WASHINGTON, April 13 (UPI) -- Tucked away inside the small print of the latest Federal Reserve report on its balance sheet is a jaw-dropping nugget of information. A year ago, American banks had $1.8 billion on deposit with the Fed above and beyond the regulatory requirements. This month, these excess deposits have soared to $771.2 billion.
This is not just massive evidence of hoarding of funds by the banks. It also means that the banks are undermining the Obama administration's attempts to stimulate the economy. Just as President Obama pumps $787 billion of deficit spending into the economy, the banks take $771 billion out of it and sock it away in the Fed's vaults.
It's not quite as bad as that, thanks to the heroic efforts of Fed Chairman Ben Bernanke to boldly go where no central bank has ever gone before and create unprecedented amounts of money.
In the last six months -- as far as we can measure since the Fed no longer issues traditional money-supply data -- the old M3 measure of money supply has increased by 17 percent. (That last bastion of monetarism, the St. Louis branch of the Fed, still publishes a form of M3 data even though the head office in Washington decided to drop it for reasons that have never been satisfactorily explained.)
Bernanke's Fed has expanded its balance sheet from less than $800 billion when this crisis really began last September to around $2 trillion now as it seeks to recapitalize the banks by taking just about anything as collateral. The Fed has even bought more than $450 billion of mortgage-backed securities, the toxic stuff that got us into this financial mess in the first place.
This is all very daring and unprecedented, and it may help to explain the public nervousness of the Chinese government over its dollar holdings. The dollar was one thing when it was backed by gold in Fort Knox, but it is quite another now that the currency is backed by dubious "assets."
"The Fed has gone mad," I was told by a very senior German banker, speaking off-the-record on a recent trip through Europe.
Curiously enough, on returning to Washington, this columnist heard a similar comment about the European Central Bank from one of Obama's economic advisers. The trans-Atlantic divisions over economic policy between European and U.S. political leaders that were on display at the G20 summit in London on April 2 are but a fraction of the much wider differences between the rival central banks.
The ECB, to be fair, is still a very young institution and feels the need to prove itself through displays of rigorous orthodoxy in winning unimpeachable anti-inflation credentials. That was why it raised eurozone interest rates last July, at a time when the recession had already landed. It still insists on keeping interest rates much higher than those in the United States and Britain and engages in none of the fancy footwork like "quantitative easing" that the Anglo-Saxons are deploying.
It also means real economic pain for eurozone countries like Spain and Greece and Ireland that are deep in recession but can get no monetary easing -- and no hope of some gentle inflation to get them off the hook. For the ECB, there is no such thing as gentle inflation.
But the impact on European countries is devastating. Unemployment in Spain is at 15 percent and rising. Greece is beset by general strikes and social unrest. Industrial output is collapsing, by 24 percent in Spain, 23 percent in Germany, 21 percent in Italy and 14 percent in France.
Ireland is in agony. Finance Minister Brian Lenihan has just introduced a ferocious cost-slashing budget that is designed to stop this year's budget deficit from hitting 13 percent, and private analysts say it will be higher than that. Ireland's economy could shrink by a stunning 8 percent this year, Lenihan said, in addition to the startling 7.1 percent shrinkage in the fourth quarter of 2008.
Simon Johnson, former chief economist at the International Monetary Fund, has denounced the ECB for adopting a "ruinous policy." And the difficulties of managing a global recession when the central banks of the two biggest economies are running wholly contradictory policies are evident.
A terrifying experiment is under way to see which of these two, the Fed or the ECB, is right. Given the traditional vigor and innovation of the U.S. economy, my money would be on the Fed, except that it is fighting with one hand tied behind its back by the plight of the American banks. By socking away so much of their depositors' money in the Fed, where it earns a modest interest, the banks may be rebuilding their capital to buy themselves out of the U.S. Treasury Department's intrusive Troubled Asset Relief Program. But they certainly aren't helping haul the economy out of the ditch they drove it into.
