• 5 minutes Desperate Call or... Erdogan Says Turkey Will Boycott U.S. Electronics
  • 11 minutes Don't Expect Too Much: Despite a Soaring Economy, America's Annual Pay Increase Isn't Budging
  • 15 minutes WTI @ 67.50, charts show $62.50 next
  • 14 hours The EU Loses The Principles On Which It Was Built
  • 6 hours Starvation, horror in Venezuela
  • 9 hours Why hydrogen economics does not work
  • 7 hours Again Google: Brazil May Probe Google Over Its Cell Phone System
  • 6 hours Tesla Faces 3 Lawsuits Over “Funding Secured” Tweet
  • 2 hours Mike Shellman's musings on "Cartoon of the Week"
  • 19 hours WSJ *still* refuses to acknowledge U.S. Shale Oil industry's horrible economics and debts
  • 1 day Chinese EV Startup Nio Files for $1.8 billion IPO
  • 7 hours Saudi Fund Wants to Take Tesla Private?
  • 23 hours Crude Price going to $62.50
  • 2 hours California Solar Mandate Based on False Facts
  • 2 hours Oil prices---Tug of War: Sanctions vs. Trade War
  • 18 hours Saudi Arabia Cuts Diplomatic Ties with Canada

Daytime Credit a Thing of the Past as the Fed Rewards High Reserves

In my 2008 post, Interpreting the Monetary Base Under the New Monetary Regime, I argued that the massive increase in bank reserves was neither a necessary harbinger of inflation (as people on the right feared) nor a sure sign of a liquidity trap (as people on the left claimed) but rather represented, at least in part, a sensible aspect of the new regime of paying interest on reserves. I wrote:

When no interest was paid on reserves banks tried to hold as few as possible.  But during the day the banks needed reserves – of which there were only $40 billion or so – to fund trillions of dollars worth of intraday payments.  As a result, there was typically a daily shortage of reserves which the Fed made up for by extending hundreds of billions of dollars worth of daylight credit.  Thus, in essence, the banks used to inhale credit during the day – puffing up like a bullfrog – only to exhale at night.  (But note that our stats on the monetary base only measured the bullfrog at night.)

Today, the banks are no longer in bullfrog mode.  The Fed is paying interest on reserves and they are paying at a rate which is high enough so that the banks have plenty of reserves on hand during the day and they keep those reserves at night.  Thus, all that has really happened – as far as the monetary base statistic is concerned – is that we have replaced daylight credit with excess reserves held around the clock.

A post today at Liberty Street Economics, the blog of the New York Federal Reserve illustrates and explains how the excess reserves have reduced transaction costs in the payment system and risk to the Federal Reserve.

For the full article click here.



Join the discussion | Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News