Krugman kicks von Mises acolyte while he's down

[Kimura]

Edit to add:

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.

Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.

Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.

 

[Toddsterpatriot]

I love your constant claim that the Treasury doesn't borrow money.
I'm wondering if they have a pill that can help your issue.

I'm wondering if the average American is as clueless as you are.

Again, from whom does the Treasury borrow $$$$? Under a fiat system and non-convertible currency, spending by sovereign governments is independent of taxing and borrowing. Get over it.

Why would a bank need to borrow today? They have trillions in excess reserves at the Fed.

Your claim is silly. Banks loan excess reserves, either to borrowers, other banks or, currently, to the Fed.
A bank would be stupid to borrow excess reserves elsewhere when they have their own.

You need to understand banks create loans through an accounting entry on their books. This is the power granted to you by the state once you receive a bank charter. Loans are created out thin air so to speak. Banks aren't RESERVE constrained, they're CAPITAL constrained. No reserves in this equation, not at this point.

My point being that if a bank requires nothing more than capital and book keeping to facilitate loans, why in god's name would they lend out reserves? This would fall under the category of retarded business decision. Reserves also earn interest for banks, so even if rates are low, the interest adds up in the aggregate, which add to the bottom line. It's also a zero risk form of income for a sector that is loaded with heavy risk (the banking sector).

We had this discussion multiple times. Why would a bank lend out its reserves and throw about that risk free income when it's not even needed? A loan is nothing more than an entry on the bank's balance sheet. They do this any time they desire and let reserves site idle and earn income.

By the way, I'm not even sure if bank can legally make loans with reserves. I'm pretty confident reserves can only be invested in certain assets granted by regulatory authorities and I'm pretty sure it's government securities.

That's only because the FED does have access to a source of funds the Treasury doesn't.

Do I have to draw you a picture? I'm being serious.

Again, from whom does the Treasury borrow $$$$?

From anybody that buys a Treasury security.

You need to understand banks create loans through an accounting entry on their books.

I do. Doesn't make your silly claim less wrong though.

My point being that if a bank requires nothing more than capital and book keeping to facilitate loans, why in god's name would they lend out reserves?

Why would they lend out money they're already paying interest on instead of borrowing still more money they'll need to pay interest on? Gee, I'll have to think about that one.

I'm not even sure if bank can legally make loans with reserves.

Wow! you need to read a book or something. They aren't lending reserves, they're lending excess reserves.

A new bank gets a $1 million deposit.
That $1 million is now excess reserves.
They are paying interest to the depositor.
A customer comes to the bank to borrow $500,000.
The bank could borrow $500,000 and pay Fed Funds but then they'd be paying interest on $1.5 million.
Or they could use their excess reserves to make the loan and only pay interest on $1 million.
I wonder what's better, paying more interest or less?

Why would a bank lend out its reserves and throw about that risk free income when it's not even needed?

Why would a bank borrow reserves when it's not even needed?

Do I have to draw you a picture?

Go ahead. I enjoy exposing the flaws in your claims.

 

[Toddsterpatriot]

Edit to add:

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.

Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.

Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

Correct. Banks can lend their own deposits or borrow excess deposits(excess reserves) from other banks to lend out. In either case, the loan came from the deposits.

 

[Kimura]

Edit to add:

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.

Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.

Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

Correct. Banks can lend their own deposits or borrow excess deposits(excess reserves) from other banks to lend out. In either case, the loan came from the deposits.

Banks tend to finance most loans using deposits, I would assume it's a more cost-effective method. The bottom line is that the asset and liability side of the bank's balance sheet has to balance out. If a bank makes a loan (bank asset) which is funded by a deposit (bank liability), and the deposit is drawn down, the bank must seek another funding mechanism. Deposits would be the least expensive way to accomplish this, and when a deposit it made, the bank's reserve account at the FED is credited as well. This may have came across as confusing on my part since banks have a customer book and their book at the FED.

This is why I always get a little miffed when people say that loans create deposits and reserves. It's correct in a technical sense if we at look the banking system in the aggregate. If people don't understand the process, they tend to make mistakes and think that banks literally create reserves with key strokes the same way they create loans. This isn't really the case at all.

