Fed isn't "really" printing money?

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    At Fed

    Reserve account
    Securities account

    When the Fed buys treasury bonds via QE, it debits the bank’s securities accounts and credits their reserve account. All that has happened is a decrease in one account with a corresponding increase in another.

    Why aren’t securities accounts considered money like reserve accounts? Reserve accounts were convertible to gold whereas securities accounts weren’t…. and only reserve accounts apply to the 10 percent reserve requirement.

    So is the only distinction worth making the ability of the banks to multiply the new reserve money?

    Does this swapping of assets “really” have an impact on the bond market, or is the observed affect just speculation from us peons(not understanding the above)?


    Commercial banks don’t hold “securities accounts” at the Fed. The Federal Reserve Bank of New York has a “System Open Market Account” in which it holds securities that the Fed has purchased in Open Market Operations.


    The Federal Reserve’s balance sheet shows that its liabilities do not include “securities accounts” held by commercial banks. Commercial banks hold “reserve balances” with the Fed. For the week ending on Sept. 11, these were $2,265,831 million.

    The balance sheet shows that the Fed’s assets include “Securities Held Outright.” For the week ending on Sept. 11, these were $3,394,176 million.


    Here is a description of how the Federal Reserve Bank of New York conducts open market operations.



    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.

    ~Cullen Roche

    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:


    When a commercial bank sell Treasury securities to the Fed, its total assets are initially unchanged. However, the Fed permits commercial banks to hold less than 10 percent of the total checking account balances of their customers as reserves. With additional reserves, therefore, commercial banks are able to generate more than 10 times the additional reserves in checking accounts of their customers. They increase the checking account balances of their customers by extending them loans. So. the total assets of commercial banks increase (as do their liabilities) and the additional loans stimulate spending and production.

    For example, Bank A sells $1 million in Treasury securities to the Fed and the Fed pays with $1 million in reserves. With $1 million more in reserves, Bank A can have $10 million more in checking account balances of its customers and still meet the Fed’s reserve requirement ratio of 10 percent. The bank then extends loans of $10 million to its customers and writes the loan proceeds into their checking accounts. The increase supply of credit pushes interest rates down. The lower interest rates and the spending of the newly-created money by the borrowers, pushes up prices of goods they are buying. Entrepreneur who are producing these goods expand production which increases the demand for inputs they are buying. The prices of the input they are using and the prices of the assets they are using both increase. The boom is underway.

    Take a look at Murray Rothbard’s book, What Has Government Done to Our Money.


    The reasons that QE3 is not producing this chain of effects are first, in a depression, when banks sell assets to the Fed the hold the reserves and do not create credit. Excess reserves, which are typically between 5 and 10 percent of checking account balances are currently well over 100 percent. And second, in a period of unpredictable policy measures, investors hold cash instead of investing in production.

    Take a look at Robert Higgs’s article, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.”




    If the Fed buys treasuries from the commercial banks–those are treasuries the commercial bank already owns? I thought when the Fed buys treasuries, it is lending to the government and the commercial banks just get a premium from the transaction. I’m a little confused here but I think I understand the rest of the post.


    Yes, commercial banks bought Treasuries in the past and hold a substantial portfolio of them. For the week ending Sept. 4, 2013, commercial banks were holding $1,760.6 billion in “Treasury and Agency Securities.”


    The Fed is not permitted to buy Treasury securities directly from the Treasury. It must buy them in the “open market” and thus, the phrase “open market operations.”



    Then the idea of QE is countercyclical? Stimulate when weak and unwind the portfolio “when the economy is strong enough”?

    I just don’t see how they are going to unwind QE and raise interest rates. They have failed desperately to produce the Keynesian “quasi-boom” and returning to pre-crisis policy would just allow the economy to tumble again…… thus, “not on my watch” imo.

    I have to ask what you are predicting for the next 10 years in terms of monetary and fiscal policy and economic performance.


    Since 2008, the Fed has been using QE counter-cyclically. But expansionary monetary policy can be used pro-cyclically as well. Normal open market operations are used this way, i.e., to stimulate a boom. The Fed is a one horse show. No matter the economic conditions, it inflates the money stock through credit expansion.

    No one knows how the Fed will unwind QE. Here is Bernanke on the topic in 2010:


    Here is Bob Murphy’s response:


    The only other time the Fed was faced with such a large build up of excess reserves in commercial banks was from its attempt at monetary inflation in the 1930s. Banks built their excess reserves to unprecedented levels during the mid-1930s and were still carrying enormous excess reserves into the Second World War.

    Unless the government roles back its intervention and stops its expansionary monetary policy and profligate fiscal policy, I think the next 10 years will be a period of stagflation, like the 1970s.


    How do you explain the CPI since the 90’s in Japan along with your opinion on the possibility of stagflation in the US?


    The “stag” in stagflation is already underway. Economic growth depends on investment and investment has been suppressed by government intervention and the downturn to the point that the capital stock in our economy is not expanding enough to generate economic progress. I cited Bob Higgs’s work in an earlier post.

    The Fed’s expansion of its balance sheet and commercial banks’s build up of excess reserves provides the potential for the “flation” in stagflation. I lack confidence in the Fed to unwind this potential without significant price inflation. The Fed is dominated by officials who favor price inflation. If they make a mistake, they will err on the side of price inflation, not price deflation.

    The purchasing power of money is determined by the money stock and the demand to hold money. If they are roughly balanced over time, then money’s purchasing power will be roughly stable. The chart shows that the CPI index in Japan has fallen from just below 103 in 2000 to just below 100 in 2012. In other words, prices were less than 3 percent lower in 2012 than 12 years earlier.



    This from Gary North today, seems to be right in line with this topic


    This blew my mind., and it totally makes sense. I suppose then that the payment of interest on excess reserves is to put a floor on the fed funds rate and the increase in reserves due to QE will just DELAY the normalizing of the fed funds rate?


    In normal times, the Fed “targets” a level for the Fed Funds rate because it thinks that upward movements in the FF rate beyond the target rate indicate that reserves are too scarce and that downward movements in the FF rate below the target rate indicate that reserves are too plentiful. When reserves are too scare, the Fed supplies more to banks by stepping up open market purchases. When reserves are too plentiful, the Fed withdraws reserves by open market sales, or at least backing off open market purchases. The Fed uses the FF rate as a feedback mechanism to gauge what should be done about monetary policy. At least, this is the theory. In practice, the Fed tends to move the target rate with movements in the actual FF rate.

    Here is the graph of the Effective Fed Funds Rate.


    If you set the beginning date for drawing the graph to 1982-09-27, it will have the same time line as the graph of the Fed Funds Target Rate. Then you can compare the two graphs.



    Right…… but it seems to me that there could be 10 trillion in excess reserves and still the same fed funds rate right now, no? I suppose my thinking is that the interest on excess reserves allows for the same fed funds rate no matter what they do, while excess reserves are exceedingly plentiful.


    Yes, as long as excess reserves pass some threshold and are widely held by commercial banks (instead of concentrated in small number of them), then the demand to borrow reserves will be small and the resulting interest rate to borrow reserves will be low.

    It should be remembered, however, that interest is paid on all reserves, not just excess reserves.


    Currently, the Fed pays 1/4 percent on both required and excess reserves.


    Thus, unless the Fed increases the interest rate it pays on excess reserves, there is no penalty to commercial banks that convert their excess reserves to required reserves by issuing more fiduciary media through credit creation. That the Fed is paying interest on reserves, therefore, is not the reason banks are not lending.


    It makes sense now. Thanks for the exchange.

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