This will get you ROFL its so clueless. Alan Blinder wants to "release the 1.5 trillion in reserves" using a negative interest rate. Robert Wenzel at Economic Policy Journal thinks that Blinder has lost his mind because it will be inflationary.
Oh my.
Read it at Economic Policy Journal
Alan Blinder: Release the Trillion in Excess Reserves!!
by Robert Wenzel
(h/t Scott Fullwiler via Twitter)
Read it at Economic Policy Journal
Alan Blinder: Release the Trillion in Excess Reserves!!
by Robert Wenzel
(h/t Scott Fullwiler via Twitter)
Yes!! Why didn't we think of this before! Give borrowers more of what they don't want in the first place. Brilliant!
ReplyDeleteAnd these are our leaders!
ReplyDeleteResp,
Look, we can do this. I just thought of a new loan product that has a negative interest rate! It automatically offsets the monthly principal payment completely!!!
ReplyDeleteI can't even read this crap anymore. I want to get into something else.
ReplyDeletewell the guy who wrote the article is clueless as well
ReplyDeleteAw, c'mon Mike! You never like ANY of my ideas.
ReplyDeleteIn a saner world, it would a joke. It still has me ROFL anyway.
ReplyDeleteYou got it right, Tom. That these guys have any influence at all is evidence of a Bonehead Income Guarantee.
ReplyDeleteIf these guys were broke, bankrupt and on the streets, they probably couldn't even manage to hold the tin cup the right end up. "These pencils are defective! They keep falling on the ground like all the others!!!"
Un,
ReplyDeleteYes literally they are that stupid imo... good analogy.
rsp
What would happen if the Fed started charging banks interest for holding 'excess Reserves'? Where would 'they' go?
ReplyDeleteNowhere ... The banks will simply lose a subsidy
ReplyDeleteApj
I understand that increases the amount of Reserves in the system doesn't encourage lending because banks are not "Reserve-constrained" …
ReplyDeleteWhat I don't understand is… can Reserves be "used" for anything?
Correct me if I'm wrong, but normally the Fed sells Treasuries to "soak up" excess Reserves via open market operations, in order to maintain its target Federal Funds Rate.
Is it accurate to say: through the QEs, the Fed has bought back many Tresuries, consequently flooding the banking systems with Reserves… and this hs driven down the FFR to near zero?
So back to my original question: can banks do anything with Reserves? Can they "use" Reserves in any way?
jk,
ReplyDeleteReserves are an abstract regulatory construct, like a 'debit'.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=bank+balance+sheet
They are (minus actual vault cash) an abstract asset category measure on a bank balance sheet used to account for interbank transactions and the levels (balances) are monitored for regulatory compliance.
That is all.
They are not "lended out" because they are not real.
That would be like saying "hey can you lend me some of those debits?"
It's absurd.
These people cannot think in the abstract, no mathematical maturity.
Once humanity started to keep track of these transactions via journal entries on paper coordinated via the telegraph wire between banks, these people's thinking never changed.
Their brains can only think in terms of real physical silver coins being put in and taken out of jars just like 2,000 years ago when we had no paper and no telegraph.
http://mikenormaneconomics.blogspot.com/2011/04/who-did-roman-government-get-this-money.html
If we still used physical coins that we put in and took out of buried jars and "reserves" were a required minimum amount of physical coins that were required to be kept in the jar, then these dopes' thinking gets closer to reality (but still off a bit).
Blinder's ability for abstract mathematical thinking is like 2,000 years behind the times... moron.
It should have went out with the invention of paper/ink and the carrier pigeon.
So of course he is promoted to the CEA at the Whitehouse and Princeton.
"alleging themselves to be wise, they are made stupid" Romans 1
rsp,
Here you go JK - http://bilbo.economicoutlook.net/blog/?p=20343#more-20343
ReplyDeleteSays it better than I ever could
Apj
…I want to get into something else."
