Thursday, August 28, 2014

Warren Mosler — Comments on Professor John Cochrane’s "A Few Things the Fed Has Done Right"

Warren fisks John Cochrane's recent paper.

The Center of the Universe
Comments on Professor John Cochrane’s – A Few Things the Fed Has Done Right
Warren Mosler


Roger Erickson said...

how can an economist not know that Banking Reserves are NOT capital?

It gets worse. It's truly astounding that so many economists don't learn the simplest fundamentals about currency and banking operations.

This is like gun designers never learning how a gun shoots. Inevitably, they get out of touch.

Matt Franko said...

Right Roger this is a good one from Warren and imo puts our problem with these people in a nutshell:

"Doesn’t mention/forgets that the Fed buying secs is functionally identical to the tsy not selling them in the first place, etc."

They are just not qualified in math/quantitative systems to do the jobs they are currently in...

They should either get back to school or even better look at retirement....


Ryan Harris said...

Has a regulated bank in the US ever been shuttered or failed because of a failure to meet reserve constraints?

Lots of shadow bank funding issues.

Google doesn't index federal reserve enforcement actions very well and is further confused because the word reserve exists in the name of the Fed and in reserve requirement so its a difficult topic to search.

The Just Gatekeeper said...

Hi Ryan,

To my knowledge, there are no legal penalties for failing to meet reserve requirements. The only penalty comes in incurring an overdraft, or borrowing at the window, which may be more expensive than a traditional funding source.

Tom Hickey said...

If a bank has insufficient reserves in its account at the cb to meet the RR at the close of a period, it is automatically charged the overdraft fee.

The asset and liability department of the bank is charged with maintaining sufficient funds in the reserve account to meet requirements, e.g., by borrowing from other banks on the interbank market, along with its other responsibilities.

However, the cb looks at overdrafts as poor management on the part of the bank and flags the bank for scrutiny. So banks avoid using the discount window as a stigma.

Recall how Ben had to convince the banks to use the discount window during the liquidity crunch and even did some arm-twisting to get the big banks to use the discount window even if they didn't need to as an example of changed policy, which was then making unlimited liquidity available "no questions asked" to take a blow torch to the liquidity freeze.