Reserves at the FED are created via keystrokes, but reserves only exist on the FED's spreadsheet via administrator and only the FED has the administrator's password so to speak. If a bank is short on reserves at the FED, the FED will act as lender of last resort, and lend reserves with a penalty rate so that payments clear. If a bank doesn't meet regulatory specs, it's put into resolution. They can't use FED reserves to mask capital issues, unless the FED extends a bailout like they did for the Too-Big-Too-Fails.

Here:

Banks Don't Lend Out Reserves - Forbes

 

[Toddsterpatriot]

Edit to add:

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

This is why the fractional reserve model is simply not applicable under our fiat/non-convertible currency.

Under current institutional arrangements, the total cost of reserves is key, not the availability of reserves. The FED will always make reserve available to a member bank to settle up on the interbank system. We're talking overnight rate and feds funds rate at the end of the day, and setting said rates is a key component of monetary policy.

Banks also have the option to move reserves into Treasuries to earn interest, or they can lend said excess reserves to other banks in the overnight market with rates set by the FED if the FED isn't paying IOR the same as or more than the overnight rate.

Banks lends at profit through borrowing on the interbank market or straight from the FED to meet reserve requirements. In theory, a bank doesn't even need deposits in order to lend.

Correct. Banks can lend their own deposits or borrow excess deposits(excess reserves) from other banks to lend out. In either case, the loan came from the deposits.

Banks tend to finance most loans using deposits, I would assume it's a more cost-effective method. The bottom line is that the asset and liability side of the bank's balance sheet has to balance out. If a bank makes a loan (bank asset) which is funded by a deposit (bank liability), and the deposit is drawn down, the bank must seek another funding mechanism. Deposits would be the least expensive way to accomplish this, and when a deposit it made, the bank's reserve account at the FED is credited as well. This may have came across as confusing on my part since banks have a customer book and their book at the FED.

This is why I always get a little miffed when people say that loans create deposits and reserves. It's correct in a technical sense if we at look the banking system in the aggregate. If people don't understand the process, they tend to make mistakes and think that banks literally create reserves with key strokes the same way they create loans. This isn't really the case at all.

Reserves at the FED are created via keystrokes, but reserves only exist on the FED's spreadsheet via administrator and only the FED has the administrator's password so to speak. If a bank is short on reserves at the FED, the FED will act as lender of last resort, and lend reserves with a penalty rate so that payments clear. If a bank doesn't meet regulatory specs, it's put into resolution. They can't use FED reserves to mask capital issues, unless the FED extends a bailout like they did for the Too-Big-Too-Fails.

Here:

Banks Don't Lend Out Reserves - Forbes

You're suddenly making sense. What happened?

Your link is still wrong.

Banks cannot and do not “lend out” reserves

They do lend out excess reserves. The banking system as a whole cannot lend out excess reserves, one loan (reducing reserves) becomes a deposit elsewhere (increasing reserves). Customers can reduce excess reserves, by holding FRNs.

or deposits, for that matter.

As you know, they can lend out those portions of deposits that are excess reserves.

 

[Kimura]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

 

[Toddsterpatriot]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

 

[Kimura]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

That PDF spells it out.

To understand the first issue, note the composition of a central bank's balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank's capital (5) and some other possible minor items, the central bank balance sheet identity is:

Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).


Assets Liabilities

Assets (A) Reserves (R)
Banknotes in circulation (BK)
Government deposits (GD)


There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level canchange in three, and only three, ways (6). Reserves go up (or down) when:

(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain "parked" at the central bank. To express wonder that banks don't lend out their reserves or that they park the mat the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.

*didn't post the images

I really can't find anything wrong with this analysis.

 

[Toddsterpatriot]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

That PDF spells it out.

To understand the first issue, note the composition of a central bank's balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank's capital (5) and some other possible minor items, the central bank balance sheet identity is:

Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).


Assets Liabilities

Assets (A) Reserves (R)
Banknotes in circulation (BK)
Government deposits (GD)


There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level canchange in three, and only three, ways (6). Reserves go up (or down) when:

(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain "parked" at the central bank. To express wonder that banks don't lend out their reserves or that they park the mat the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.

*didn't post the images

I really can't find anything wrong with this analysis.

Looks good to me.

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers.

Agreed.

bank reserves have to remain "parked" at the central bank.

But excess reserves can be lent. Are you still confused?

 

[Kimura]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

That PDF spells it out.

To understand the first issue, note the composition of a central bank's balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank's capital (5) and some other possible minor items, the central bank balance sheet identity is:

Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).


