On one side of the Atlantic, it seems that central bankers understand the way the monetary system operates, while on the other side, central bankers are either not cognisant of how the system really works or choose to publish fake knowledge as a means to leverage political and/or ideological advantage.|Bill Mitchell – billy blog
Yesterday, the Deutsche Bundesbank released their Monthly Report April 2017, which carried an article – Die Rolle von Banken, Nichtbanken und Zentralbank im Geldschöpfungsprozess(The Role of Banks, Non-banks and the central bank in the money-creation process). The article is only in German and provides an excellent overview of the way the system operates. We can compare that to coverage of the same topic by American central bankers, which choose to perpetuate the myths that students are taught in mainstream macroeconomic and monetary textbooks. Today’s blog will also help people who are struggling with the Modern Monetary Theory (MMT) claim that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency and the fact that private bank’s create money through loans. There is no contradiction. Remember that MMT prefers to concentrate on net financial assets in the currency of issue rather than ‘money’ because that focus allows the intrinsic nature of the currency monopoly to be understood.
Deutsche Bundesbank exposes the lies of mainstream monetary theory
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
73 comments:
https://www.bbva.com/en/news/economy/the-bank-leverage-ratio-quality-is-just-as-important-as-quantity/
" Thus, institutions with high risk-weighted asset levels are subject to the restriction of increasing capital to comply with regulatory requirements, while those with low NWAs will be constrained by the leverage ratio."
I believe reserves are included in computing the Leverage Ratio... so if govt is changing reserve policy then bank credit could conceivably be constrained by an unexpected influx of reserve assets ... would seem....
See this statement from Bill:
"Banks do not lend out reserves and a particular bank’s ability to expand its balance sheet by lending is not constrained by the quantity of reserves it holds or any fractional reserve requirements that might be imposed by the central bank."
I'm not sure that this statement is holding at this time... it looks to me as if it is not under current conditions...
@ Matt
Checking on the accounting. So you are saying that government spending from the TGA, which credits banks' reserve accounts, affects bank lending through the leverage requirement of assets to capital since rb count as assets, unless the additional rb are drained by a combination of taxation and tsy issuance in case of deficit, or reverse repo (cb selling tsys)?
This would mean that the MMT view that its' not necessary to drain reserves when the cb is paying IOR or to issue securities at all if the overnight rate is set zero would need to be qualified in light of the leverage requirement in that an increasing financial ratio (assets/equity) would require banks to shed assets or increase capital to increase lending.
Note: Government spending from the TT&L accounts rather than the TGA doesn't change rb since only the TGA doesn't count toward rb but the TT&Ls do. When government spends using the TT&L accounts, the rb just shift within the banking system and rb are not affected in aggregate.)
Yes more or less Tom.... at least in US...
Also, govt hasnt been using the TTL accounts lately for some reason... they did before GFC...
This article from the UK governing body (H/T Derek in UK) talks to this and seems the UK institutions are looking for some relief on this, havent seen anything wrt US policy though...
http://www.bankofengland.co.uk/pra/Documents/publications/reports/prastatement0816.pdf
"FPC recommends to the PRA that, when applying its rules on the leverage ratio, it
considers allowing firms to exclude from the calculation of the total exposure
measure those assets constituting claims on central banks where they are matched
by deposits accepted by the firm that are denominated in the same currency and of
identical or longer maturity. "
But again this is UK...
The other thing is we have a lot going on with IOR, Large Scale Asset Purchases, Debt Ceiling, Extrordinary Measures, Reverse Repo, etc... so conditions are not "normal" (although this is now going on for 8 years)....
I get Bill's larger point that "banks dont lend out the reserves" etc... but if they are trying to maintain a fixed regulatory ratio of capital : ALL assets , then if govt policy is causing reserve assets to wildly fluctuate by 100s of $B over relatively short periods of time, then you could perhaps say "reserves are constraining lending"... again short term... when reserves increase alot in a short period...
I'm still going to say that this is what caused the GFC... ie when they did this back in late 2008... and has been acting as an impediment to growth during periods of high reserve asset growth when they have increased the Asset Purchases...
