tag:blogger.com,1999:blog-17232051.post7095784738715062078..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Is the interest rate on reserves holding the economy back?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger121125tag:blogger.com,1999:blog-17232051.post-20012738525066885342013-11-04T12:37:27.028-05:002013-11-04T12:37:27.028-05:00dan @ 2.12
your first answer was not at all clear ...dan @ 2.12<br />your first answer was not at all clear and full of jargon.<br />If you had to explain this to you brother in law the plumber, what would you say ?<br />I highly doubt words like "channel" would figure<br />yr 2.12 is much, much betterAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22064797360775062902013-07-26T20:48:46.715-04:002013-07-26T20:48:46.715-04:00PARI PASSUUUUUUUUUUUUUUUUUUUUPARI PASSUUUUUUUUUUUUUUUUUUUUNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26467239480041658612013-07-26T10:18:47.591-04:002013-07-26T10:18:47.591-04:00From the period 10/1/2008 until the present: 87% o...From the period 10/1/2008 until the present: 87% of Reserve Bank Credit (“manna from Heaven”), became excess reserves. But required reserves grew by only 5.45% (& required reserves are based on transaction type deposit classifications 30 days prior – i.e., our "means-of-payment" money, where 93-96% of all demand drafts clear thru). That corresponds to a 5.67% increase in Commercial Bank credit (where from the system’s standpoint, loans=deposits). <br /><br />The Fed’s “open market power” has been emasculated by the IOeR policy. As of Oct. 9 2008, the FRB-NY’s “trading desks” POMOs can be likened to “pushing on a string”. And QE stimulus is becoming ever less effective. Given a dollar’s worth of bond purchases in 7/2009, .75% were converted to excess reserves. But today given a dollar’s worth of bond purchases in May 2013, 1.37% are converted to excess reserves. I.e., 83% more IBDDs are created today by the Fed than 5 years earlier. Is QE becoming contractionary? Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52644602076144955272013-07-26T04:19:41.279-04:002013-07-26T04:19:41.279-04:00Joan Robinson said that one of the reasons why neo...Joan Robinson said that one of the reasons why neoclassical economics stinks is that it works in logical time, not historical time. Reserves are provided later by the CBs (see Constancio) without questions asked, otherwise interbank interest rates would skyocket.<br /><br />Kuodishttps://www.blogger.com/profile/18277330788082694353noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78604216739246738622013-07-25T23:25:12.301-04:002013-07-25T23:25:12.301-04:00Insanity & being wrong, wrong, wrong - again, ...Insanity & being wrong, wrong, wrong - again, & again, & again - are two sides of the same coin. Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47592095050354425942013-07-25T23:21:00.136-04:002013-07-25T23:21:00.136-04:00You must have limited functionality on your site. ...You must have limited functionality on your site. Sumner deletes whatever he doesn't want to deal with. <br /><br />(1) From 1942 until 2008 the banks minimized their non-earning assets. With excess cash, they'd buy gov'ts from the non-banks & expand the money stock. After the IOeR policy, the CBs reversed the flow & traded any gov'ts for IBDDs. I.e., they pillage safe-assets from the NBs (as they can outbid the NBs via arbitrage with the remuneration rate), & re-stock their shelves. <br /><br />(2) DDs are simultaneously created in conjunction with a bank's investments (just as with loans). The CB's best customer is the U.S. Treasury (it's as creditworthy as any loan applicant). But because the Fed flattened the yield curve (LSAPs, Operation Twists, etc.), thereby reducing net interest rate margins, it priced small businesses & consumers out of any new financing opportunities under c. $30,000 (e.g., "long-term assets were just 17 per cent of banks' portfolios; now they are 28 per cent").<br /><br />See: Stanford Economist Prof. Ronald McKinnon – appropriately titled “Fed ‘stimulus’ chokes indirect finance to SMEs.<br /><br />" 'small' businesses make up a big chunk of the U.S. economy – 49.2% of private sector employment and 46% of private-sector GDP"<br /><br />See also:<br /><br />"Low Inflation in a World of Securitization" FRB-STL<br /><br />"U.S. credit conditions may not drastically improve until sources of market funding start to recover. The Bank of England has moved away from asset purchases toward incentivized lending schemes that loan high-quality collateral (gilts) to banks, which can then be used to obtain cheap funding in repo markets. Given the U.S.’s reliance on market-based credit, similar policies to subsidize repo borrowing may have more impact than continuing to increase bank reserves" <br /><br />Your website’s name is apropos. <br />Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-83270477593840384532013-07-25T21:39:40.310-04:002013-07-25T21:39:40.310-04:00As I said in my first comment, cash is the only ot...As I said in my first comment, cash is the only other common way that banks can affect the size of their reserve accounts, and you are now giving an example of that. But, the reserve bank (or the treasury of the government) has to cooperate by producing