Assets Liabilities

Assets (A) Reserves (R)
Banknotes in circulation (BK)
Government deposits (GD)


There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level canchange in three, and only three, ways (6). Reserves go up (or down) when:

(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain "parked" at the central bank. To express wonder that banks don't lend out their reserves or that they park the mat the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.

*didn't post the images

I really can't find anything wrong with this analysis.

Looks good to me.

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers.

Agreed.

bank reserves have to remain "parked" at the central bank.

But excess reserves can be lent. Are you still confused?

I'm not confused. I couldn't discern if you were talking about the banking system in the aggregate or an individual transaction. This is where the plot thickened.

I printed out that PDF, it's a little wonkish, but I'm reading through it.

It might be asked: if banks cannot lend the excess reserves that the central bank provides, what is the point of thecentral bank supplying them? The answer to that question is simply that QE does serve to ease financial conditions.

Technically, QE allows the central bank to change the composition of the aggregate portfolio held by the private sector; the central bank takes out of that portfolio the government debt and other securities it buys and replaces them with reserves and bank deposits (the latter when it buys assets directly from the public or its non bank financial intermediaries) (10). This has an easing effect via so-called "portfolio rebalance effects," including but not limited to the associated downward pressure that QE puts on the yield curve (11).

Just like any monetary easing, QE, and the supply of excess reserves that it entails, should lead, over time, to more credit creation than would have occurred in the absence of the QE (12). Partly, this is because the easier financial conditions should make borrowers a little bit more willing than otherwise to borrow. Part of the portfolio rebalancing might also involve banks being a little bit more willing than otherwise to lend because they have fewer higher-yielding or longer-duration assets on their balance sheet (as a proportion of their assets and likely in absolute amount, too).

Thus the fact that banks have excess reserves on their balance sheet should induce banks to lend a bit more than they would otherwise have done. But this would occur as part of the "portfolio rebalance effect" and is a far cry from the mechanical view of the world that sees bank reserves as the (direct) fodder for bank lending.

Music to me ears.

Oh gawd. This is what I've spent months trying to explain. All QE operations are an asset swap. It's a change in overall asset composition and term structure of government sector liabilities, there wasn't an increase in non-government net financial assets.

 

[Toddsterpatriot]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

That PDF spells it out.

To understand the first issue, note the composition of a central bank's balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank's capital (5) and some other possible minor items, the central bank balance sheet identity is:

Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).


Assets Liabilities

Assets (A) Reserves (R)
Banknotes in circulation (BK)
Government deposits (GD)


There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level canchange in three, and only three, ways (6). Reserves go up (or down) when:

(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain "parked" at the central bank. To express wonder that banks don't lend out their reserves or that they park the mat the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.

*didn't post the images

I really can't find anything wrong with this analysis.

Looks good to me.

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers.

Agreed.

bank reserves have to remain "parked" at the central bank.

But excess reserves can be lent. Are you still confused?

I'm not confused. I couldn't discern if you were talking about the banking system in the aggregate or an individual transaction. This is where the plot thickened.

I printed out that PDF, it's a little wonkish, but I'm reading through it.

It might be asked: if banks cannot lend the excess reserves that the central bank provides, what is the point of thecentral bank supplying them? The answer to that question is simply that QE does serve to ease financial conditions.

Technically, QE allows the central bank to change the composition of the aggregate portfolio held by the private sector; the central bank takes out of that portfolio the government debt and other securities it buys and replaces them with reserves and bank deposits (the latter when it buys assets directly from the public or its non bank financial intermediaries) (10). This has an easing effect via so-called "portfolio rebalance effects," including but not limited to the associated downward pressure that QE puts on the yield curve (11).

Just like any monetary easing, QE, and the supply of excess reserves that it entails, should lead, over time, to more credit creation than would have occurred in the absence of the QE (12). Partly, this is because the easier financial conditions should make borrowers a little bit more willing than otherwise to borrow. Part of the portfolio rebalancing might also involve banks being a little bit more willing than otherwise to lend because they have fewer higher-yielding or longer-duration assets on their balance sheet (as a proportion of their assets and likely in absolute amount, too).

Thus the fact that banks have excess reserves on their balance sheet should induce banks to lend a bit more than they would otherwise have done. But this would occur as part of the "portfolio rebalance effect" and is a far cry from the mechanical view of the world that sees bank reserves as the (direct) fodder for bank lending.