"government spending from the TGA, which credits banks' reserve accounts, affects bank lending through the leverage requirement of assets to capital since rb count as assets,"
Well what happened is for some reason the TGA increased by 400B over a long period of time so that allowed banks to put other assets on their BSs as the USD balances moved from reserve accounts at the fiscal agents (banks) into the TGA ... then all of a sudden the TGA withdrawals increased in a short period ... so when this TGA drawdown happened Mike (I get his weekly report) was picking up on significant drawdown in other bank assets (or a drop in the YoY growth) at the same time in his report so I looked into it looking for causation...
so my assumption is that the banks and regulators dont understand these processes (FD: I'm biased ...and ofc Bill makes the case in his blog that they dont understand these systemic relationships, etc....) and banks just deal with what comes at them as best they can seeking to comply with regulatory ratios in light of anything they have to deal with good or bad.....
I'm still going to say that this is what caused the GFC... ie when they did this back in late 2008... and has been acting as an impediment to growth during periods of high reserve asset growth when they have increased the Asset Purchases...
But that was just asset substation? Fed buying a dodgy bank asset (MBS) in exchange for rb to strengthen the balance sheet when bank solvency was an issue.
all of a sudden the TGA withdrawals increased in a short period ... so when this TGA drawdown happened Mike (I get his weekly report) was picking up on significant drawdown in other bank assets (or a drop in the YoY growth) at the same time in his report so I looked into it looking for causation...
TGA withdrawals are for spending, transfers, interest payment, or redeeming government securities instead of rolling them over. In any case, the Treasury directs the fed to credit banks' reserve accounts with rb, for which the Fed debits the TGA.
This is going on all the time. Usually, this is smoothed through taxes, tsy issuance, and the TT&L accounts.
Seems that, for some reason, they (Fed working with Treasury) decided not to smooth, leading to spiking net injection of rb.
What else could it be?
Well they bought a lot of govt bonds not shit ... they bought USTs and govt MBS...
So if you go back an look at the H.4.1 factors affecting, they went way up to now like 4T when they were under 1T pre GFC ... so if a non-bank was holding the govt securities and then the Fed stepped in front and bought $1T of govt securities thru the creation of new reserve assets, then those reserve assets ended up on the bank balance sheets where there were none before... they would need 50B of new capital at 1:20 to handle the new 1T in deposits...
so I dont know if you can see that... it creates an inequality with the target regulatory ratio... so they have to shed other assets in order to maintain a constant leverage ratio...
Did they coordinate this with the banks so the banks could go get more capital in advance of the large scale purchases in 2008? I'm going to assume not (again I'm biased so caveat emptor...)
And I dont think it was easy for banks to raise capital that year anyway there was a lot of uneasyness... to say the least...
so if your insight is non mathematical, and instead you are going with the construct "you gotta dance when the music is playing!" then youre gonna get killed in that environment as to you "the music stopped"... and i would say those people STILL dont really know what is going on with (what should be) adequate understanding (but again FD I am biased...)
Or if they thought "banks lend out the reserves!" then they would have done what they did too...
I think they looked at the pre 2008 commercial paper market and it was running at that time about 1T so they thought if they just increased reserves by 1T then banks would have another 1T to lend and would have just moved into financing what the commercial paper market was previously financing.... so they bought 1T of govt securities with new reserves and ended up crashing the whole thing down as banks had to liquidate portions of other assets to take on the flood of the new reserves...
"But that was just asset substitution?"
It was perhaps between govt and non-govt an asset substitution, but not necessarily between govt and depository institutions... iow that asset exchange between govt and non-govt affected the composition of bank balance sheets which are regulated... perhaps in a way that was not ideal, perhaps harmful...
"Usually, this is smoothed through taxes, tsy issuance, and the TT&L accounts."
Yes usually.. ie "normal"... but they have a lot of stuff going on currently other than that...
Low rates and big CB 'balance sheets' are not ideal...
Low rates and big CB 'balance sheets' are not ideal... Why?
I'd have to see it worked out in the double entry accounting — Fed's books, Treasury's books, banks's books, and non-banks' books. Otherwise, it is pretty vague.
They're not ideal because we have a lot of savings ... so those savers were planning on higher savings rates ... and the big Fed balance sheet increases bank deposits and banks are not planning for that either...
OTOH glass half full it looks like they are starting to reverse a lot of this...
and the big Fed balance sheet increases bank deposits. Maybe it's the vocabulary, but I am not understanding what you're trying to say here, Matt. Customer loans create bank deposits. Bernancke was trying to increase them by generating reserves, removing a bank's obstacle to making that loan. Didn't happen.
"trying to increase them by generating reserves,"
Well Bill shows how that is not how it works... but they never the less did it and what DID it do?