ReplyDeleteI hope it's growing your own food.
I've ben thinking about these kinds of things:
http://www.resilientcommunities.com/what-are-the-boundaries-of-your-local-economy/
"I can't even read this crap anymore. I want to get into something else."
ReplyDeleteWhat does that mean?
JK,
ReplyDeleteReserves are the electronic version of cash (notes and coins). They exist on a computer system within the central bank.
Let's say you deposit $100 in cash notes at your bank. The bank doesn't need the extra notes so sends them to the central bank and swaps them for reserves instead.
With these electronic reserves they can buy govt bonds and settle payments with other member banks and with the government.
Banks also lend each other reserves, and the rate at which they lend is the Fed Funds rate or base rate.
But they don't lend reserves 'out'. They can't lend reserves to anyone outside the central bank reserve system. And when you take a loan from a bank, the bank doesn't give you a trunkload of cash.
Hi JK
ReplyDeleteWhat you're basically asking about is an excess reserve tax. I wrote to pieces in July 2009 at NEP on that, FYI.
Best,
Scott Fullwiler
While I am against negative interest rates on reserves, indeed I am against the whole rotten Fed system, it is ridiculously stupid to believe that should negative interest rates on reserves be put into affect, and it compels the banks to lend those reserves, that it won't be price inflationary. More loans adds to aggregate nominal demand, and when aggregate nominal demand goes up without a corresponding increase in supply, prices will go up.
ReplyDeleteYou MMTers simply do not understand the monetary system. You can only see the economy in terms of static accounting equations, totally ignoring the process involved in getting to particular static states.
You all believe that because reserves, if loaned out, will end up right back in the banking system, that there is allegedly no change to "net financial assets" and hence not inflationary. What is going over your heads is that the time in between the reserves starting and ending in the banking system, there was an addition to loans, and loans to one client end up back in banks by way of that client spending the money, after which the receiver puts the money into their bank account. Yes, reserves are the same before and after. But what you are ignoring is the credit financed spending that resulted from the seemingly innocuous shift in reserves from bank to bank (and even within the same bank).
Again, I think it's a stupid idea, but if reserves are taxed 5% say, but the tax brings about loans that earn 10% say, then the goal of increasing AD will still be met. For $1 trillion in idle reserves isn't contributing towards AD. $1 trillion lent does contribute to AD. And because individual banks will not keep received reserves idle for long, lest they be taxed, then a hot potato effect will be brought about, and this will keep the reserves "flowing", i.e. being spent and respect, from banks to borrower, from borrower back to banks, and from banks to borrower again, and so on.
Yes, the banks are paying a tax which sees excess reserves gradually dwindle, but the Fed can still buy treasuries from the banks, thus topping the reserves back up. There is no reason for reserves to continue to decline over time. The Fed can increase reserves through OMO as fast as they tax reserves.
Anonymous,
ReplyDeleteBanks don't lend reserves to anyone but other banks. Your entire post is incorrect due to that fact. Sorry, but "static accounting" done correctly is the necessary starting point (not ending point, obviously, which you wrongly suggest is our view), and you completely blew that one.
Thanks for the insight and links everyone.
ReplyDeleteScott, do you remember the name of the posts at NEP where you discussed an excess reserve tax?
Clicking on your name over there, it looks like it's The Sector Financial Balances Model of Aggregate Demand (both the original and the revised).
A related question: if/when the Fed pays interest on Reserves, do those interest payments add to Reserves in the system? Or are they not Reserves, and rather a 'profit' that is more of a fiscal operation that the Fed happens to be preforming (creation of new net financial assets)?
Anonymous'
ReplyDelete"There is no reason for reserves to continue to decline over time. The Fed can increase reserves through OMO as fast as they tax reserves."
Yes, but banks lose the bonds. So there is *certainty* that bank capital will be depleted over time - the missing bonds sold to the Fed are the lost capital. So you simply made banking less profitable as a whole, capital will go somewhere else. What banks most certainly won't do is start making bad loans just because they can lose less than by doing nothing. They can always ensure that the loss is zero (not negative) by quitting banking altogether, and that is what would happen.