the notes, so it still isn't really within the control of the commercial banks - at least not on a scale of trillions of dollars. And that was the point - the size of the sum of reserve accounts isn't within commercial banks' control. <br /><br />I am looking at the Reserve Bank of Zimbabwe balance sheets up until 2005 from their web site. You may have a note from later than that, and as I say, after 2005 who knows what happned. There was another three years of hyperinflation after that. Possibly once the databases couldn't deal with the numbers any more they found it easier to make enourmous denomination notes rather than get software changes made. Unanimousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-20258333966356542312013-07-25T21:15:52.958-04:002013-07-25T21:15:52.958-04:00Like Weimar Germany, Zimbabwe printed physical pap...Like Weimar Germany, Zimbabwe printed physical paper money. In Zimbabwe they were printing $100 Trillion dollar notes, I have one. If they are printing physical paper money, "loaning it to the government", and the government is spending physical paper money, then it will not be in excess reserve accounts. <br /><br />What source are you looking at that makes you think the new money was excess reserves?Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65621156283391249112013-07-25T20:49:09.725-04:002013-07-25T20:49:09.725-04:00Vincent, you are correct in your description above...Vincent, you are correct in your description above about the government spending and the central bank buying bonds, but you need to follow the whole process through. Government spending consists of transfers from the government's reserve bank account to the accounts of the receivers of the government expenditure. These transfers happen by way of the commercial banks' reserve accounts, and the result in each transfer is that the commercial bank's reserve account increases by the same amount as the account of the receiver of each government transfer. <br /><br />From the central bank's point of view their liabilities to the rest of the government have been transferred to a liability to the commercial bank. The commercial bank has received an asset (the reserve account increase), and a matching liability (the receiver's account increase). Neither bank has had any change in their net assets. The government financial assets have gone down, and the receiver's financial assets have gone up. The total of all bank's reserve accounts will have matched the total of government expenditure that was not funded out of bond sales - that is the QE. <br /><br />Even by 2005 Zimbabwe was experiencing inflation at a rate of hundreds of percent, and had been for several years. The reserve bank balance sheets are consistent with what I have described above, and are inconsistent with what you describe. There isn't enough detail to explicitly identify the reserve accounts of the commercial banks, but the overall aggregates balance as they should. <br /><br />After 2005 I can't find records. It isn't clear what happened. Maybe the numbers got too big for the fields in the data bases, maybe the accounting rules were not obeyed, there is a wide range of possibilities as to what happened. Without accurate records you can't draw any conclusions. Unanimousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61473264135239974422013-07-25T11:54:46.947-04:002013-07-25T11:54:46.947-04:00PARI PASSU WITH POMOS<b>PARI PASSU WITH POMOS</b>Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59703689514332930002013-07-25T11:51:42.233-04:002013-07-25T11:51:42.233-04:00"Excess reserves are not lent out"
Fals..."Excess reserves are not lent out"<br /><br />False. From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, & probably its legal reserves (gratis – not a tax), & thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other CBs (e.g., an outflow of cash & due from bank items), unless the inflow results from a return flow of currency held by the non-bank public, or is a consequence of an expansion of Reserve Bank credit.<br /><br />Thus IBDDs (excess reserves) are indeed “lent” from the standpoint of an individual bank (have reserve velocity) but are not destroyed from a system’s perspective (unless Federal Reserve Bank credit on the BOG’s balance sheet changes).<br /><br />I.e., CBs need clearing balances to lend (from an individual bank’s perspective), but these “reserves” are either re-deposited within the same institution, or shifted to (clear thru) other CBs (reflecting the distribution of reserves from the system’s perspective). I.e., they are either derivative or primary inter-bank demand deposits (IBDDs) to member banks, but just a change in the composition of IBDDs for the system.<br /><br />Even with CB credit expansion, total reserves remain the same, but their form may change if excess, or “precautionary” (liquidity) reserves need to be converted to legally “required” reserves (though since c. 1995, for our FRB system, reserves are no longer binding).