Sunday, February 26, 2017

Why did the Federal Reserve start paying interest on reserve balances?


The article begins:

Four decades ago, Milton Friedman recommended that central banks like the Federal Reserve pay interest to depository institutions on the reserves...

Well... if Milton Friedman recommended it that's all we need... he probably worked it all out right?

Dr. Econ
Why did the Federal Reserve start paying interest on reserve balances held on deposit at the Fed?
Federal Reserve Bank of San Francisco
March 2013



39 comments:

MRW said...

Because Warren Mosler convinced them to do it.

lastgreek said...

Well, Looky here. Kevin Hassett has the Vox thumbs up:

Ezra Klein ‏@ezraklein Feb 25
In the realm of picks Trump could've made for chief economist, Kevin Hassett is a good one

Ralph Musgrave said...

Why should taxpayers have to pay interest to Wall Street banksters who choose to hoard cash? If the Fed wants to raise interest rates it could raise reserve requirements.

Anyone like to pay me interest for storing a pile of cash under my mattress?

Matt Franko said...

"banksters who choose to hoard cash?"

They dont Ralph I see you've been hitting the MMT-lite again .... SP500 revenues 11T, retained earnings 150B...

The problem is not with the firms whether financial or non-financial...

MRW said...

Ralph, if taxpayers paid for everything that people claim they do, then taxpayers would be handing over many trillions more than they actually do. Last year (fiscal 2016) it was a mere $2.8 trillion if memory serves me correctly. US federal taxpayers pay for nothing, basically.

MRW said...

Paraphrased from Wikipedia about Hassett: Economist and blogger Nate Silver described Hassett's book as "charlatanic." Does that imply he's a chartalist?

Andrew Anderson said...

The reason depository institutions get swamped with reserves is because only they in the private sector may even use fiat except for unsafe, inconvenient physical fiat, a.k.a. "cash." Thus the demand for fiat is artificially suppressed as are interest rates in it.

The solution then is not welfare proportional to wealth, interest on reserves, but allowing all citizens to have accounts at the central bank and by eliminating all other privileges for banks, especially government-provided deposit insurance.

In other words, the solution to government privileges for the banks is NOT government welfare for the banks. (I'm reminded of the Tar Baby).



MRW said...

Wouldn't that be good news?

MRW said...

Andrew, you need to listen to some people who know what they are talking about when it comes to the US system, because you have no fucking clue what you are talking about. Stick to fairy tales about the Bank of England, if you must indulge in them.

Watch these:

Frank Newman: Government Finance
https://www.youtube.com/watch?v=aA8I60oR_hA
Frank Newman was former Deputy Secretary of the US Treasury

Paul McCulley: Sovereign Money
https://www.youtube.com/watch?v=Sdhv2WuoYGM&t=1007s
Paul McCulley was Former Chief Economist and Managing Director of PIMCO. Since 2014, he’s now back at PIMCO as Chief Economist.

MRW said...

McCulley makes the excellent point in the video above that if you had the government do what you keep insisting that it should--the Federal Reserve is part of the Executive branch of the government, the US Treasury--you would really have institutionalized crony capitalism.

Six said...

https://www.treasurydirect.gov

Matt Franko said...

MRW here is something from Hassett from a while back when the Picketty thing was all the rage:

https://www.youtube.com/watch?v=kBl5V-pQOAw

Not bad refutation of Picketty for sure but he's AEI, ie libertarian... ie not good....

Matt Franko said...

I dont see why firms with $bazillions dont just buy a small bank and deposit their USDs there and collect the support rate which is a lot higher than UST rates right now...

Matt Franko said...

Maybe that is what they have been doing if you look at Foreign Holdings they have gone down by 200B YoY meanwhile we have still run a big current account deficit of over 500B...

If I understand the NAI correctly (pls correct me if I am wrong) foreign holdings of USTs should have normally gone up....

Matt Franko said...

NIA...

Noah Way said...

Privately owned, never audited. Plus a guaranteed 6% annual dividend.

The FED is the biggest financial scam ever created.

MRW said...

I am too inebriated to assess these comments so far--Sunday night consequence--and I don't understand what you're telling me, Matt. Could you try a direct hit? would you mind?

Auburn Parks said...

Noah-

The Fed is a Govt agency, its not a private bank. The Fed was literally just audited a few years ago, Randy Wray did a lot of work on the audit info, and determined the Fed lent $29 trillion during the crisis. Plus, the Fed is pretty darn transparent. I mean their balance sheet is public information.

