The series equals total balances maintained plus currency in circulation.
Ringing any bells yet?
wow you seem like such a smart guy....... so why are you trying so hard to change subject??
so for 6th time who controls the money supply if not the Fed and what makes you think they control it????
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly
That must be it.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks.
Required reserves and to clear checks and wires.
Paying interest on reserves is entirely new since the crash.
They were planning on paying interest, before the crash.
The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.
The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.
FRB: Interest on Required Balances and Excess Balances
Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
Is 0.25% really enough to stop banks from lending extra reserves if they wanted?
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
The banks have trillions in cash reserves, the Fed has trillions in MBS and Treasury securities.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again?
Well, if they feel the need to raise rates on Treasuries, they can sell bonds outright.
If the want their exit to be more gentle, they can let the bonds mature without replacing them.
Or, they could keep the balance sheet steady and let the economy grow into it.
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly
That must be it.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks.
Required reserves and to clear checks and wires.
Paying interest on reserves is entirely new since the crash.
They were planning on paying interest, before the crash.
The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.
The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.
FRB: Interest on Required Balances and Excess Balances
Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
Is 0.25% really enough to stop banks from lending extra reserves if they wanted?
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
The banks have trillions in cash reserves, the Fed has trillions in MBS and Treasury securities.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again?
Well, if they feel the need to raise rates on Treasuries, they can sell bonds outright.
If the want their exit to be more gentle, they can let the bonds mature without replacing them.
Or, they could keep the balance sheet steady and let the economy grow into it.
Yeah, I didn't know that. I'd be interested in reading up on the motivations for such a move. If the bank kept reserves themselves, they obviously wouldn't be earning interest on them. So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Yeah, they can sell those treasuries.... I think that's where the rub comes. The Fed collected $115 Billion from the US Treasury for 2014. If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
Now from what I understand of how the system works, is that the treasury sells bonds. Private buyers buy the bonds. Then Federal Reserve is buying those bonds from the private seller, and does so in exchange for "reserves". Then when the bank needs those reserves, for whatever reason, they simply get money from the Treasury, and pay them the reserves. So in a round-a-bout way, the Government is buying it's own bonds.
Money supply drastically increased.
Now the money supply had been under $1.4 Trillion, for years. And prior, it had been just under $1.2 Trillion for all of the 90s.
Over the course of the crisis, the Fed started buying treasuries at a rate of roughly $100 billion a month.
Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York
Here is a schedule of Fed Treasury buying schedules, going back to 2010. If you look at Nov 2010, to Jun 2011, they were purchasing $100 Billion worth every month.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
How then, did they avoid the hyper inflation people like Ron Paul were screaming about?
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
I'm convinced, thus far, that this is what has happened.
Now you are correct they could sell off some US treasuries, and make the reserves simply disappear.... in theory.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries. But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government. The politicians would be screaming.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous. Pennies on the dollar I wager.
Obviously the safest course of action, is to simply allow the bonds to mature, and use the money paid to the Fed, from the US government, to pay back the reserves.
No new money is introduced, and the system is stable.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
And that requires two things.... A: there is no economic turbulence that causes banks to need to draw down those reserves, and B: there is no economic boom, that causes banks to want to draw down those reserves to invest elsewhere.
What do you see that I have missed in my analysis?
Can the Fed unload its toxic assets successfully?
I just happen to stumble onto this article, which largely says exactly the same thing I just did. Doesn't mean I'm right, or it's right. But at least I'm not the only one thinking this way.
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly
That must be it.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks.
Required reserves and to clear checks and wires.
Paying interest on reserves is entirely new since the crash.
They were planning on paying interest, before the crash.
The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.
The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.
FRB: Interest on Required Balances and Excess Balances
Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
Is 0.25% really enough to stop banks from lending extra reserves if they wanted?
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
The banks have trillions in cash reserves, the Fed has trillions in MBS and Treasury securities.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again?
Well, if they feel the need to raise rates on Treasuries, they can sell bonds outright.
If the want their exit to be more gentle, they can let the bonds mature without replacing them.
Or, they could keep the balance sheet steady and let the economy grow into it.
Yeah, I didn't know that. I'd be interested in reading up on the motivations for such a move. If the bank kept reserves themselves, they obviously wouldn't be earning interest on them. So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Yeah, they can sell those treasuries.... I think that's where the rub comes. The Fed collected $115 Billion from the US Treasury for 2014. If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
Now from what I understand of how the system works, is that the treasury sells bonds. Private buyers buy the bonds. Then Federal Reserve is buying those bonds from the private seller, and does so in exchange for "reserves". Then when the bank needs those reserves, for whatever reason, they simply get money from the Treasury, and pay them the reserves. So in a round-a-bout way, the Government is buying it's own bonds.
Money supply drastically increased.
Now the money supply had been under $1.4 Trillion, for years. And prior, it had been just under $1.2 Trillion for all of the 90s.
Over the course of the crisis, the Fed started buying treasuries at a rate of roughly $100 billion a month.
Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York
Here is a schedule of Fed Treasury buying schedules, going back to 2010. If you look at Nov 2010, to Jun 2011, they were purchasing $100 Billion worth every month.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
How then, did they avoid the hyper inflation people like Ron Paul were screaming about?
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
I'm convinced, thus far, that this is what has happened.
Now you are correct they could sell off some US treasuries, and make the reserves simply disappear.... in theory.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries. But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government. The politicians would be screaming.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous. Pennies on the dollar I wager.
Obviously the safest course of action, is to simply allow the bonds to mature, and use the money paid to the Fed, from the US government, to pay back the reserves.
No new money is introduced, and the system is stable.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
And that requires two things.... A: there is no economic turbulence that causes banks to need to draw down those reserves, and B: there is no economic boom, that causes banks to want to draw down those reserves to invest elsewhere.
What do you see that I have missed in my analysis?
Can the Fed unload its toxic assets successfully?
I just happen to stumble onto this article, which largely says exactly the same thing I just did. Doesn't mean I'm right, or it's right. But at least I'm not the only one thinking this way.
So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
The Fed link explained, holding reserves that earn no interest is a tax on the banks.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Reserves in the system are very dependent on the Fed.
Before 2008, there just wasn't a lot of excess reserves in the system.
The Fed collected $115 Billion from the US Treasury for 2014.
No, the amount collected from the Treasury was much smaller than that.
Their MBS holdings are about 40% of their total and these MBS earned an average of 3.01% versus 2.50% on the Treasuries.
FRB: Annual Report 2014 - Federal Reserve Banks
If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
The Fed holds about $2.5 trillion in Treasuries, out of $13.1 trillion of Debt held by the Public.
So in a round-a-bout way, the Government is buying it's own bonds.
You bet.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
It was a dramatic increase, but that doesn't mean it would automatically cause major inflation.
You can't look only at supply while ignoring demand. Demand for cash increased dramatically during the crisis.
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
Lending does not destroy or "use up" reserves.
If a bank had $1 trillion in excess reserves and lent them out, most of those reserves would
remain in the banking system at the Fed. The only way (for someone besides the Fed) to remove reserves is to convert them to currency and for customers to hold this currency outside their bank.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries.
Correct. But they also have $1.7 trillion in MBS.
But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government.
They would only sell if they needed to raise interest rates, to control inflation. Fed losses shouldn't be part of the equation. They don't run the Fed to make a profit, and if they have to lose money to shrink the sheet, then that's what they should do.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous.
You are mistaken. They don't hold toxic assets, they only bought Treasuries and guaranteed MBS.
MBS that trade above par.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
When the Treasury pays off a bond held by the Fed, reserves are destroyed, by definition.
No need for the banks to do a thing. It just happens.
I just happen to stumble onto this article, which largely says exactly the same thing I just did.
Yes, this article has says some of the same errors that you've said.
There are no toxic assets at the Fed. There are no subprime mortgages at the Fed.