JK: "can Reserves be "used" for anything?"
ReplyDeleteAs Scott has pointed out previously, reserve = reserve balances (rb) and vault cash. Rb serve as a settlement vehicle and to meet reserve requirements (RR) if imposed RR were imposed on banks as a liquidity provision in a fixed rate convertible system, which is unnecessary now since we are running under a non-convertible floating rate system in which the cb is acting as LLR and always provides liquidity needed to settle at its price.
The thinking seems to be that banks would reduce rb by increasing lending or else holding more vault cash, which it is supposed would somehow increase spending in the economy. Both ideas are based on a misunderstanding of how banking works.
What is likely is that many banks would seek to swap their rb for tsys. This would drive up tsys and drive down the yield curve. Barring that they would seek the next safest and most highly liquid parking place that paid better than the negative rate.
STF,
ReplyDeleteYou said:
"Banks don't lend reserves to anyone but other banks. Your entire post is incorrect due to that fact."
This is false. Banks ALSO lend reserves to non-bank borrowers. If all banks have their reserves taxed, then they'll loan even more to non-bank borrowers.
You said:
"Sorry, but "static accounting" done correctly is the necessary starting point (not ending point, obviously, which you wrongly suggest is our view), and you completely blew that one."
But then why are you only focusing on the end point of banks possessing reserves? You're ignoring the process of going from reserves at bank A to reserves at bank B.
.....................
PeterP,
You said:
"Yes, but banks lose the bonds."
Yes but they gain more reserves. Bonds earn interest, reserves do not.
You said:
"So there is *certainty* that bank capital will be depleted over time - the missing bonds sold to the Fed are the lost capital."
Bank reserves are not capital. MMTers who say banks are not reserve constrained, but capital constrained, are tacitly saying reserves are not capital.
Bank capital will not be reduced. Not even reserves will be reduced because the Fed can just buy more bonds from the banks.
You said:
"So you simply made banking less profitable as a whole, capital will go somewhere else."
This is false. Idle reserves don't otherwise earn interest (assuming IOR is abolished). Reducing the reserves that banks have does not reduce their profitability, because idle reserves don't earn profits anyway.
You said:
"What banks most certainly won't do is start making bad loans just because they can lose less than by doing nothing."
Then there is no reason not to try it. Let's see just how bad the loan market really is given the NEW conditions that as of now do not apply, and so cannot be used to prove that banks are lending as much as they can.
You said:
"They can always ensure that the loss is zero (not negative) by quitting banking altogether, and that is what would happen."
That is just fear mongering. You are ignoring the fact that banks can increase their reserves by selling bonds to the Fed.
Tom,
ReplyDeleteHave you come across Silvio Gesell's work? He had a workable idea of negative interest rates. If reserves are identical to cash, and if the CB starts charging interest to hold reserves at the CB, the banks will shift to vault cash to hold their reserves. That is where Silvio Gesell's ideas come into play -see Silvio Gesell and Stamped Money: Another Thing Fisher and Wicksell Knew that Modern Economists Have Forgotten
The stamped money experiment was conducted in Wörgl, Austria with astounding results See - The Wörgl Experiment: Austria (1932 - 1933)
Quote:
In 1932, in the midst of the Great Depression, the small town of Wörgl in Austria successfully experimented with its own local currency (in the form of a stamp scrip). Based on the thinking of Silvio Gesell, an early 20th-century economist, and designed to stimulate the local economy, the new currency helped put the population back to work, and inspired many other communities to want to follow its example, until the experiment was abruptly terminated by Austria’s Central Bank in 1933. The following is the story of the “miracle of Wörgl” as told in The Future of Money (pp. 153-155).
Yes, I am aware of it, Clonal. Seems to be the likelihood of the US dollar becoming stamp currency is about nil.
ReplyDeleteAnyone know the answer to this:
ReplyDeleteIf/when the Fed pays interest on Reserves (which I believe Congress instructed it to do as of a few years ago), do those interest payments add to Reserves in the system? Or are they not Reserves... rather a profit earned; a fiscal operation that the Fed happens to be preforming (creation of new net financial assets)?
When the Fed credits a banks reserve acct in payment of IOR, it increases the bank's assets. The banks liabilities do not increase correspondingly so it is an add to NFA. Unlike govt expenditure that is appropriated, it has no corresponding Tsy liability. The increase in bank assets has an in increase in Fed liabilities corresponding to it.
ReplyDeleteSo it's both an increate in net financial assets and reserves. Makes sense. It's like if the U.S.Gov were to cut me a check (all else equal), it wouldn't add reserves to the banking system until I deposited the check. The Fed marking up reserve accounts just skips the intermediary "sending a check" part.
ReplyDeleteAnonymous,
ReplyDeletePeterP,
You said:
"Yes, but banks lose the bonds."
"Yes but they gain more reserves. Bonds earn interest, reserves do not."
No, they don't gain reserves, you said new reserves only replace the ones lost due to tax. Initial situation: 100 reserves, 100 bonds. Tax -5 reserves. Now we have 95 reserves, 100 bonds. Replace missing reserves: 100 reserves, 95 bonds. Result: 5 bonds lost. Net loss. End of story.
However you take the final portfolio, the balance sheet is hurt by the tax on reserves, you managed to confuse yourself several times in your post.
"Bank reserves are not capital. MMTers who say banks are not reserve constrained, but capital constrained, are tacitly saying reserves are not capital."
No, they are not tacitly saying that you just are confused again. Reserves can be part of capital.
Say there are 2 banks, both have liabilities=100. Bank A has assets: 90 reserves, 20 bonds. Bank B has assets: 20 reserves, 100 bonds. Which one is more likely to make more loans? Bank B. Has less reserves but more capital. After it makes loans it will sell bonds and get reserves, its present reserve position does not constrain it. It is not rocket science.
Bank capital will not be reduced. Not even reserves will be reduced because the Fed can just buy more bonds from the banks.
Look on top of this post. This is wrong. Capital is reduced by the tax. Dollar for dollar.
You said:
"So you simply made banking less profitable as a whole, capital will go somewhere else."
This is false. Idle reserves don't otherwise earn interest (assuming IOR is abolished). Reducing the reserves that banks have does not reduce their profitability, because idle reserves don't earn profits anyway.
Huh? They have to replace the lost capital to make the same amount of loans or make fewer loans. How is taxing not reducing profitability? Where did you learn econ?
"What banks most certainly won't do is start making bad loans just because they can lose less than by doing nothing."
Then there is no reason not to try it. Let's see just how bad the loan market really is given the NEW conditions that as of now do not apply, and so cannot be used to prove that banks are lending as much as they can.
So let's forbid grocery stores from using fridges: the food will rot faster ("tax on reserves") and they will have to sell it faster ("loan out money faster"), we will get growth! Sheesh. It is so stupid, why do we have to explain it over and over? The result of a ban on fridges would NOT be more sales, but less profitability and fewer grocery stores, the capital will go somewhere else.
"They can always ensure that the loss is zero (not negative) by quitting banking altogether, and that is what would happen."
That is just fear mongering. You are ignoring the fact that banks can increase their reserves by selling bonds to the Fed.
Not fear mongering but comparing opportunity cost. It will drive capital out of banking.
The Fed can replace reserves, but won't replace the tax, do the math, more tax=fewer bonds (less capital) like I showed you in elementary example above.
PeterP:
ReplyDeleteNo, they don't gain reserves, you said new reserves only replace the ones lost due to tax.
No, I didn't. I said it not only replaces the lost reserves, but MORE than replaces the lost reserves with treasury purchases exceeding the tax.
