Writing in Time, Lawrence H. Officer and Ari J. Officer argue that the Federal Reserve has made a terrible mistake: In their haste to avoid a repeat of the 1930s, they’ve treated the current crisis as if it, like the Depression, is the result of a liquidity crisis. And so they have responded by vastly increasing liquidity. “Incredibly, excess reserves of depository institutions have increased from under $2 billion in August to a record $774 billion in mid-December, according to the Federal Reserve’s Dec. 18 release.”
But the bans have not vastly increased their lending. Why? The authors argue that we’re in a crisis of confidence, not liquidity. That’s all fine, except that the excess liquidity has the potential to spark rapid inflation when the crisis of confidence ends, which would create a whole new set of problems.