Three billion dollars a year in interest payments is a large portion of the Fed's annual operating profits. The recipients — America's large and not-so-large banking establishments — are now much less hindered by subprime loans than they were two years ago. How much longer the Fed can give the banking sector billions of dollars to hold on to these reserves is questionable. Politically, it seems unlikely that Americans will continue to support these payments. Economically, the Fed is losing a large portion of its operating profits to these payments.
Worrying about 0.25% paid on reserves, when the Fed is earning over 2% on their bonds, is just silly.
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly
That must be it.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks.
Required reserves and to clear checks and wires.
Paying interest on reserves is entirely new since the crash.
They were planning on paying interest, before the crash.
The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.
The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.
FRB: Interest on Required Balances and Excess Balances
Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
Is 0.25% really enough to stop banks from lending extra reserves if they wanted?
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
The banks have trillions in cash reserves, the Fed has trillions in MBS and Treasury securities.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again?
Well, if they feel the need to raise rates on Treasuries, they can sell bonds outright.
If the want their exit to be more gentle, they can let the bonds mature without replacing them.
Or, they could keep the balance sheet steady and let the economy grow into it.
Yeah, I didn't know that. I'd be interested in reading up on the motivations for such a move. If the bank kept reserves themselves, they obviously wouldn't be earning interest on them. So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Yeah, they can sell those treasuries.... I think that's where the rub comes. The Fed collected $115 Billion from the US Treasury for 2014. If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
Now from what I understand of how the system works, is that the treasury sells bonds. Private buyers buy the bonds. Then Federal Reserve is buying those bonds from the private seller, and does so in exchange for "reserves". Then when the bank needs those reserves, for whatever reason, they simply get money from the Treasury, and pay them the reserves. So in a round-a-bout way, the Government is buying it's own bonds.
Money supply drastically increased.
Now the money supply had been under $1.4 Trillion, for years. And prior, it had been just under $1.2 Trillion for all of the 90s.
Over the course of the crisis, the Fed started buying treasuries at a rate of roughly $100 billion a month.
Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York
Here is a schedule of Fed Treasury buying schedules, going back to 2010. If you look at Nov 2010, to Jun 2011, they were purchasing $100 Billion worth every month.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
How then, did they avoid the hyper inflation people like Ron Paul were screaming about?
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
I'm convinced, thus far, that this is what has happened.
Now you are correct they could sell off some US treasuries, and make the reserves simply disappear.... in theory.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries. But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government. The politicians would be screaming.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous. Pennies on the dollar I wager.
Obviously the safest course of action, is to simply allow the bonds to mature, and use the money paid to the Fed, from the US government, to pay back the reserves.
No new money is introduced, and the system is stable.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
And that requires two things.... A: there is no economic turbulence that causes banks to need to draw down those reserves, and B: there is no economic boom, that causes banks to want to draw down those reserves to invest elsewhere.
What do you see that I have missed in my analysis?
Can the Fed unload its toxic assets successfully?
I just happen to stumble onto this article, which largely says exactly the same thing I just did. Doesn't mean I'm right, or it's right. But at least I'm not the only one thinking this way.
So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
The Fed link explained, holding reserves that earn no interest is a tax on the banks.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Reserves in the system are very dependent on the Fed.
Before 2008, there just wasn't a lot of excess reserves in the system.
The Fed collected $115 Billion from the US Treasury for 2014.
No, the amount collected from the Treasury was much smaller than that.
Their MBS holdings are about 40% of their total and these MBS earned an average of 3.01% versus 2.50% on the Treasuries.
FRB: Annual Report 2014 - Federal Reserve Banks
If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
The Fed holds about $2.5 trillion in Treasuries, out of $13.1 trillion of Debt held by the Public.
So in a round-a-bout way, the Government is buying it's own bonds.
You bet.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
It was a dramatic increase, but that doesn't mean it would automatically cause major inflation.
You can't look only at supply while ignoring demand. Demand for cash increased dramatically during the crisis.
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
Lending does not destroy or "use up" reserves.
