In the bank’s perspective, isn’t it just an asset swap? There was no change in net worth at the time of the QE. It seems to be analogous to a checking account vs money held in CD’s.
I am thinking too much is made of QE. The more I try to understand it, the more confused I get. I don’t understand why the swapping of treasury securities for reserves is to boost the economy.
Their goals are:
-They want to push down interest rates to spur lending….
-Push up stock and home prices
-Then spending and investment (via wealth effect) is encouraged
So treasuries are bid to prices that are less attractive to the private sector than would otherwise be. Thus they decide to invest in other assets? Their “cure” for the economy is capital market inflation? Are these assets included in any inflation measurement? Capital markets seem to be a repository of inflationary potential and this should be a potential warning sign for impending price inflation, no?
But QE isn’t really doing all that much of their stated goals. Sure, assets are doing well, but banks are still bloated in excess reserves. Is this the intention of the interest on excess reserves then?
Bank lending is not reserve constrained (in fact, many countries don’t even have reserve requirements at all). This means that banks do not need reserves before they make loans. Instead, banks make loans first and obtain reserves in the overnight market (from other banks) or from the Fed after the fact (if needed). New loans result in a newly created deposit in the banking system.
Banks are capital constrained. Banks can always find reserves from the central bank so banks do not check reserve balances before making loans. Instead, they will check the creditworthiness of the borrower and their own capital position to ensure that the loan is consistent with the goal of their business – earning a profit on the spread between their assets and liabilities.
First, is this true as stated? I had understood the reserve requirement to be analogous to a ceiling.
This paper seems to suggest that I am wrong, or rather incomplete in understanding: