a lot of money available; it just has no use.

What’s to become of all this cash if you and I aren’t using it? In this environment, banks earn a higher profit than they otherwise could, and weak corporations that would otherwise close down or reorganize stay afloat. We used to call these bailouts.

All the Fed’s cash can’t put the economy back together again.