We should all agree with this!

[Kimura]

Once again, I never said banks loaned reserves or debited them. They don't. I have said this numerous times, in fact that has been one of my primary arguments against Toddster. Where did you get the idea I believed banks loaned out reserves from the post of mine you quoted?

Gotcha...

It was from the other thread:

We do have a fractional reserve system--banks do still hold reserves--the reserve requirement is just not a very good limit. Even with no reserve requirement, banks would be keeping a certain percentage of deposits as reserves. For the past several years, for example, banks have been given more reserves but have not expanded lending significantly.

I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

Not they don't, not in the conventional sense.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts. The only way for them to decrease excess reserves would be to convert them to physical cash, but all that would do is swap out one asset (reserves) for another (physical cash). This has no effect on their ability to lend. The central bank is the only institution which can decrease base $$$$ (reserves & cash) in circulation so to speak. As long as the FED continues to purchase assets in the private sector, excess reserves will continue to grow and the cavity between loans and deposits will continue to increase.

 

[ShackledNation]

When commercial banks issue loans, at the end of the day, all they're doing is crediting the bank account of the borrower, but they're not debiting their reserves. The bank has the asset as the amount of the loan, and the borrower assumes the liability of the loan repayment. Commercial banks aren't currency issuers.

See the difference?

Once again, I never said banks loaned reserves or debited them. They don't. I have said this numerous times, in fact that has been one of my primary arguments against Toddster. Where did you get the idea I believed banks loaned out reserves from the post of mine you quoted?

Gotcha...

It was from the other thread:

We do have a fractional reserve system--banks do still hold reserves--the reserve requirement is just not a very good limit. Even with no reserve requirement, banks would be keeping a certain percentage of deposits as reserves. For the past several years, for example, banks have been given more reserves but have not expanded lending significantly.

I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

It was perfectly rational for you to interpret it that way. I was very vague. Sorry about that.

 

[Kimura]

Once again, I never said banks loaned reserves or debited them. They don't. I have said this numerous times, in fact that has been one of my primary arguments against Toddster. Where did you get the idea I believed banks loaned out reserves from the post of mine you quoted?

Gotcha...

It was from the other thread:

We do have a fractional reserve system--banks do still hold reserves--the reserve requirement is just not a very good limit. Even with no reserve requirement, banks would be keeping a certain percentage of deposits as reserves. For the past several years, for example, banks have been given more reserves but have not expanded lending significantly.

I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

It was perfectly rational for you to interpret it that way. I was very vague. Sorry about that.

Cool. I also meant the money supply, not base money, that was a brain fart.

 

[ShackledNation]

The money is created in the form of a deposit account, which is the liability

And when the borrowers funds leave the bank, they need to get more liabilities.
Because deposits are larger than loans.
Because banks aren't magic.

Yes, the bank gets more liabilities...which are simply deposits that were created out of thin air at another bank. If the bank is a monopoly bank, then the deposit is literally the same one the bank created, just shifted to another person.

Yes, the bank gets more liabilities...

Because a bank with only $100 in liabilities can't loan $900.

Yes it can. I don't think you understand what happens when a loan is made. The bank creates both a liability and and asset of the same amount at the same time. Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

 

[ShackledNation]

Gotcha...

It was from the other thread:



I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

It was perfectly rational for you to interpret it that way. I was very vague. Sorry about that.

Cool. I also meant the money supply, not base money, that was a brain fart.

No worries at all. There are so many annoying terms regarding this topic--I've made the same mistake a million times.

 

[Kimura]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

 

[Wry Catcher]

Since it seems there are those with specialized knowledge about banks and banking, I'd like to go off course and ask how they feel about the Bank of N. Dakota.

See: Bank of North Dakota - Wikipedia, the free encyclopedia

 

[Kimura]

Since it seems there are those with specialized knowledge about banks and banking, I'd like to go off course and ask how they feel about the Bank of N. Dakota.

See: Bank of North Dakota - Wikipedia, the free encyclopedia

They've done a good job operating under the current constraints of our retarded banking system.