If a bank had $1 trillion in excess reserves and lent them out, most of those reserves would
remain in the banking system at the Fed. The only way (for someone besides the Fed) to remove reserves is to convert them to currency and for customers to hold this currency outside their bank.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries.
Correct. But they also have $1.7 trillion in MBS.
But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government.
They would only sell if they needed to raise interest rates, to control inflation. Fed losses shouldn't be part of the equation. They don't run the Fed to make a profit, and if they have to lose money to shrink the sheet, then that's what they should do.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous.
You are mistaken. They don't hold toxic assets, they only bought Treasuries and guaranteed MBS.
MBS that trade above par.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
When the Treasury pays off a bond held by the Fed, reserves are destroyed, by definition.
No need for the banks to do a thing. It just happens.
I just happen to stumble onto this article, which largely says exactly the same thing I just did.
Yes, this article has says some of the same errors that you've said.
There are no toxic assets at the Fed. There are no subprime mortgages at the Fed.
Three billion dollars a year in interest payments is a large portion of the Fed's annual operating profits. The recipients — America's large and not-so-large banking establishments — are now much less hindered by subprime loans than they were two years ago. How much longer the Fed can give the banking sector billions of dollars to hold on to these reserves is questionable. Politically, it seems unlikely that Americans will continue to support these payments. Economically, the Fed is losing a large portion of its operating profits to these payments.
Worrying about 0.25% paid on reserves, when the Fed is earning over 2% on their bonds, is just silly.
Ok, I see that now. So the $115 Billion is on all assets, not just T-Bonds. Got it. That makes me feel a ton better.
You have shown very well that the interest payment on reserves didn't have the impact I thought, and thus that conclusion is not accurate. I still think it should not be done. Reserves are there to keep the system sound, as it was intended, and if these banks held the reserves themselves, they wouldn't be getting an interest payment from themselves. But you made your point well... so... I'll move on.
I would agree with you that demand did increase. But is that sustainable? International demand, and bank demand, kept the currency stable relative to increased supply. Would there have been the demand for Bonds for example, had the Treasury not been buying bonds? I doubt it.
You are the first one thus far to ever say that the Fed was purchasing AAA guaranteed MBSs. That doesn't make sense. The purpose was to prevent toxic assets that were dropping in value, from screwing up the balance sheets of the banks. If the Fed was buying up the quality assets, and leaving the bank with the toxic assets, that would have left the banks in worse fiscal shape than before. I'll have to look into that. What you are saying is very confusing.
I'm also curious how the Fed is earning 2% on T-bonds, when the Treasury is openly saying they are 0% on the buy-direct web site.
It's possible that I'm not relaying the information correctly. I'm not exactly a Ph.D at banking speak.
But....
Richard Fisher on Too Big to Fail and the Fed | EconTalk | Library of Economics and Liberty
This is an interview with the Richard Fisher, President of the Federal Reserve Bank of Dallas.
He basically says that everything I just said is true.
You can listen to the interview, or just believe I'm lying... But this is what I'm going on, with a few other outside sources.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks. The Federal Reserve did not lend out this money... this money is the emergency money of the banks. If they lend it out, that defeats the purpose of have a capital reserve.
Further, the Federal Reserve did not pay interest on those reserves. Ever. Paying interest on reserves is entirely new since the crash. Remember, the banks were required by law to have reserves, so there was no need to pay interest.
Now there is a need to pay interest. Why? Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again? There is no good answer to that yet.
It's possible that I'm not relaying the information correctly
That must be it.
Banks put money on deposit with the Federal Reserve. Those deposits originally were only there as collateral against liabilities of the banks.
Required reserves and to clear checks and wires.
Paying interest on reserves is entirely new since the crash.
They were planning on paying interest, before the crash.
The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.
The interest rate on required reserves (IORR rate) is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate on excess reserves (IOER rate) is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.
FRB: Interest on Required Balances and Excess Balances
Because the amount of money the Fed wanted them to hold in reserve, was higher than the amount required by law. Therefore to get banks to keep the deposits at the Fed, they had to pay the banks interest on their reserves, or the bank would pull out the extra reserves, and use it.
