Paying interest on excess reserve balances

[flow5]

Introducing the payment of interest on excess reserve balances on Oct 9, 2008 thwarted our recovery. Remunerated excess reserve balances alter the construction of a normal yield curve, they INVERT the short-end segment of the yield curve known as the money market (which funds the capital market, etc.)

Savings are attracted from the non-banks (shadow banks or financial intermediaries). It's called dis-intermediation (where the size of the non-banks shrink, but the size of the commercial banking system remains unaffected).

The lending capacity of financial intermediaries (non-banks) is almost exclusively dependent on the volume of voluntary savings placed at their disposal. However, the CBs could continue to lend if the public should cease to save altogether. The size of the CBs is determined by monetary policy - not the savings practices of the public.

The non-banks are the CB's customers. From the standpoint of the system, the non-banks do not compete with the CBs for savings. Savings flowing through the non-banks never leave the CB system in the first place.

Unspent savings exert a depressing effect upon the economy. I.e, savings impounded within the CB system have a velocity of zero (because CBs create new money when they lend & invest, CBs do not loan out existing deposits, saved or otherwise).

Lending by the non-banks is non-inflationary & matches savings with investment (ceteris paribus), whereas lending by the CBs is inflationary (where savings are a leakage in Keynesian National Income Accounting). I.e., CB lending expands both the volume & rate-of-turnover of money, whereas, lending by the non-banks affects only the turnover of existing money.

The .25% remuneration rate sharply reduced the supply of loan-funds in both the money market & capital market. It necessitates that the Fed follow a much easier monetary policy in order to counteract the policies’ depressionary impact. Without extraordinary monetary intervention in 2013 there will be a recesssion.

One of the principle reasons the Fed expanded its balance sheet was to offset the decline in the supply of loan-funds (increase the availability & decrease the cost of loan-funds). However in the process the Fed created a shortage of safe assets (reduced the supply of collateral in the repo market).

Interbank demand deposits (IBDDs) aren’t close substitutes for safe assets as they only exist within the CB system (whereas lending by the non-banks required governments to facilitate lending). This un-necessary competition has set up a "collateral squeeze", reduced the “velocity of pledged collateral, & limited commercial bank credit expansion (investments).

The upshot is that IOeR's result in a cessation of the circuit income & transactions velocity of funds. And in the longer term, IOeR's exacerbate stagflation.

Ultimately the welfare of the commercial banks (credit creators) is dependent upon the welfare of the non-banks (credit transmitters), or the intermediaries between savers & borrowers. Encouraging the flow of savings (money velocity) through the non-banks will increase the ratio of real-gDp to nominal-gDp & will lower the un-employment numbers (& will also enhance the earnings of the CBs).

[flow5]

For example: the 5 1/2 percent increase in REG Q ceilings on December 6, 1965 (applicable exclusively to the commercial banking system), is analogous to the .25% remuneration rate on excess reserve balances introduced on Oct 9, 2008 (i.e., the remuneration rate @ .25% is higher than daily Treasury yield curve rates almost 2 years out – .24% as of 11/15/12).

In 1966, it was the lack of mortgage funds, rather than their cost that spawned the credit crisis & collapsed the housing industry. I.e., it was dis-intermediation (an outflow of funds, or negative cash flow), involving the non-banks – but not the CBs as a system.

The fifth (in a series of rate increases), promulgated by the Board & the FDIC beginning in January 1957, was unique in that it was the first increase that permitted the commercial banks to pay higher rates on savings, than savings & loans & the mutual savings banks could competitively meet.

Just as in 1966, during the Great Recession, the Shadow Banking System (non-banks) experienced dis-intermediation (like the CB’s, IOeR’s now compete with other financial assets [held by the non-banks], on the short-end of the INVERTED yield curve).

Bankers, confronted with a remuneration rate that is higher (vis a’ vis), other competitive financial instruments, will hold a higher level of un-used excess reserves – i.e., will not invest in securities with comparable returns (stopping the flow of funds into investment & consumption, or retarding the transactions velocity of savings).

Obviously the payment of interest on excess reserve balances killed the commercial paper market, etc., etc.

[Aman A.K.A. Ahamburger]

Flow, have been thinking about this since you posted it. Isn't the hording of money by the banks the reason the hosing market has been able to recover? In a normal bust you're looking at getting that money back out into the market, with this one there was no where for the money to go in '08 and '09 because of the amount of homes on the market. They essentially needed the money to help pay for all the bad mortgages that they took on.

[flow5]

The U.S. housing industry's collapse & recovery is complicated. I'm no expert. This was another monetary policy blunder:

(1) Bernanke pricked the valuation bubble in 2006. He drove home prices lower until a depression was created in the industry. Prices fell sharply at first & continued to fall for 6 years.
(2) Bernanke destroyed the funding process when he destroyed the shadow banking system (including the financial innovations used in the mal-investment & mal-distribution of available savings). Bernanke failed to supply liquidity to the CBs & thereby the non-banks. Then he actually "tightened" money policy when the NBER declared a recession for the last qtr of 2008.
(3) Bernanke's solution was (& still is) to lower bond yields until consumers & business can refinance & rebalance their income & expenses. That's not the solution.