 

[ShackledNation]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset from an investor. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

 

[Kimura]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

We should maybe look at all banks in the aggregate, as opposed to individual banks if that makes sense. All banks, in the aggregate, and individual banks, cannot lend out reserves as we've pointed out. However, I think Francis could have gotten into more detail ( I read that article months ago, but imageshacked the FRED data, being to lazy to recreate it). Individuals banks can offload excess reserves through asset purchases or lending to other banks. However, all banks in the aggregate can't do this if that makes sense? Under such a circumstance, reserves that move from one bank's balance sheet move to another all while still remaining on the FED's balance sheet.

 

[ShackledNation]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

We should maybe look at all banks in the aggregate, as opposed to individual banks if that makes sense. All banks, in the aggregate, and individual banks, cannot lend out reserves as we've pointed out. However, I think Francis could have gotten into more detail ( I read that article months ago, but imageshacked the FRED data, being to lazy to recreate it). Individuals banks can offload excess reserves through asset purchases or lending to other banks. However, all banks in the aggregate can't do this if that makes sense? Under such a circumstance, reserves that move from one bank's balance sheet move to another all while still remaining on the FED's balance sheet.

That makes sense, but it doesn't really explain my confusion. I am not looking at an individual bank buying an asset or lending to other banks. I am looking at what happens when the Fed buys assets from a private investor (not a bank). Why would excess reserves at banks increase as well? The investor would have more money in his deposit account, increasing aggregate deposits. But an increase in aggregate deposits does not necessitate an increase in assets--the banks may very well just have less equity overall. All else remaining equal, an increase in deposits will actually decrease excess reserves, which are a ratio of total reserves minus required reserves. Why? Higher deposits mean required reserves will be higher.

 

[Kimura]

I found the article that is from, for anyone interested in the whole thing:
Banks Don't Lend Out Reserves - Forbes

It is a really great explanation of why excess reserves are so high. But the second part about about buying assets creating more reserves confuses me. When an asset is bought, the result is a decrease in equity. Why would the Fed also have to increase bank reserves? For example, if the Fed buys a $1000 asset, the equity would decrease by $1000 and everything balances. I do not understand why we can assume that when the Fed buys a $1000 asset, it also creates $1000 more in reserves for the banks.

Everything else in the article seems spot on, so I think I may be missing something here. Or maybe the article was unclear. For if the Fed buys assets, the result will be more deposits. This will also decrease excess reserves, which all else remaining equal decrease when deposits increase. The total volume of reserves will not actually change of course. For example, Say there are $3,000 in reserves and $10,000in deposits. The reserve ratio is 10%. Required reserves would be .10 x 10,000, which is $1000. Therefore, there are $3,000 - 1000 in excess reserves, which is $2000 in excess reserves.

Now say the Fed buys a $1,000 asset. We then have this: $3,000 in reserves and $11,000 in deposits. The volume of reserves is the same, but excess reserves would be less. The required reserves for $11,000 is $1100. Thus the excess is now $3000 - 1100, which is $1900 in excess reserves. So why would we assume the Fed is not only buying assets but increasing the volume of reserves at the same time? That runs contrary to its goal in reducing the excess.

A more logical reason is that the deposit-destroying effect of calling in loans and not creating new ones is counteracting the deposit-creating effect of QE. Banks simply are not creating more loans. In the above scenario, even with the QE decreasing the excess by $100, banks may have just called in a $100 loan. With no corresponding new loan, the deposits would fall by $100. Excess reserves would once again be $2000, despite QE.

In short, QE does not create more reserves in volume, and has the effect of reducing excess reserves all else remaining equal. All else is not equal, however, and if banks are not creating money through lending, but closing deposits by calling in loans, then QE will fail because the lack of lending has the precise opposite effect.

We should maybe look at all banks in the aggregate, as opposed to individual banks if that makes sense. All banks, in the aggregate, and individual banks, cannot lend out reserves as we've pointed out. However, I think Francis could have gotten into more detail ( I read that article months ago, but imageshacked the FRED data, being to lazy to recreate it). Individuals banks can offload excess reserves through asset purchases or lending to other banks. However, all banks in the aggregate can't do this if that makes sense? Under such a circumstance, reserves that move from one bank's balance sheet move to another all while still remaining on the FED's balance sheet.