I'm suggesting it was more complicated than a benign "asset swap"...
Let's say you were in short term Treasuries in mid 2008 and the Treasury redeemed your bonds and you ended up with your bank deposit account higher ...then you planned on going to the auction next week and rolling into a new UST issue, but instead the Fed stepped in front of you and bought the bonds you were going to buy... you are stuck in a bank deposit account ... if they did this for $1T then deposits are $1T higher then they would have been if Fed did nothing... i.e. people would have been in the bonds and bank deposits would be way lower...
Here
https://www.google.com/amp/seekingalpha.com/amp/article/234490-what-does-quantitative-easing-mean-for-banks
"The Federal Reserve today announced a new quantitative easing plan in which they will buy $600 billion of long-term Treasury securities. What does this mean for banks?
Bank deposits and reserves will increase."
Yes loans create deposits but the Fed can also create deposits by buying assets via crediting any reserve account of the asset seller...
If you own a UST and the Fed buys it from you you lose the UST security and your deposit account is marked up along with your bank's reserve asset account ... they have done this for $Ts of USDs...
A Fed official when asked specifically about this said that the Fed doesn't buy bonds directly from the Treasury by participating in the auction, nor does the Fed lend the PD's rb to purchase securities at auction. He said that the PD's pay for their subscriptions though correspondent banks using the rb of those banks anyway. The Fed always makes sure there are always sufficient rb to clear through their normal operations. There can never be insufficient rb in the system to clear because the Fed is the LLR. All transactions always clear automatically based on normal operations.
Seems to me that the Fed stepping in front is a myth based on this explanation.
The Economist covers it here
http://www.economist.com/blogs/blighty/2014/10/leverage-ratio
THE Bank of England is set to announce its view on the leverage ratio, a key regulatory tool for ensuring the safety of banks. James Titcomb has written a piece for the Telegraph purporting to explain the leverage ratio. The piece makes the following claim:
One of the key pillars of this is a bank’s capital—how much it is holding in reserve to cushion the bank against losses. The leverage ratio is one of the two key measures of this."
This is a common misconception about what bank capital is. When bankers say “capital”, they usually mean “equity” (or equity-like instruments). I will use “equity capital”. Equity capital is one way banks fund their operations. It is raised by issuing shares. The alternative is issuing debt or deposits. The key distinction between equity capital and debt is that debt cannot lose its value if the bank makes losses. Shares can. For that reason, equity capital is loss absorbing, but there is no sense in which it must be “held in reserve”. Money raised by issuing shares can be lent out to borrowers, just the same way money raised by issuing debt can.
The leverage ratio measures the percentage of the bank’s operations (ie, its assets, or lending) that is funded by equity instead of debt. It is therefore best thought of as a limitation on bank borrowing. It is a crucial measure because it represents the percentage decline in the value of a bank’s assets that would render the bank insolvent. If the leverage ratio is 3%, then a decline in the value of assets worth 3% would wipe it out, as its share price would be driven to zero. If the leverage ratio were higher, failure would require bigger losses. That is why a higher leverage ratio (confusingly also referred to as “less leverage”) makes banks safer.
The rhetoric that capital is “held in reserve” is advantageous to bankers, as it makes it sound like capital requirements hurt the economy: money that is held in reserve cannot be lent out. That is not what the leverage ratio requires. There are other, more technical reasons why it might reduce lending. These are the subject of dispute amongst academics. But the leverage ratio does not require banks to keep cash in the vault
Banks Are Not Lending Like They Should, And With Good Reason
Forbes blames the leverage ratio amoung other things.
https://www.forbes.com/sites/richardfinger/2013/05/30/banks-are-not-lending-like-they-should-and-with-good-reason/#9b5918c519f8
They say banks are giving up on mortgage lending ( not commercial) as there is no money in it and other lending companies have stepped in to take up the slack. Because they are not subject to the same high standards of capital requirements that banks are.
Daily telegraph
Raising banks' leverage ratio will do more harm than good
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10294550/Raising-banks-leverage-ratio-will-do-more-harm-than-good.html
The leverage ratio works because it is a fall back measure. If the modelling that goes into weighting the bank’s risk is found wanting, we can still have confidence that they have enough money in reserve to withstand any shocks. But it is important that these risk weightings remain the primary constraining factor on the banks’ abilities to lend. Banks should be required to hold more capital against riskier loans.
