Reply To: Paying Banks to Keep Money Out of the Economy?


The story assumes that banks will lend their excess reserves when market interest rates rise. To prevent the excess reserves from getting into the hands of people, the Fed will have to raise the interest rate it pays on reserves. But this is not the normal way that banks operate. When banks have excess reserves, they normally convert them into required reserves by issuing fiduciary media by creating credit. To prevent this process, the Fed must create a spread between the interest rate it pays on required reserves and the interest rate it pays on excess reserves.

Excess reserves are around $2.5 trillion and the interest on them, according to the story is $12 billion. The interest payments to banks, then, are a drop in the bucket in a $18 trillion GDP. But, the excess reserves are much more than a drop in the bucket and the fiduciary media that could be created on the excess reserves are more than the bucket.