Is 0.25% really enough to stop banks from lending extra reserves if they wanted?
The amount of reserves at the Fed, was fairly flat and steady for decades prior to the QE. After QE, the Feds have trillions in reserves.
The banks have trillions in cash reserves, the Fed has trillions in MBS and Treasury securities.
That's what they need an exit strategy for. How do they unload these trillions in reserves, without causing a problem in the market again?
Well, if they feel the need to raise rates on Treasuries, they can sell bonds outright.
If the want their exit to be more gentle, they can let the bonds mature without replacing them.
Or, they could keep the balance sheet steady and let the economy grow into it.
Yeah, I didn't know that. I'd be interested in reading up on the motivations for such a move. If the bank kept reserves themselves, they obviously wouldn't be earning interest on them. So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Yeah, they can sell those treasuries.... I think that's where the rub comes. The Fed collected $115 Billion from the US Treasury for 2014. If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
Now from what I understand of how the system works, is that the treasury sells bonds. Private buyers buy the bonds. Then Federal Reserve is buying those bonds from the private seller, and does so in exchange for "reserves". Then when the bank needs those reserves, for whatever reason, they simply get money from the Treasury, and pay them the reserves. So in a round-a-bout way, the Government is buying it's own bonds.
Money supply drastically increased.
Now the money supply had been under $1.4 Trillion, for years. And prior, it had been just under $1.2 Trillion for all of the 90s.
Over the course of the crisis, the Fed started buying treasuries at a rate of roughly $100 billion a month.
Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York
Here is a schedule of Fed Treasury buying schedules, going back to 2010. If you look at Nov 2010, to Jun 2011, they were purchasing $100 Billion worth every month.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
How then, did they avoid the hyper inflation people like Ron Paul were screaming about?
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
I'm convinced, thus far, that this is what has happened.
Now you are correct they could sell off some US treasuries, and make the reserves simply disappear.... in theory.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries. But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government. The politicians would be screaming.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous. Pennies on the dollar I wager.
Obviously the safest course of action, is to simply allow the bonds to mature, and use the money paid to the Fed, from the US government, to pay back the reserves.
No new money is introduced, and the system is stable.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
And that requires two things.... A: there is no economic turbulence that causes banks to need to draw down those reserves, and B: there is no economic boom, that causes banks to want to draw down those reserves to invest elsewhere.
What do you see that I have missed in my analysis?
Can the Fed unload its toxic assets successfully?
I just happen to stumble onto this article, which largely says exactly the same thing I just did. Doesn't mean I'm right, or it's right. But at least I'm not the only one thinking this way.
So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
The Fed link explained, holding reserves that earn no interest is a tax on the banks.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Reserves in the system are very dependent on the Fed.
Before 2008, there just wasn't a lot of excess reserves in the system.
The Fed collected $115 Billion from the US Treasury for 2014.
No, the amount collected from the Treasury was much smaller than that.
Their MBS holdings are about 40% of their total and these MBS earned an average of 3.01% versus 2.50% on the Treasuries.
FRB: Annual Report 2014 - Federal Reserve Banks
If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
The Fed holds about $2.5 trillion in Treasuries, out of $13.1 trillion of Debt held by the Public.
So in a round-a-bout way, the Government is buying it's own bonds.
You bet.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
It was a dramatic increase, but that doesn't mean it would automatically cause major inflation.
You can't look only at supply while ignoring demand. Demand for cash increased dramatically during the crisis.
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
Lending does not destroy or "use up" reserves.
If a bank had $1 trillion in excess reserves and lent them out, most of those reserves would
remain in the banking system at the Fed. The only way (for someone besides the Fed) to remove reserves is to convert them to currency and for customers to hold this currency outside their bank.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries.
Correct. But they also have $1.7 trillion in MBS.
But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government.
They would only sell if they needed to raise interest rates, to control inflation. Fed losses shouldn't be part of the equation. They don't run the Fed to make a profit, and if they have to lose money to shrink the sheet, then that's what they should do.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous.