<br /><br />Note: legal (fractional) reserves ceased to be binding c. 1995: because increasing levels of vault cash/larger ATM networks (in Dec.1959 liquidity reserves began to count), retail deposit sweep programs (beginning c.1994), fewer applicable deposit classifications (including the “low-reserve tranche” & “exemption amounts”) & lower reserve ratios (since Mar. 1980, 1990, & 1991), & reserve simplification procedures (beg. July 2012 contractual clearing balances, were eliminated, etc.), have combined to remove reserve, & reserve ratio, restrictions.<br /><br />So excess reserves may be depleted (if not offset by the “trading desk”), as “factors that affect reserve balances change” (as currency is issued or as System Open Market Account securities are sold or “run off”, etc).<br /><br />Fractional reserve (or prudential reserve) banking is a function of the clearing velocity of centralized bank deposits (based on interbank payments & settlements, i.e., liquidity backstops). Money creation is not a function of the volume of CB deposits. I.e., for the CB system, the whole is not the sum of its parts. Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87339887717892109142013-07-25T11:31:31.829-04:002013-07-25T11:31:31.829-04:00That's called disinformation. Tell me this. ...That's called disinformation. Tell me this. What was the interest rate differential between the CBs & the NBs cost of loan-funds in 1966? Was it greater, lesser, or the same as the IOeR rate? Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28343178078951197612013-07-25T10:26:23.465-04:002013-07-25T10:26:23.465-04:00The reason nobody buys government bonds during hyp...The reason nobody buys government bonds during hyperinflation, except the central bank, is the value of the currency is dropping much faster than the interest payments can compensate for, so it is a crazy bad investment.<br />Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3272760995254770672013-07-25T10:19:56.075-04:002013-07-25T10:19:56.075-04:00I would be very appreciative of any feedback you c...I would be very appreciative of any feedback you can give on my Hyperinflation FAQ:<br /><br />http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-89441593139980800442013-07-25T10:17:21.866-04:002013-07-25T10:17:21.866-04:00But that is because the public loses faith in the ...But that is because the public loses faith in the currency and if it is fiat, then the government has to really (not just literally like in Japan, the USA,... today) print money and hand it out to the people, because they would otherwise reject the currency completely. Hyperinflation is a cognitive phenomenon, not merely an economic and has to be strictly separated from high hinflation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25400987827951100572013-07-25T09:55:43.252-04:002013-07-25T09:55:43.252-04:00How in the world can banks "lend out reserves...How in the world can banks "lend out reserves"??? Everybody writes that but it doesn't make sense (unless the native english speaking people think of something else than I do)!<br /><br />A bank cannot lend out reserves. It can originate a new loan, for which it needs more reserves through the reserves requirenment, or it can convert the reserves to physical cash and store it in a vault (or drop it from a helicopter). But the last point does not make any sense, since it incures costs for a bank to store it. So where shall the direct inflationary process in having excess reserves come from? It just sits in the accounts of commercial banks (yes there might be indirect effects through a better looking capital structure of the bank and therefore a better possible ability to extend credit. But as we have seen, in balance sheet recessions banks cannot find enough willing borrowers and borrowers cannot find willing lenders. So credit creation remains anemic unrelated to the amount of excess reserves.) And this is not a matter of paying IROR or not. Reserves are basically stuck in the interbank market no matter what. They always come back to a commercial bank. The interbank market is a closed system. The monetary base doesn't change unless the central bank intervenes (OMOs,...). It is like a hot potatoe effect. One bank extends a credit, and gets the required reserves from another bank which has them in excess. And so the sum of reserves stays the same.<br /><br />So please tell me, how should reserve be lend out? I cannot go to a bank and tell them to lend me the reserves for one month. I can get a credit for which the bank has to fulfill underlying reserve requirenments, but the public cannot obtain central bank reserves in any way!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51662663865395427082013-07-25T08:51:04.408-04:002013-07-25T08:51:04.408-04:00Oh, and in hyperinflation usually nobody else is b...Oh, and in hyperinflation usually nobody else is buying government bonds, only the central bank.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68720916011824915442013-07-25T08:42:07.329-04:002013-07-25T08:42:07.329-04:00The way I know is that in hyperinflation the centr...The way I know is that in hyperinflation the central bank is making money and buying government bonds and the government is spending the money it gets from selling the bonds. So it is as if money is just being printed and spent. Much like what is really going on in Japan right now. Hyperinflation works the same for democracies and dictators, for East and West, with rule of law and without. Hyperinflation is an equal opportunity destruction.