But some politicians in the UK want a leverage ratio to be raised to 4%. This could create problems for both banks and their customers. Research shows that at 4%, the leverage ratio changes from being a fall back measure to the main constraint on banks’ lending. As a blunt tool, the leverage ratio does not differentiate between risky and safe lending. This completely distorts the sensible incentive structure that has been put in place to promote lending and economic activity. A bank would have to hold back the same amount of capital for a risky business loan and a safe mortgage.
BoE: "Money raised by issuing shares can be lent out to borrowers, just the same way money raised by issuing debt can."
What? Contradicts an earlier position that loans create deposits.
Equity capital is a reserve fund against losses from loan default.
The financial ratio is assets/equity capital. The fewer assets covered by equity capital as a reserve fund against non-performing loans, the greater the risk exposure. This is especially the case with banks where a significant portion of the banks's assets are loans, which are accounts receivable and therefore subject to non-payment. It's the quality of loans that counts most.
Holding rb as cb liabilities in the payments system generally implies that the bank has corresponding bank liabilities as customer deposits unless the bank has sold the cb some government securities from its own holdings. The amount of deposits does not material affect the bank's risk exposure as such.
It's the loans that are at risk of non-payment. In the absence of bank runs, which are a thing of the past with deposit insurance, there is no risk exposure with deposits no matter how short the maturity.
BTW, this is a big reason that Warren recommends regulating banks from the asset side of the balance sheet.
"What? Contradicts an earlier position that loans create deposits. "
Tom no one is arguing that any of these people really know what is going on completely.... many dogmas and partial dogmas remain with all the actors here....
To me it is often SCARY.....
Foot I sort of look at it as the Capital Ratio is a qualitative measure and the Leverage Ratio is a simple quantitative measure...
BTW, banks can lighten the loan portfolio by factoring in the secondary market. They would be more likely to do that than raise more capital.
It's the economist Tom.
What do you expect ?
However, there is a theme running through all 3 articles that the leverage ratio can reduce bank lending under a range of scenario's. Which many people are starting to look at because of Basel (IV). Europe seems to be ahead of the game on this.
I think that's what the reforms to Dodd Frank was all about and why it's the first thing Trump pushed through. The BOE has been ontop of it for a while now.
Has anybody spoke to Warren about it to see what he thinks of it ?
Has anybody spoke to Warren about it to see what he thinks of it ?
Not to my knowledge.
I spoke with Éric Tymoigne about it and his reply was....
"You should contact people at the Treasury in my opinion. Or maybe wait, at times the TGA did get volatile in the past.
Yes, has nothing to do with CAR ( capital to assets ratio), and I doubt it plays any role with leverage ratio that is still not fully integrated in Basel 3 anyway."
JP morgan has a slighlty different angle.
Leveraging the Leverage Ratio
https://www.jpmorgan.com/jpmpdf/1320634324649.pdf
Can do no harm getting Warren to take a look at it ?
We are better getting it nailed down 100% now leaving no doubt at all don't you think ?
I also contacted Cullen Roche as 10 heads are better than one.
His reply was...
"Looks pretty normal to me. Add in the supplementary accounts and this is just another day at the office. It's just debt ceiling evasion"
https://fred.stlouisfed.org/series/WOFDRBORBL
Neil should take a look at it as well.
We don't want to be wrong on this.
The more people that look at this the better. Matt is probably right but there's nothing wrong in getting it double and triple checked.
Mike believes in it 100% after taking a good long look at it.
Why Do Banks Sell Mortgage Loans?
"However, there is a theme running through all 3 articles that the leverage ratio can reduce bank lending under a range of scenario's."
How can it?
Loans create deposits. Deposits are converted to equity at a price. All that changes is the price. When you introduce any of these ratios, the banks just convert the assets and liabilities into the appropriate form. That gives the cost base which they mark up for their next round of lending. It's a dynamic process between a lending department and a Treasury department.
The MMT statement is that banks will expand lending as long as there are creditworthy borrowers able and willing to pay the current price of money.
Changing leverage ratios and capital ratios just alters the mix of deposits, bonds and equity on the funding side - which changes the price of loans. You get the same with 100% reserve concepts - where the funding side is all bonds and equity. That puts the price up.
Well, that's the clearest explanation I've read, Neil.
" banks just convert the assets and liabilities into the appropriate form"
Well govt policy can effect that distribution... as opposed to bank policy... then the banks are in a reaction mode.... and they can react by reducing the propensity to add loan assets...