You are mistaken. They don't hold toxic assets, they only bought Treasuries and guaranteed MBS.
MBS that trade above par.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
When the Treasury pays off a bond held by the Fed, reserves are destroyed, by definition.
No need for the banks to do a thing. It just happens.
I just happen to stumble onto this article, which largely says exactly the same thing I just did.
Yes, this article has says some of the same errors that you've said.
There are no toxic assets at the Fed. There are no subprime mortgages at the Fed.
Three billion dollars a year in interest payments is a large portion of the Fed's annual operating profits. The recipients — America's large and not-so-large banking establishments — are now much less hindered by subprime loans than they were two years ago. How much longer the Fed can give the banking sector billions of dollars to hold on to these reserves is questionable. Politically, it seems unlikely that Americans will continue to support these payments. Economically, the Fed is losing a large portion of its operating profits to these payments.
Worrying about 0.25% paid on reserves, when the Fed is earning over 2% on their bonds, is just silly.
Ok, I see that now. So the $115 Billion is on all assets, not just T-Bonds. Got it. That makes me feel a ton better.
You have shown very well that the interest payment on reserves didn't have the impact I thought, and thus that conclusion is not accurate. I still think it should not be done. Reserves are there to keep the system sound, as it was intended, and if these banks held the reserves themselves, they wouldn't be getting an interest payment from themselves. But you made your point well... so... I'll move on.
I would agree with you that demand did increase. But is that sustainable? International demand, and bank demand, kept the currency stable relative to increased supply. Would there have been the demand for Bonds for example, had the Treasury not been buying bonds? I doubt it.
You are the first one thus far to ever say that the Fed was purchasing AAA guaranteed MBSs. That doesn't make sense. The purpose was to prevent toxic assets that were dropping in value, from screwing up the balance sheets of the banks. If the Fed was buying up the quality assets, and leaving the bank with the toxic assets, that would have left the banks in worse fiscal shape than before. I'll have to look into that. What you are saying is very confusing.
I'm also curious how the Fed is earning 2% on T-bonds, when the Treasury is openly saying they are 0% on the buy-direct web site.
Would there have been the demand for Bonds for example, had the Treasury not been buying bonds? I doubt it.
The Fed bought about $1.7 trillion in Treasuries since the crisis started. The Treasury has issued about $8.5 trillion in that time. I think they'd have had no problem selling without the Fed involvement.
You are the first one thus far to ever say that the Fed was purchasing AAA guaranteed MBSs. That doesn't make sense.
They only bought Fannie and Freddie MBS, guaranteed by the US Treasury.
If the Fed was buying up the quality assets, and leaving the bank with the toxic assets, that would have left the banks in worse fiscal shape than before.
Nope. The banks now have more cash, their biggest issue was liquidity. The Fed added liquidity. Trillions of it.
Nothing higher quality than cash.
I'm also curious how the Fed is earning 2% on T-bonds, when the Treasury is openly saying they are 0%
T-Bills, less than a year to maturity, are yielding just a bit.
10 year bonds, currently over 2%. 30 years, about 3%.
Yeah, I didn't know that. I'd be interested in reading up on the motivations for such a move. If the bank kept reserves themselves, they obviously wouldn't be earning interest on them. So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Yeah, they can sell those treasuries.... I think that's where the rub comes. The Fed collected $115 Billion from the US Treasury for 2014. If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
Now from what I understand of how the system works, is that the treasury sells bonds. Private buyers buy the bonds. Then Federal Reserve is buying those bonds from the private seller, and does so in exchange for "reserves". Then when the bank needs those reserves, for whatever reason, they simply get money from the Treasury, and pay them the reserves. So in a round-a-bout way, the Government is buying it's own bonds.
Money supply drastically increased.
Now the money supply had been under $1.4 Trillion, for years. And prior, it had been just under $1.2 Trillion for all of the 90s.
Over the course of the crisis, the Fed started buying treasuries at a rate of roughly $100 billion a month.