That makes sense, but it doesn't really explain my confusion. I am not looking at an individual bank buying an asset or lending to other banks. I am looking at what happens when the Fed buys assets from a private investor (not a bank). Why would excess reserves at banks increase as well? The investor would have more money in his deposit account, increasing aggregate deposits. But an increase in aggregate deposits does not necessitate an increase in assets--the banks may very well just have less equity overall. All else remaining equal, an increase in deposits will actually decrease excess reserves, which are a ratio of total reserves minus required reserves. Why? Higher deposits mean required reserves will be higher.

Hmmm....

Well.....when the FED purchases from banks we're looking at an asset swap on the bank's ledger, so we're looking at nothing more than changing less liquid and riskier assets for cash money owned by the bank, which doesn't create any new deposits. In other words, the liabilities side remains unchanged. When the purchase is made from a private investor, this causes an increase in the bank's balance sheet since cash was deposited as a new deposit. This results in excess deposits when we think about it.

 

[ShackledNation]

Hmmm....

Well.....when the FED purchases from banks we're looking at an asset swap on the bank's ledger, so we're looking at nothing more than changing less liquid and riskier assets for cash money owned by the bank, which doesn't create any new deposits. In other words, the liabilities side remains unchanged. When the purchase is made from a private investor, this causes an increase in the bank's balance sheet since cash was deposited as a new deposit. This results in excess deposits when we think about it.

Ahhhh nevermind. I just figured it out. This article cleared my mind. My error was that I was assuming the Federal Reserve was buying directly from the private investor, and crediting the investors account. This makes no sense--the investor does not have a bank account with the Fed, so there is none to credit!

When buying from private investors, the Fed goes to the bank the investor is a customer of, and credit's that bank's account with the Fed. The member bank then credits the deposit account of the investor. Since the bank's account with the Fed is its reserves, crediting it increases reserves. The bank, in crediting the depositor, increased deposits. And there you have deposits and reserves increasing equally--with clearly no reduction in excess reserves as a result.

For anyone with the same confusion, keep in mind that the Fed does not pay people directly because people don't have accounts at the Fed, only banks do. Thus the only way a Fed can pay an investor is to give money to the banks first, in the form of increased reserves. Doi.

Edit: I suppose the Fed could also pay the investor directly with newly minted cash, but this would have the same effect. The cash would be deposited at a bank. The bank would then create a demand deposit of the same value, and the cash would be added to reserves. I am quite certain this is not what happens of course, but the effect would be the same.

 

[Kimura]

Hmmm....

Well.....when the FED purchases from banks we're looking at an asset swap on the bank's ledger, so we're looking at nothing more than changing less liquid and riskier assets for cash money owned by the bank, which doesn't create any new deposits. In other words, the liabilities side remains unchanged. When the purchase is made from a private investor, this causes an increase in the bank's balance sheet since cash was deposited as a new deposit. This results in excess deposits when we think about it.

Ahhhh nevermind. I just figured it out. This article cleared my mind. My error was I was assuming the Federal Reserve was buying directly from the private investor, and crediting the investors account. This makes no sense--the investor does not have a bank account with the Fed, so there is none to credit!

When buying from private investors, the Fed goes to the bank the investor is a customer of, and credit's that bank's account with the Fed. The member bank then credits the deposit account of the investor. Since the bank's account with the Fed is its reserves, crediting it increases reserves. The bank, in crediting the depositor, increased deposits. And there you have deposits and reserves increasing equally--with clearly no reduction in excess reserves as a result.

For anyone with the same confusion, keep in mind that the Fed does not pay people directly because people don't have accounts at the Fed, only banks do. Thus the only way a Fed can pay an investor is to give money to the banks first, in the form of increased reserves. Doi.

I was under the impression you meant assets that were bought by investors and then they turn around and deposit the funds in the bank.

But yeah, individual investors don't have reserve accounts.

 

[Toddsterpatriot]

Gotcha...

It was from the other thread:



I interpreted that post as you insinuating the banks lend out reserves but simply choose not to. Glad we cleared that up.

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

Not they don't, not in the conventional sense.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts. The only way for them to decrease excess reserves would be to convert them to physical cash, but all that would do is swap out one asset (reserves) for another (physical cash). This has no effect on their ability to lend. The central bank is the only institution which can decrease base $$$$ (reserves & cash) in circulation so to speak. As long as the FED continues to purchase assets in the private sector, excess reserves will continue to grow and the cavity between loans and deposits will continue to increase.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts.