Another thing Neil is that liabilities are not involved...
Iow with " banks just convert the assets and liabilities into the appropriate form". I don't see how liabilities are involved....
Seems like the regulatory ratios are solely between stated capital and assets only....
The way THEY view it then liabilities are involved as they think banks lend out the deposit liabilities.....
Are you guys relying on the concept "loans create deposits" and then when I point out how the Fed can also create deposits you are not understanding it?
Iow you guys think "ONLY loans create deposits"?
MMT doesn't say "ONLY loans create deposits"... at least I don't think t does....
"I don't see how liabilities are involved"
Deposits are liabilities. If you need a higher capital ratio or leverage ratio you have to sell some equity. The money to purchase equity comes from deposits. It's just a right hand side asset swap overall.
The Fed creating deposits and creating the balancing central bank loan (reserves) expands the ratio. You have to change some of those deposits into equity to rebalance the ratios.
If only people at other banks buy your equity and therefore bring in central bank loans (reserves) as well then you just have to sell more equity to get your ratio (or offer a discount to those who have accounts at your bank).
Loans create deposits. Fed reserves are functionally loans to the central bank at a fixed interest rate over which the commercial bank has little say.
"you have to sell some equity."
That doesn't happen in an afternoon....
Well govt policy can effect that distribution... as opposed to bank policy... then the banks are in a reaction mode.... and they can react by reducing the propensity to add loan assets...
Banks have a propensity not to hold loan assets. They factor them. It's more profitable for banks to factor. See the link above at my 4.26 @11:05 PM.
This a reason that Fannie Mae holds 95% of domestic mortgages.
"That doesn't happen in an afternoon...."
It happens all the time as part of the treasury function of a bank. For equity read 'appropriate tier of capital'.
Of course they are. Asset/equity capital ratio shows how reliant the firm is on liabilities.
Asset = Liabilities + Equity (capital).
The idea is to provide enough equity as a funding reserve against liabilities.
Of course it's only a ballpark figure, since the quality of the assets and liabilities are significant. For example, accounts receivable are more risky than cash, and short term debt is riskier than long term.
This is what the the finance people do in a firm and in banks it is the asset and liability management department (ALM). It's about risk. Non-banks are about production; banks are about transforming risk.
Are you guys relying on the concept "loans create deposits" and then when I point out how the Fed can also create deposits you are not understanding it?
Iow you guys think "ONLY loans create deposits"?
That would be wrong. When a bank spends, it does so by creating a deposit for itself.
The Basel III leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage:
Leverage ratio = Capital measure Exposure measure
Basel III leverage ratio framework and disclosure requirements
Operationally, banks consist essentially of a loan department for extending credit (assuming risk) and an asset and liability management department for managing risk and meeting banking requirements. The rest is administrative.
ALM is devoted full time to optimizing risk management relative to the profitability of the firm while making the funding work out in terms of requirements.
Well how often does a bank capital committee meet? Compared to the frequency response of asset levels?
Well how often does a bank capital committee meet? Compared to the frequency response of asset levels?
You seem to think that a bank doesn't operate with control mechanisms.
This is what ALM does all day every day.
They know all the factors like risk levels, e.g., VAR, and requirements that have to be met, e.g., required reserves. Tthey manage the funding to meet requirements while maximizing bank profit at minimum acceptable risk, given the risk exposure that they are dealt by the loan department.
To do this they switch BS funding around as needed on an aggregate basis, as Neil has been explaining.
When a bank spends, it does so by creating a deposit for itself.
*sigh*
Sure wish I could do that.
"Sure wish I could do that."
You can.
Anybody can create money. The hard bit is getting somebody else to accept it.
Create money in Canada and you will go to jail.
Private banks' right to print/create money is a subsidy of those banks. Thus it is a right which should be abolished. As Joseph Huber put it in his book "Creating New Money", “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.”
Ralph the loan creates a deposit (liability) for the bank on which the bank pays interest to the depositor.... it's a system....
"ALM is devoted full time to optimizing risk management relative to the profitability of the firm "
You are making my point, when govt policy intervenes and forces changes in asset composition upon banks the banks respond to that... some responses can be fast (asset sales) and some can be slow (raising capital) ...
You guys are not taking time domain response characteristics of the different regulatory actions into account...
Does anybody know what would happen if they dumped $500 billion worth of reserves onto the banks in one day ?
And the banks promised to give everyone a loan who asked for one on that day not matter their credit history ?
