September 2, 2013 at 12:41 pm #17973
This is probably a misguided question but I ask as much for a correction of my premise than for an answer to it: Can the Federal Reserve decide, if in the case of high price inflation, to evaporate the excess reserves that are being held there? I ask this under the premise that the money was loaned to the banks by the Federal Reserve in the first place and so the Federal Reserve has the option of recalling those loans, thus just securing the excess reserves for itself.?????? Does this make sense to you? Also, I have heard that the excess reserves are being used as collateral for other leveraging to buy assets by the deposit banks. That to me is the same concept as fractional reserves and the money is, indeed, circulating. Please try to explain what is going on right now even if you do not fully understand my question. Thank you.September 2, 2013 at 5:07 pm #17974
Bank reserves are cash banks hold in their vaults and checking account balances that banks hold at the Fed. The Fed requires banks to hold reserves against the checking account balances banks issue to their customers. Roughly speaking in normal times banks hold 5-10 percent of their customers’ checking account balances as reserves. Any amount of reserves that banks hold above those required by the Fed are called excess reserves. Currently banks hold well over 100 percent of their customers’ checking account balances as reserves.
The Fed cannot evaporate the cash that banks hold as reserves and dare not evaporate the banks’ checking account balances. If it did this, banks would lose a valuable asset and their equity would be jeopardized. The funds which are bank reserves were not loaned to the banks by the Fed but were payments the Fed made when banks sold some of their assets to the Fed.September 4, 2013 at 2:10 pm #17975
But didn’t the Fed lend money to the banks at close to zero percent interest? Didn’t the Fed create that money out of thin air to lend? Or is it just the checking account balances the Fed creates when it acquires banks’ assets that is its creation of money? What is the Fed lending out when it creates credit? Does it lend out already existing money? My head is starting to spin. Is there a difference between the excess reserves banks hold at the Fed and their checking accounts at the Fed?
Your first paragraph begged another question–Do people actually hold so much money in their checking accounts to have allowed the banks to lend out 90% of it? Why don’t they put it in savings accounts or C.D.s if the balances are 90% above their spending levels? I understand a cushion but that just seems like stock piling–which may indicate some kind of fear or indecisiveness, I guess–is that bad for the economy in an Austrian view?
Also, savings accounts seem to be more or less demand deposits–maybe they require a balance of sorts but anything above that can be used as an emergency fund or whatever. Is that the idea? Are the percentages of fractional reserves different for checking accounts, savings accounts and C.D.s? I would think so.
Anyway, I guess what I was asking in the first post is: Are there any loans that the Fed has made that it can call back? And does it already have in its possession the collateral?
I believe your answer was no–or maybe it just was, that would be too destructive. Or just that the reserves are not collateral for the loans but payment for assets sold to the Fed.?September 4, 2013 at 2:14 pm #17976
Also, are the banks buying corporations and land? If so, by what means?September 5, 2013 at 10:49 am #17977
The Fed’s balance sheet shows total assets of $3,601 billion. Securities held are $3,380 billion. So 94 percent of Fed assets are securities that it has purchased, not loans. Loans are $227 million (yes, million with an “m”) or 0.008 percent of Fed assets. And $154 million of that $277 million are “seasonal loans” which have nothing to do with the crisis.
The Fed did not loan money to banks. It bought securities from banks. The Fed paid banks by crediting checking account balances that banks hold at the Fed. This is the normal manner in which the Fed generates monetary inflation. The Fed buys securities from banks and pays with newly created money substitutes, the banks then use the money substitutes as reserves and issues their own money substitutes (i.e., customer checking accounts) by making loans to customers.
Reserves of banks are funds they hold against their checking account balances. The Fed requires banks to hold these funds as either cash or checking account balances at the Fed. The Fed sets the reserve requirement ratio that banks must meet, which is roughly 10 percent of their checking account balances. Banks cannot hold less than required reserves, but they can hold more. Any reserves banks hold in excess of those required by the Fed are “excess reserves.”
For example, customers of Bank A have a total of $10,000,000 in their checking accounts. If the reserve requirement ratio for Bank A is 10 percent, then Bank A must hold a minimum of $1,000,000 as reserves. It can hold these reserves as either cash or in a checking account balance with the Fed. If Bank A actually holds $1,200,000, then it is holding $200,000 in excess reserves. The excess reserves, like any reserves, can be either cash or checking account balances at the Fed.
The money stock is not 90 percent above people’s spending levels. The additional checking account balances come into existence as loans to customers. The customers are borrowing to spend the money. the recipients of the money then apportion it between money holding, consumption spending, and investment spending. As the new money is spent on more and more goods, their prices rise. If any person believes that his money holdings are too large, then he spends it to buy goods or invests it (and the borrower spends it on goods) and the money continues to bid up prices further. At higher prices, i.e., lower purchasing power of the monetary unit, people need to hold more money to command the same purchasing power over goods. This is the process by which prices are bid up from the monetary inflation generated by the Fed. At the end of the process people desire to hold all the money that exists.
Yes, saving account balances can be money substitutes if banks have a practice of redeeming them on demand at par for money. The Fed sets a lower reserve requirement for them than it does for demand deposits.
The main assets of commercial banks are loans and securities.
As the link below reveals, banks don’t have a significant portfolio of land and corporations.September 8, 2013 at 12:53 pm #17978
Wow, I have a lot of misconceptions to sort through. Thank you for your time and links. The 90% I was referring to was how much of a person’s demand account that he does not spend based on the banks’ remaining solvent after having lent out 90% of said holdings–meaning if more than 10% is withdrawn, then the bank would not have the money to give him (if operating under the reserve requirements, no more) I think I understand that a person receives money from the original lending of that money; and, therefore, that money does not represent the money stock but, more accurately, money substitutes. Is the end of the process people wishing to hold all the money that exists or to spend all the money that exists?
Is there evidence that people are holding more money? Are we now seeing this as an effect of inflation?September 8, 2013 at 1:05 pm #17979
Perhaps the banks have been buying land and corporations more recently.September 8, 2013 at 8:49 pm #17980
Every dollar of money and money substitutes is held by someone. Money and money substitutes are valuable goods and so every dollar of them is owned by someone. All the funds in your checking account in any moment are being held by you and not spent. And the same is true for everyone else.
Money Stock = Money + Money Substitutes
To calculate the money stock, one adds up all the money, which is cash (currency and coins), and money substitutes, which are claims redeemable for money on demand at par (mainly checking accounts and saving accounts). The money stock that you are holding at any moment is the cash you have plus your checking and saving account balances. And the same is true for everyone else.September 9, 2013 at 10:18 am #17981
I should have added that for each person:
Income = Consumption Expenditures + Investment Expenditures + Changes in Money Holdings
The last category is the money you hold onto instead of spending on consumption and investment. The money stock is all the money and money substitutes people hold onto.September 9, 2013 at 12:22 pm #17982
Right, I remember that in an Austrian Economics lesson of which I was particularly excited.
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