<br /><br />http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22516439454591182432013-07-25T07:43:52.122-04:002013-07-25T07:43:52.122-04:00The reserve bank of Zimbabwe seems to have stopped...The reserve bank of Zimbabwe seems to have stopped publishing its balance sheet in 2005, and even then there wasn't a sufficient breakdown of liabilities to determine what the size of the commerical banks' reserve accounts were. How do you know that the reserve accounts didn't grow just as large as the QE? <br /><br />And anyway, a dictatorship with poor rule of law and probably inaccurate government accounting is hardly a good example of what happens in western countries. Unanimousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-20154841220836983552013-07-25T07:43:00.628-04:002013-07-25T07:43:00.628-04:00The new money will leave the Fed's building wh...The new money will leave the Fed's building when banks think they can make more than the Fed is paying them to keep it there. If interest rates keep going up and the Fed does not raise this 0.25% then it could happen soon.<br /><br />How? What are the mechanics of it leaving? It could be as simple as a bank using some excess reserves to buy some 5 year Treasuries that were paying higher. It could be a bank takes out Federal Reserve Notes in an armored car. Probably some of both.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73689122434456314222013-07-25T06:51:10.173-04:002013-07-25T06:51:10.173-04:00The question of why risk alternatives can't wi...<i>The question of why risk alternatives can't win out over such low paying "risk free" alternatives is orthogonal to the argument that if new money has not yet left the Fed's building then of course it has not yet caused inflation.</i><br /><br />How and why would new money "leave the building?"mattskihttps://www.blogger.com/profile/07936264188400397646noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23459724933059839792013-07-25T06:33:49.402-04:002013-07-25T06:33:49.402-04:00Zimbabwe tried QE and reserve accounts did not gro...Zimbabwe tried QE and reserve accounts did not grow just as large as the QE.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29596243166311855932013-07-25T05:35:13.034-04:002013-07-25T05:35:13.034-04:00Before reserve banks tried QE, the total of all ba...Before reserve banks tried QE, the total of all banks' reserve accounts were small because reserve banks weren't trying QE. Reserve banks normally keep a small balance in banks reserve accounts by buying small amounts of bonds. Reserve banks do this to enable daily fluctuations in bank transfers to be handled without the reserve accounts going negative. <br /><br />Every reserve bank that has tried QE has had its commercial banks' reserve accounts become just as large as the size of the QE. By accounting, this has to happen because the reserve accounts are the liabilities incurred by the central bank when it buys bonds. Look at the balance sheets of the central banks. They are avaialble on a monthly basis on most central banks' web sites. <br /><br />In practice, the central bank controls the size of the commercial banks' reserve accounts - not individually, but overall. Banks can individually change the size of their reserve accounts, but only by transferring their liabilities between banks, and this does not change the overall total of reserve accounts. There are theoretical things that banks might do to change this (eg. hording cash), but they are not practical. Unanimousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87494278372043549222013-07-25T05:16:40.881-04:002013-07-25T05:16:40.881-04:00Adair Turner, Chairman of the FSA (Sept 2011)
The ...Adair Turner, Chairman of the FSA (Sept 2011)<br />The banking system can thus create credit and create spending power – a reality not well captured by many apparently common sense descriptions of the functions which banks perform. Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy. But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit.Kuodishttps://www.blogger.com/profile/18277330788082694353noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26468351284203857532013-07-25T05:11:39.567-04:002013-07-25T05:11:39.567-04:00ECB, Monthly Bulletin (2012, May):
The occurrence ...ECB, Monthly Bulletin (2012, May):<br />The occurrence of significant excess central bank liquidity does not, in itself, necessarily imply an accelerated expansion of MFI credit to the private sector. If credit institutions were constrained in their capacity to lend by their holdings of central bank reserves, then the easing of this constraint would result mechanically in an increase in the supply of credit. The Eurosystem, however, as the monopoly supplier of central bank reserves in the euro area, always provides the banking system with the liquidity required to meet the aggregate reserve requirement. In fact, the ECB’s reserve requirements are backward-looking, i.e. they depend on the stock of deposits (and other liabilities of credit institutions) subject to reserve requirements as it stood in the previous period, and thus after banks have extended the credit demanded by their customersKuodishttps://www.blogger.com/profile/18277330788082694353noreply@blogger.com