Now they've hit their debt ceiling ??
What would actually happen ??
"You are making my point, when govt policy intervenes and forces changes in asset composition upon banks the banks respond to that... some responses can be fast (asset sales) and some can be slow (raising capital) .."
It's not slow. The capital response is at about the same speed as the loan sales funnel response rate.
Here's the Bank of England Capital ratio data
Up to £36bn of capital increases per quarter - some 6% of additional bank capital in a quarter.
"What would actually happen ??"
Doesn't matter. That's not how it works.
You have a loan sales pipeline - from initial contact to completion. That takes time due to the checks - but the bank knows statistically how many are likely to complete and that is information that is provided to a Bank's treasury department who will forward project the ratios required dynamically - plus a safety buffer. The treasury departments then works to hit their marks.
If push came to shove, the banks would start discouraging deposits - by charging to hold them. That would force people to cash.
And that's what will happen over here now ...
Banks just reported a solid first quarter and now they will probably take some retained earnings and put some in the capital account...
I'm not the one pushing the panic button because the year-over-year growth rate in bank loans was down in first quarter...
It was down because the influx of reserve assets during the quarter displaced bank capacity for lending .... now they will meet after they reported 1Q earnings and see how much they want to add to the capital account...
Loans will then return to "normal" YoY growth rates in 2nd and 3rd quarter...
They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.”
They have to fund their liabilities that balance assets, or increase equity capital. Their profit is the spread between interest they receive and funding costs.
"ALM is devoted full time to optimizing risk management relative to the profitability of the firm "
You are making my point, when govt policy intervenes and forces changes in asset composition upon banks the banks respond to that... some responses can be fast (asset sales) and some can be slow (raising capital) ...
You guys are not taking time domain response characteristics of the different regulatory actions into account...
Matt, you seem to be arguing that government action prevents banks from making loans that they would like to make to creditworthy customers.
That is not clear from the evidence you have presented, and some of us are presenting counter evidence that seems to speak against your position.
In short, you the one making the claim, and therefore you have to defend it.
I am far from convinced at this point.
I am not saying you are wrong. I don't know. I don't have enough evidence to come to firm conclusion.
I think it is still an open question.
Does anybody know what would happen if they dumped $500 billion worth of reserves onto the banks in one day ?|
"Dumped" ?
What does that mean?
What are the accounting entries?
In one month, Fed buys 550b of USTs meanwhile the deficit that month was only 50b...
So in the month, there would have been only 50b of net issuance so Fed would have bought 500b of either on the run or rollovers....
My example would be for one month not Foot's one day ...
I was trying to come at it from a different angle and just threw it in there using extremes.
Because that's the crux of the issue. Will the banks still be able to keep lending when push comes to shove in that time frame.
If they can then the debate is over. If they can't then why ?
They privatize the GSEs and the new entities as private institutions can no longer have their own accounts at the Fed and have to use depository institutions....
They increase the TGA by 400B over a one year period and then withdraw it all in one month....
They continue to deficit spend at the debt ceiling by borrowing against the Fed employees govt bond ERISA account...
They increase the TGA by 400B over a one year period and then withdraw it all in one month...
"Tax and and spend."
In one month, Fed buys 550b of USTs meanwhile the deficit that month was only 50b...
So in the month, there would have been only 50b of net issuance so Fed would have bought 500b of either on the run or rollovers....
So we have
1 Fed's liabilities (rb) increase 550B and assets (tsys) increase 550B (as in QE)
2. Treasury spending exceeds revenue by 50B. Treasury liabilities (tsys) increase 50B.
3. Banks' assets (rb) increase 550B less aggregate bank assets (tsys) sold to Fed.
4. Customers's deposit accounts increase by aggregate amount of customer-owned tsys sold to Fed.
So I assume you are saying that banks then have to add equity relative to increase in assets (rb from Fed tsy purchases) iaw the leverage requirement in order to increase credit extension, since loads are bank assets (loans), or else curtail issuing new loans even in the face of demand for them on the part of creditworthy customers.
That would contradict a chief purpose of QE, which was to increase bank lending.
Was the Fed in the dark on this, and shooting itself in the foot with QE, or it there something wrong with the analysis?
They continue to deficit spend at the debt ceiling by borrowing against the Fed employees govt bond ERISA account...|
Right, they juggle the books up to a point — It's called "cash flow management" — but then there is no more juggling room and the ceiling kicks in unless Congress acts.
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