Tentative Outright Treasury Operation Schedule - Federal Reserve Bank of New York
Here is a schedule of Fed Treasury buying schedules, going back to 2010. If you look at Nov 2010, to Jun 2011, they were purchasing $100 Billion worth every month.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
How then, did they avoid the hyper inflation people like Ron Paul were screaming about?
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
I'm convinced, thus far, that this is what has happened.
Now you are correct they could sell off some US treasuries, and make the reserves simply disappear.... in theory.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries. But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government. The politicians would be screaming.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous. Pennies on the dollar I wager.
Obviously the safest course of action, is to simply allow the bonds to mature, and use the money paid to the Fed, from the US government, to pay back the reserves.
No new money is introduced, and the system is stable.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
And that requires two things.... A: there is no economic turbulence that causes banks to need to draw down those reserves, and B: there is no economic boom, that causes banks to want to draw down those reserves to invest elsewhere.
What do you see that I have missed in my analysis?
Can the Fed unload its toxic assets successfully?
I just happen to stumble onto this article, which largely says exactly the same thing I just did. Doesn't mean I'm right, or it's right. But at least I'm not the only one thinking this way.
So why should the Fed pay them interest on reserves they are required to have? The only reason I can see for the Fed wanting to pay interest on reserves, is to encourage banks to hold excess reserves.
The Fed link explained, holding reserves that earn no interest is a tax on the banks.
Nevertheless, if the interest payments were not enough to cause banks to keep excess reserves at the Fed, then how do you explain that fact they never had more then required reserves up until the point they started paying the interest?
Reserves in the system are very dependent on the Fed.
Before 2008, there just wasn't a lot of excess reserves in the system.
The Fed collected $115 Billion from the US Treasury for 2014.
No, the amount collected from the Treasury was much smaller than that.
Their MBS holdings are about 40% of their total and these MBS earned an average of 3.01% versus 2.50% on the Treasuries.
FRB: Annual Report 2014 - Federal Reserve Banks
If that is actually true, and if the numbers we're getting from the Treasury is accurate, that means that 1/4th of the Federal debt is going to the Federal Reserve.
The Fed holds about $2.5 trillion in Treasuries, out of $13.1 trillion of Debt held by the Public.
So in a round-a-bout way, the Government is buying it's own bonds.
You bet.
So clearly, and obviously, if you pumped in $700 Billion in new money, in a system of only $1.5 Trillion, that would be a dramatic increase in the money supply that would without any doubt cause major inflationary issues.
It was a dramatic increase, but that doesn't mean it would automatically cause major inflation.
You can't look only at supply while ignoring demand. Demand for cash increased dramatically during the crisis.
Again, they kept the money out of circulation. They kept it as reserves at the Fed. How did they convince banks to keep the money at the Fed? With interest payments.
Lending does not destroy or "use up" reserves.
If a bank had $1 trillion in excess reserves and lent them out, most of those reserves would
remain in the banking system at the Fed. The only way (for someone besides the Fed) to remove reserves is to convert them to currency and for customers to hold this currency outside their bank.
The Fed has $2.3 Trillion in treasuries, which means there are more excess reserves than treasuries.
Correct. But they also have $1.7 trillion in MBS.
But in the very act of selling them, they would lose value. This would not only cause the Fed to lose billions of dollars, but it would also jack up the interest rate on the government.
They would only sell if they needed to raise interest rates, to control inflation. Fed losses shouldn't be part of the equation. They don't run the Fed to make a profit, and if they have to lose money to shrink the sheet, then that's what they should do.
And of course the only other assets they have, are the toxic assets, which the idea they are going to get a ton of money for assets already known to be toxic, is ridiculous.
You are mistaken. They don't hold toxic assets, they only bought Treasuries and guaranteed MBS.
MBS that trade above par.
The one issue there, is this assumes that banks draw down their reserves slow enough, that the bond payments cover the draw down.
When the Treasury pays off a bond held by the Fed, reserves are destroyed, by definition.
No need for the banks to do a thing. It just happens.