The 6% dividend is not that big of a deal, its just a little bit of money Since the Fed member banks dont own that many shares. But I agree, dividends are an unnecessary giveaway and should be phased out.

Matt Franko said...

I would have thought that as the current account was in deficit over the last year by 400-500B that we would have seen total foreign holdings of USTs go up by a similar amount as those nations with the surplus USDs would normally deposit those balances in a UST securities account at the Fed...

But if you look here the total foreign holdings went down YoY:

http://ticdata.treasury.gov/Publish/mfh.txt

So where have the foreign surpluses been deposited? I would think they would have to be in a bank account if not in a securities account... so maybe firms (including foreigners) have figured out how to get the support rate which is 0.75% overnight as if you look at the UST yield curve, this is inverted out to about 1 year:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Overnight support rate is 0.75% while 1-yr UST is at 0.8%... 30-day is below 0.5%...

Unless I am misunderstanding the NIA framework wrt to the Current Account... which is possible...

A larger issue is that I have a theory that the Fed is constrained on the pace at which they can raise interest rates due to the fact that they have to now pay Interest on Reserves... they cannot react quickly by raising rates as they dont want to invert the yield curve...

Which right now you'd have to say the curve is inverted out to about 1-year... so they cant raise until the short end comes up in yield.. which may never happen with all the austerity... and "the natural rate of interest is zero..."

If they raised in March they would invert it out to about 2 years...

Because "the natural rate is zero" and the fact that Fed now has to pay an IOR support rate out of their portfolio income, if they cant get the curve back to positive slope then they may run out of munnie to pay the IOR... iow their portfolio would have zero yield and they would have a 0.75% liability on reserves... they would be (to them) bankrupted...

So they wont raise which would increase their liability for IOR...

The fact that they wont/cant raise actually is creating the current low growth and low volatility environment...

Matt Franko said...

Bank deposits are up YoY by about 500B:

https://fred.stlouisfed.org/series/DPSACBM027NBOG

So seems like people might be being attracted to bank rates vs. Treasury security rates...

I would just try to buy a small bank and deposit all my munnie in there and get the 0.75% overnight from the Fed with potential for rising rates from Fed rather than get involved with lower yielding Treasuries that have a term characteristic...

Andrew Anderson said...

McCulley makes the excellent point in the video above that if you had the government do what you keep insisting that it should-- MRW

Which is what? Allowing citizens to use their Nation's fiat the same way depository institutions do - via accounts at the central bank itself? And removing other privileges for the banks as well such as government insurance of private liabilities including privately created(!) liabilities ("loans create deposits")?

the Federal Reserve is part of the Executive branch of the government, the US Treasury--you would really have institutionalized crony capitalism. MRW [bold added]

Pray tell how since:
1) Private banks would still exist but without government privileges and permitted to create as many liabilities/deposits as they dare.
2) The authority of the central bank to create fiat would be limited to creating fiat for the monetary sovereign ONLY or if for the private sector too, via equal fiat distributions to all citizens. This would eliminate the ability of the central bank to engage in crony capitalism or any other violation of equal protection under the law.

Andrew Anderson said...

Frank Newman: Government Finance
https://www.youtube.com/watch?v=aA8I60oR_hA
Frank Newman was former Deputy Secretary of the US Treasury
MRW

Nice video but it taught me almost nothing. Instead it confirms what I already know.

BTW, Frank Newman seems to be a very nice guy. That other guy, McCully, is difficult to watch. Could you please tell me exactly where in that video he makes the point about crony capitalism?

Noah Way said...

@AP

According to the Fed itself, the Fed "is an independent entity within the government, having both public purposes and private aspects." It is an entity outside of the central bank – the U.S. Department of the Treasury.

All of the major banks own (hold shares) in the Fed: Goldman Sachs, Morgan Stanley, etc. Many of these banks were directly responsible for the mortgage crisis.

GAO audits are highly restricted (among other things, no review of “deliberations, decisions, or actions on monetary policy matters,” as well as “discussion or communication among or between members of the Board and officers and employees” related to such deliberations), and internal audits are private. And as much as it is politicized, calls for a thorough public audit of the Fed are routinely rejected by Congress (what are they hiding?).

And as to the $29T, Fed Chairman Bernanke claimed it was $1.2T.

