Up until now, the United States has operated under a “fractional reserve” banking system.  Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says “impose costs and distortions on the banking system”. At least that is what a footnote to his testimony before the US House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all? The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system. The truth is that Bernanke is making a mess of the US financial system.

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