Music to me ears.

Oh gawd. This is what I've spent months trying to explain. All QE operations are an asset swap. It's a change in overall asset composition and term structure of government sector liabilities, there wasn't an increase in non-government net financial assets.

I couldn't discern if you were talking about the banking system in the aggregate or an individual transaction.

From all my examples, it should be obvious I was talking about individual banks.

It might be asked: if banks cannot lend the excess reserves that the central bank provides,

But they can, subject to capital restraints .

what is the point of the central bank supplying them?

They increase the money supply, just without the multiplier that previous additions of high-powered money caused.

 

[Toddsterpatriot]

Overview
• Many talk as if banks can "lend out" their reserves, raising concerns that massive excess reserves created by QE could fuel runaway credit creation and inflation in the future. But banks cannot lend their reserves directlyto commercial borrowers, so this concern is misplaced.

• Banks do need to hold reserves (as a liquidity buffer) against their deposits, and banks create deposits when
they lend. But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

• Banks in aggregate can reduce their reserves only to the extent that they initiate new lending and the bank
deposits created as a result flow into the economy as new banknotes as the public demands more of them.

• QE does aim to ease financial conditions and spur more bank lending than otherwise would have occurred, but
the mechanisms by which this happens are much more subtle and indirect than commonly implied.

• If the excess reserves created by QE were to be associated with too much credit creation, central banks could readily extinguish them.

Two key points that seem to get lost in translation.

But banks cannot lend their reserves directly to commercial borrowers,

But of course they can. Hello ABC bank, I'd like you to wire $1,000,000 from my line of credit to UBS, thanks!

But normally banks are not reserve constrained, so excess reserves do not loosen a reserve
constraint.

Currently banks are not reserve constrained. That wasn't always the case in the past.
And saying we have excess reserves we can lend does not mean we don't lend excess reserves.

That PDF spells it out.

To understand the first issue, note the composition of a central bank's balance sheet (see table 1) and note an identity linking the two sides. Abstracting from the central bank's capital (5) and some other possible minor items, the central bank balance sheet identity is:

Assets (A) = Reserves (R) + Banknotes in circulation (BK) + Government deposits (GD).


Assets Liabilities

Assets (A) Reserves (R)
Banknotes in circulation (BK)
Government deposits (GD)


There you have it. This being an identity and reserves being a liability of the central bank, their aggregate level canchange in three, and only three, ways (6). Reserves go up (or down) when:

(1) The central bank increases (decreases) its assets;
(2) The public decreases (increases) the amount of cash (banknotes) it wants to hold;
(3) The government reduces (increases) its deposits at the central bank because it makes net transfers to (receives net transfers from) the private sector (7).

Most importantly, banks cannot cause the amount of reserves at the central bank to fall by "lending them out" to customers. That possibility is not allowed for in the identity because bank lending does not enter into it. Assuming that the public does not change its demand for cash and the government does not make any net payments to the private sector (two things that are both beyond the direct control of the banks and the central bank), bank reserves have to remain "parked" at the central bank. To express wonder that banks don't lend out their reserves or that they park the mat the central bank is to fundamentally misunderstand the balance-sheet mechanics of credit creation and how QE works.

*didn't post the images

I really can't find anything wrong with this analysis.

bank reserves have to remain "parked" at the central bank.

To be more precise, the vault cash portion of reserves does not remain parked at the central bank.

 

[Dot Com]

you are very gracious to "instruct" these low-info Randians who cling to theories despite their being discounted in Academia AND IRL .

 

[EdwardBaiamonte]

you are very gracious to "instruct" these low-info Randians who cling to theories despite their being discounted in Academia AND IRL .

Dear, Rand's theory was that capitalism is best. Do you dispute it? If so exactly why or admit to having the IQ of a liberal.

 

[Toddsterpatriot]

you are very gracious to "instruct" these low-info Randians who cling to theories despite their being discounted in Academia AND IRL .

I'm happy to help.
Don't think Kimura is a Randian though.

 

[EdwardBaiamonte]

you are very gracious to "instruct" these low-info Randians who cling to theories despite their being discounted in Academia AND IRL .

I'm happy to help.
Don't think Kimura is a Randian though.

no, he's a self described progressive/libertarian and he's going to tell us what that is as soon as he figures it out