Letter I sent to all my congress-bots

"Mr. Olver (et al.),

In a May 7 2008 Wall Street Journal article I read that the Federal Reserve is going to go before Congress and ask if it could pay interest on the reserves banks are required to keep at the Fed. I am writing to express my complete disapproval of this request; I think it is a poor usage of tax dollars.

From the article, the argument by the Fed seems to be twofold. First, the Fed claims this measure will allow them to entice banks into holding more reserves for a rainy day. To this I say: the reserve requirement is set by the Government and as such, if the reserve needs to be higher, then just set it higher. Banks don't need to be reimbursed for this "lost" reserve money; the reserve requirement exists to protect banks from themselves (and protect America from banks) by preventing banks from lending more then they can handle. And banks will do this (ex: S&L crisis).

The Fed also claims this new measure will allow them to keep the market-set interest rate from falling well below the Fed-set interest rate when there is a lot of free cash in the market and lending is prevalent. This is an interesting argument considering the credit crisis might aptly be retitled the "cash-or-no-cash-we-aren't-going-to-lend crisis". The disjunction between liquidity and interest rates aside, I don't see when exactly market-set interest rates are going to fall below Fed-set interest rates - they haven't yet.

The bottom line again: I feel the Fed's idea is just a waste of money. Please don't support it.

Thank you for your time.

Regards,
Nathaniel Walton"

I might have just made up the part about market-set interest rates being higher than fed-set interest rates but I'm tired and I'm just trying to make a point, rather than discover the truth. Truth is for the well-rested.

cites:
http://online.wsj.com/article/SB121011673771072231.html