Andrew Anderson said...

https://www.treasurydirect.gov six

Thanks for the link but I see no checking or debit card service provided. Instead I see this:

Amounts you keep in your Payroll C of I earn no interest and remain there until used. The Payroll C of I can be redeemed at any time. The funds are usually deposited to your bank account within two business days. That's all there is to it. from https://www.treasurydirect.gov/indiv/products/prod_tdpayrollinfo.htm

So those services (checking and/or debit card) should be provided so that no citizen is EVER required to use a private depository institution (a.k.a. "bank") or be limited to mere physical fiat, a.k.a. "cash."

And once those services are provided then the government insurance of private liabilities, including privately created liabilities ("loans create deposits") can be abolished as:
1) Unnecessary for the protection of small depositors.
2) A needless subsidy of depository institutions.
3) A fundamental source of unequal protection under the law since the rich are the most so-called worthy of what is currently, due to this and other privileges for the banks, in essence, the PUBLIC'S CREDIT.

Tom Hickey said...

The Fed is a Govt agency, its not a private bank.

Central banks used to be privately owned and operated. Now most central banks are government agencies.

The Fed is a public/private partnership. The regional banks are owned by the member banks in the region that capitalize them and receive a dividend on capital investment. Although the banks own the shares, they are not tradable assets and cannot be used like other capital. The regional banks run the payments system in the region and follow the lead of the FOMC on carrying out monetary policy through bank operations.

The Fed as the monetary authority of the US and fiscal agent of the Treasury is a government agency. The board of governors is a composite of public-private participation with the majority being public, that is, appointed by the executive branch of the US government (president) and approved by the legislative branch (US Senate).

Moreover, the Fed is a creation of the US Congress, which sets the rules under which it functions.

So for all practical purposes, the Fed is a government agency that is public with "private characteristics."

The US banking system as a whole is a public-private partnership, and the US financial system as a whole is government-regulated. US financial institutions are not like non-financial institutions. They operate under different rules even though "privately owned and operated."

Tom Hickey said...

Matt, foreign government have accounts at the Fed and can choose to leave the funds on deposit or buy tsys. I assume that if they leave the funds on deposit they qualify for the deposit rate.

They can also sell USD and transfer their holdings into other assets, or use the funds to purchase US assets, at least those assets they are approved to purchase.

China would have been selling tsys to defend their peg.

Matthew Franko said...

"can choose to leave the funds on deposit or buy tsys."

Well idk if IOR is going to work for the Fed if funds on deposit yield more than treasuries...

I'd assume Friedman always assumed at best a positive yield curve if he even understood the whole process completely...

MMTers might get their permanent ZIRP after all...

Penguin pop said...

"Central banks used to be privately owned and operated. Now most central banks are government agencies.

The Fed is a public/private partnership. The regional banks are owned by the member banks in the region that capitalize them and receive a dividend on capital investment. Although the banks own the shares, they are not tradable assets and cannot be used like other capital. The regional banks run the payments system in the region and follow the lead of the FOMC on carrying out monetary policy through bank operations.

The Fed as the monetary authority of the US and fiscal agent of the Treasury is a government agency. The board of governors is a composite of public-private participation with the majority being public, that is, appointed by the executive branch of the US government (president) and approved by the legislative branch (US Senate).

Moreover, the Fed is a creation of the US Congress, which sets the rules under which it functions.

So for all practical purposes, the Fed is a government agency that is public with "private characteristics."

The US banking system as a whole is a public-private partnership, and the US financial system as a whole is government-regulated. US financial institutions are not like non-financial institutions. They operate under different rules even though "privately owned and operated."

So many people always tend to miss the public-private partnership aspect about the Fed, but also how much of its power it has because of Congress. That's where a lot of people end up assuming the Fed is entirely private and not a government agency. They just see the "private" in your statement and jump to rash conclusions. I sometimes read all these different answers about how we need to audit the Fed even though it already has been.

MRW said...

The Fed is a public/private partnership.

BECAUSE, if you read the history—and I did—the country was afraid of socialism then. They were terrified that the banks would be controlled by the state like Russia. The 1893 global panic frightened them (this ‘panic’ initiated the Russian Revolution).

Penguin pop is correct. There are 42 volumes of congressional testimony taken of over 500 witnesses throughout the month of October 1913 to back up this private/public arrangement.

Andrew is generally wrong about each statement and assertion he makes about the US banking system. Clueless.

Andrew Anderson said...