I'm not talking about the banking system reducing excess reserves, I'm talking about a single bank reducing excess reserves, by making a loan.

 

[Toddsterpatriot]

Yes, the bank gets more liabilities...which are simply deposits that were created out of thin air at another bank. If the bank is a monopoly bank, then the deposit is literally the same one the bank created, just shifted to another person.

Yes, the bank gets more liabilities...

Because a bank with only $100 in liabilities can't loan $900.

Yes it can. I don't think you understand what happens when a loan is made. The bank creates both a liability and and asset of the same amount at the same time. Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Do you understand that when the bank creates a $900 loan it is really creating both a $900 asset (the loan itself) and a $900 liability (the deposit account for the debtor)?

Yes. And as soon as the borrower empties the deposit account by writing a check or sending a wire, you have a bank with a $100 deposit which cannot fund the $900 loan. Unless they get another $900 in deposits or borrow $900 from another bank's excess reserves.

 

[Kimura]

But of course they lend out excess reserves.

A bank with $1 billion in excess reserves is not going to fund a $500 million loan with Fed Funds. They'll simply reduce their excess reserves to $500 million.

Not they don't, not in the conventional sense.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts. The only way for them to decrease excess reserves would be to convert them to physical cash, but all that would do is swap out one asset (reserves) for another (physical cash). This has no effect on their ability to lend. The central bank is the only institution which can decrease base $$$$ (reserves & cash) in circulation so to speak. As long as the FED continues to purchase assets in the private sector, excess reserves will continue to grow and the cavity between loans and deposits will continue to increase.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts.

I'm not talking about the banking system reducing excess reserves, I'm talking about a single bank reducing excess reserves, but making a loan.

Gotcha.

A single bank can shed excess reserves two ways: lending to other banks or asset purchases.

 

[Toddsterpatriot]

It looks as if these excess reserves at the central bank must be crowding out teh lending? Excess reserves + loans = deposits. Wrong. This is all double entry accounting.

When teh central bank decides to purchase assets in the private sector, not only are new deposits created, but so are new reserves. New deposits (liabilities) must have corresponding assets. So when a bank creates a deposit through lending to a borrower, that corresponding asset is the loan. When the central bank creates these deposits through asset purchases, the parallel asset is the increase in reserves, which are also created. Under this scenario, it doesn't matter how much a bank lends, if the central bank continues to create new reserves and deposits through purchasing assets from the private sector, deposits will constantly surpass loans by the amount of these new reserves.

Therefore, banks do not and cannot lend out reserves or deposits, nor do excess reserves have a crowding out effect. The positive interest rates on these excess reserves occur because the banking system is being forced to hold said reserves and pay the related fees for the deposits.

Therefore, banks do not and cannot lend out reserves or deposits,

If a bank has $10,000 in deposits and a borrower withdraws $5000 in cash to buy a car, what has the bank lent out?

 

[Toddsterpatriot]

Not they don't, not in the conventional sense.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts. The only way for them to decrease excess reserves would be to convert them to physical cash, but all that would do is swap out one asset (reserves) for another (physical cash). This has no effect on their ability to lend. The central bank is the only institution which can decrease base $$$$ (reserves & cash) in circulation so to speak. As long as the FED continues to purchase assets in the private sector, excess reserves will continue to grow and the cavity between loans and deposits will continue to increase.

The total amount of excess reserves in the banking system is rather large, but banks can't decrease them by lending large amounts.

I'm not talking about the banking system reducing excess reserves, I'm talking about a single bank reducing excess reserves, but making a loan.

Gotcha.

A single bank can shed excess reserves two ways: lending to other banks or asset purchases.

Or reducing deposits.

 

[Toddsterpatriot]

Since it seems there are those with specialized knowledge about banks and banking, I'd like to go off course and ask how they feel about the Bank of N. Dakota.

See: Bank of North Dakota - Wikipedia, the free encyclopedia

Conservative bank in a conservative state run conservatively.

Minor plus.

Ellen Brown is a moron though, for thinking they'd be a good idea in corrupt states like California and Illinois.