At any rate, it doesn't matter, because MMTers don't consider reserves as capital anyway, so taxing reserves for non-reserve constrained banks won't make a lick of difference to their capital.
No, they are not tacitly saying that you just are confused again. Reserves can be part of capital.
No, banks are not reserve constrained. Reserves are not bank capital.
Look on top of this post. This is wrong. Capital is reduced by the tax. Dollar for dollar.
False. Banks are not reserve constrained. Banks are capital constrained. Reserves are not capital.
Huh? They have to replace the lost capital to make the same amount of loans or make fewer loans. How is taxing not reducing profitability? Where did you learn econ?
It's not taxing transactions, from which profits are derived. It's taxing idle reserves. Profitability is not reduced.
Where did you learn accounting?
Not fear mongering but comparing opportunity cost. It will drive capital out of banking.
No, reserves are not capital. Banks are not reserve constrained.
The Fed can replace reserves, but won't replace the tax, do the math, more tax=fewer bonds (less capital) like I showed you in elementary example above.
False. Tax on reserves is a temporary reduction in cash. When the Fed buys more bonds, that increases bank reserves.
MF,
ReplyDeleteWow u cannot follow a 2+2 argument. I showed that tax reduces capital, u cannot refute it, just change the subject. I showed u that banks are not reserve constrained, u say "reserves are not capital", yeah they are a form of capital not equivalent to capital. Looks like u need to stick to philosophy.
"they are a form of capital not equivalent to capital"
ReplyDeleteWhat does that mean?
@y
ReplyDelete"they are a form of capital not equivalent to capital"
What does that mean?
See Matt Franko's comment at July 24, 2012 7:13 AM
Y,
ReplyDelete""they are a form of capital not equivalent to capital"
What does that mean?"
Very simple. Capital = Assets-Liabilities.
http://www.investopedia.com/terms/b/bank-capital.asp#axzz21dkDOFIi
For a person: Checking and savings account is a form of asset. Bonds are a form of asset. Loans are liabilities.
Net worth ("capital")=checking account+savings account +bonds - loans.
You cannot say "checking account is not net worth so taxing checking account doesn't impact net worth!" This is just stupid word games that confused MF.
MMT says that spending is net worth constrained, not checking account balance constrained, but saying that taxing the balance of checking accounts doesn't impact spending is stupid because checking account balance enters the net worth. Same with banks: they don't care about reserves per se, but care about capital, so reserves+bonds+other assets - liabilities. Taxing reserves decreases their assets so decreases their capital so decreases their ability to make loans.
Ok, so they are assets. That makes more sense than saying they are a "form of capital not equivalent to capital" which makes no sense linguistically.
ReplyDeleteY,
ReplyDeleteYes exactly. My wording was indeed terrible. But if I said reserves are assets, MF would say "assets are not capital, banks are capital constrained not asset constrained so it doesn't have any impact yadda yadda yadda".
PeterP:
ReplyDeleteI showed that tax reduces capital, u cannot refute it, just change the subject.
I showed that if you believe banks are not reserve constrained, but capital constrained, then you are tacitly claiming that reserves are not capital.
Therefore, taxing reserves is not a taxation of capital.
Again, I want to reiterate that I do not support the policy, but I do not support it for other reasons.
I showed u that banks are not reserve constrained, u say "reserves are not capital", yeah they are a form of capital not equivalent to capital.
That makes no sense. If reserves are a form of capital, then reserves are capital. Capital is a universal category that contains constituent subsets of types of capital. Of course a constituent of a universal is not "equivalent" to the universal.
Looks like u need to stick to philosophy.
Luks lyk U nede to edyookate yurself on eckenomicks.
Actually, I am even stronger in economics than I am in philosophy.
-------------
You cannot hold both of these positions at the same time:
1. Banks are not reserve constrained, they are capital constrained.
2. Taxing reserves is taxing capital.