Andrew is generally wrong about each statement and assertion he makes about the US banking system. Clueless. MRW

Please be so kind as to tell me which ones and why? Why, for example, should poor Social Security recipients be forced to lend the fiat they would ordinarily receive from the US Treasury to depository institutions since US citizens are not allowed to have fiat accounts themselves? But must be content with mere IOU's for fiat issued by a private bank?

Also, how can I be clueless if Frank Newman had next to nothing to teach me in that video? Is Frank Newman clueless also?

Matt Franko said...

AA, the poor SS people spend the USDs in the month they don't put it in savings accounts... many run out of funds at the end of the fiscal interval (month) and have no USDs until the first day of the next interval...

Noah Way said...

'Private' also means secret. Exclusionary audits, closed sessions, etc.

Democracy cannot function in secret. But it's a perfect venue for crony capitalism.

Auburn Parks said...

Noah-

So I guess presidential deliberations, Intel briefings etc are all "private" since they are classified?

AA-

Citizens are allowed access to Fiat accounts, they are called TSY CDs. They're Just like evil Chase Cds but for Govt fiat and not that private govt priveliged credit cartel funny money.

But hey, thankfully for the rest of us, because of Deposit insurance (Not bank insurance, individual depositor protection....why is it you never mention this point in your ridiculous anti bank screeds?) that bank funny money is just as good as Govt fiat. Personally, I love banks as I never pay them anything since I never carry a credit card balance and I dont overdraw my accounts, they provide easy and convenient banking services, and best of all not only do I not pay Bank of America anything.....THEY PAY ME!!!!! Not very good capitalists those banks just giving money away like that to me.

Noah Way said...

@AP - congratulations on seeing the obvious.

Auburn Parks said...

Noah-

Yes its obvious that your opinion on this matter aka Classified = private corporation is not well thought out and logically inconsistent to the point of irrelevance.

Matt Franko said...

It's www.federalreserve.GOV

Andrew Anderson said...

Citizens are allowed access to Fiat accounts, they are called TSY CDs. They're Just like evil Chase Cds but for Govt fiat and not that private govt priveliged credit cartel funny money. MRW

So TSY CDs are legal tender, same as physical fiat (a.k.a. "cash") and bank reserves? News to me.

But hey, thankfully for the rest of us, because of Deposit insurance (Not bank insurance, individual depositor protection....why is it you never mention this point in your ridiculous anti bank screeds?) MRW

Fiat account balances at the central bank are inherently risk-free, at least nominally (which is why banks have no need to insure THEIR accounts at the central bank). Then what need for deposit insurance from the standpoint of US citizens since they should be able to have such accounts too? If, as it should, the monetary sovereign provided convenient accounting and transaction services in its fiat for all citizens and not just for a bunch of usurers? For free for small depositors (< $250,000)?

that bank funny money is just as good as Govt fiat. MRW

Not only does government privileged private credit creation erode the purchasing power of bank credit, it also erodes the purchasing power of fiat itself since the monetary sovereign must increase deficit spending during the inevitable busts produced by the usury cartel or suffer a crippled economy.

Personally, I love banks as I never pay them anything since I never carry a credit card balance and I dont overdraw my accounts, they provide easy and convenient banking services, and best of all not only do I not pay Bank of America anything.....THEY PAY ME!!!!! Not very good capitalists those banks just giving money away like that to me. MRW

Housing prices typically rise faster than the interest banks pay so the real interest rate wrt housing (and other assets too) is typically NEGATIVE. Savers would be better off with an ethical fiat and credit creation system since:
1) All fiat creation beyond normal deficit spending by the monetary sovereign would be via equal fiat distributions to all citizens.
2) Banks would need much more fiat (especially while government-provided deposit insurance is being abolished) and would have to pay honest (not suppressed by government privilege, as is now the case) interest rates to obtain/retain it.

Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take this power away from them, and all the great fortunes disappear, and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create money and control credit. Attributed to Josiah Stamp by Silas W. Adams in The Legalized Crime of Banking (1958).

Noah Way said...

@AP Classified = private corporation

classified adj. confidential or secret
private adj. removed from or out of public view or knowledge; secret

The corporate takeover of U.S. intelligence: The U.S. government now outsources a vast portion of its spying operations to private firms -- with zero public accountability.

http://www.salon.com/2007/06/01/intel_contractors/

Back to the point: Democracy cannot function in secret. Or with the kind of ignorance you display.

Andrew Anderson said...

Correction: Quotes in my comment above are mis-attributed to MRW when they should be attributed to Auburn Parks.