I just happen to stumble onto this article, which largely says exactly the same thing I just did.
Yes, this article has says some of the same errors that you've said.
There are no toxic assets at the Fed. There are no subprime mortgages at the Fed.
Three billion dollars a year in interest payments is a large portion of the Fed's annual operating profits. The recipients — America's large and not-so-large banking establishments — are now much less hindered by subprime loans than they were two years ago. How much longer the Fed can give the banking sector billions of dollars to hold on to these reserves is questionable. Politically, it seems unlikely that Americans will continue to support these payments. Economically, the Fed is losing a large portion of its operating profits to these payments.
Worrying about 0.25% paid on reserves, when the Fed is earning over 2% on their bonds, is just silly.
Ok, I see that now. So the $115 Billion is on all assets, not just T-Bonds. Got it. That makes me feel a ton better.
You have shown very well that the interest payment on reserves didn't have the impact I thought, and thus that conclusion is not accurate. I still think it should not be done. Reserves are there to keep the system sound, as it was intended, and if these banks held the reserves themselves, they wouldn't be getting an interest payment from themselves. But you made your point well... so... I'll move on.
I would agree with you that demand did increase. But is that sustainable? International demand, and bank demand, kept the currency stable relative to increased supply. Would there have been the demand for Bonds for example, had the Treasury not been buying bonds? I doubt it.
You are the first one thus far to ever say that the Fed was purchasing AAA guaranteed MBSs. That doesn't make sense. The purpose was to prevent toxic assets that were dropping in value, from screwing up the balance sheets of the banks. If the Fed was buying up the quality assets, and leaving the bank with the toxic assets, that would have left the banks in worse fiscal shape than before. I'll have to look into that. What you are saying is very confusing.
I'm also curious how the Fed is earning 2% on T-bonds, when the Treasury is openly saying they are 0% on the buy-direct web site.
Would there have been the demand for Bonds for example, had the Treasury not been buying bonds? I doubt it.
The Fed bought about $1.7 trillion in Treasuries since the crisis started. The Treasury has issued about $8.5 trillion in that time. I think they'd have had no problem selling without the Fed involvement.
You are the first one thus far to ever say that the Fed was purchasing AAA guaranteed MBSs. That doesn't make sense.
They only bought Fannie and Freddie MBS, guaranteed by the US Treasury.
If the Fed was buying up the quality assets, and leaving the bank with the toxic assets, that would have left the banks in worse fiscal shape than before.
Nope. The banks now have more cash, their biggest issue was liquidity. The Fed added liquidity. Trillions of it.
Nothing higher quality than cash.
I'm also curious how the Fed is earning 2% on T-bonds, when the Treasury is openly saying they are 0%
T-Bills, less than a year to maturity, are yielding just a bit.
10 year bonds, currently over 2%. 30 years, about 3%.
Is that indexed to inflation? 2% over 10 years, would be a net loss considering inflation..... right?
our subject was who controls the money supply and you have been afraid to answer 7 times in a row. What does that teach you?
Reserve balances with Federal Reserve Banks are the difference between "total factors supplying reserve funds" and "total factors, other than reserve balances, absorbing reserve funds." This item includes balances at the Federal Reserve of all depository institutions that are used to satisfy reserve requirements and balances held in excess of balance requirements. It excludes reserves held in the form of cash in bank vaults, and excludes service-related deposits
Let me know when you're ready for your lesson to continue.
The series equals total balances maintained plus currency in circulation.
Ringing any bells yet?
Reserve balances with Federal Reserve Banks are the difference between "total factors supplying reserve funds" and "total factors, other than reserve balances, absorbing reserve funds." This item includes balances at the Federal Reserve of all depository institutions that are used to satisfy reserve requirements and balances held in excess of balance requirements. It excludes reserves held in the form of cash in bank vaults, and excludes service-related deposits
Let me know when you're ready for your lesson to continue.
The Fed controls reserves. They can add or subtract reserves to the banking system and banks can't do a thing about it. Get it?
M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.
Still confused?