Just as in 1966, the flow of savings needed to be encouraged to flow through the non-banks (financial intermediaries). But the payment of interest on excess reserve balances stopped the flow of funds back thru the shadow banks. I think the Z.1 flow of funds release stills shows the shadow banking sector still contracting.

[Aman A.K.A. Ahamburger]

I'm not expert either flow, just a regular guy like you. 

I partially agree with point 3.  I think that rates should have been allowed to start floating up by mid 2012, however, I think that low rates are what ultimately pulled the housing market out of this unprecedented situation.  I think that is the biggest thing with this whole situation, it's hard to gauge historically because it truly was an unprecedented situation.

Because of the type of crisis this was I think that point one and two can be summed up by two things.  Hubris and the recent transcripts of the 2007 crisis that were just released.  These "experts" truly thought that what they were doing was going to last long term (subprime/ect/ect).  The one thing that I am confused about though flow, you say that in 2008 they tightened monetary policy.  I thought, and according to these transcripts by late 2007 the FRB had already started easing??

Days Before Housing Bust, Fed Doubted Need to Act
www.nytimes.com/2013/01/19/business/economy/fed-transcripts-open-a-window-on-2007-crisis.html?partner=rss&emc=rss&_r=0

Fed missed warning signs in 2007 as crisis gained steam
www.reuters.com/article/2013/01/19/us-usa-fed-idUSBRE90H13Q20130119?feedType=RSS&feedName=businessNews&rpc=986

[flow5]

No, the BOG failed to ease at all. And Greenspan never tightened (just like Volcker).  Dec. 2007 should have been one of William Bretz's "Juncture Recognition" points. 

In Dec. 2007 the roc in MVt incontestably projected that its path would inevitably lead to a recession in the 4th qtr of 2008. Then in July 2008 the unregulated, prudential reserve, money creating, Euro-dollar banking system (not the ECB system) started to contract. As U.S. gDp started falling, the BOG introduced the payment of interest on reserves - to offset its liquidity funding facilities' growth on the asset side of the Central Bank's balance sheet. This was the 3rd time it literally withdrew liquidity from the financial markets (i.e., safe-assets or short-term gov't securities). 

If people understood this there would be all sorts of conspiracy theories - antisemitism (Friedman, Greenspan, & Bernanke are Jewish). And I think Bernanke would be assassinated. 

I have the incriminating evidence. But I have not published it as it would be censored - just like McCarthyism. Academic freedom is a barbarous relic. 

The atmosphere at the Fed has always been one of arrogance & ignorance.

[Deleted]

Sorry for the deleted.

[flow5]

Remember that FRBSTL's technical staff surmised:

“Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy WAS ACCOMMODATIVE before the financial crisis when judged in terms of liquidity. —Richard G. Anderson & Barry Jones.

[flow5]

"The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter, Forums And Blogs"

Don't be.

[flow5]

FORTUNE:
 
former Federal Reserve Vice Chairman Alan S. Blinder "After The Music Stopped: The Financial Crisis, The Response and the Work Ahead"

"The Federal Reserve...should stop paying interest to banks for their overnight deposits and should move to charge them for parking money. He says if the Fed set negative interest rates for overnight deposits – in effect charging a fee – banks would have to figure out better ways to make money and one obvious alternative would be to lend more to customers"

"While citizens fail to understand the positive role the Federal Reserve played, Blinder also says people have a right to be angry about the ongoing practice that encourages banks to keep their deposits out of general circulation"

"I have been advocating – and have not yet quite convinced (Federal Reserve Chairman) Ben Bernanke, although I am still working on it - that the Fed should lower, first to zero and then probably to negative, the interest rate it pays banks for holding reserves at the Fed," Blinder said Thursday. "When I want to be polemical about it, I say things like: 'My bank pays me one basis point on my checking account. Why are you paying my bank 25 basis points on their checking account?'"

[flow5]

"Banks are not reserve constrained as the central bank targets yields and must supply all the reserves desired at that yield that the private credit system requires based on its loans to so called creditworthy applicant" - Edward Harrison / Credit Writedowns


This is the MMTer's position. 


Don't be confused.  "Banks need central bank deposits for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets"

[flow5]

QE expands CB excess reserves & then reserves are used by the CBs to buy riskier assets. Used means IBDDs exchange hands (have reserve velocity).

You aren't able to measure this activity in absolute volumes on the Fed's balance sheet as the CB's clearing balances (from an individual bank’s perspective), are either re-deposited within the same institution, or shifted to (clear thru) other CBs (reflecting the distribution of reserves from the system’s perspective).

I.e., they are either derivative or primary inter-bank demand deposits (IBDDs) to member banks, but just a change in the composition of (IBDDs) for the system. Even with CB credit expansion, total reserves remain the same, but their form may change if excess “or precautionary?” reserves need to be converted to legally “required” reserves.

Thus IBDDs are indeed "lent" from the standpoint of an individual bank (have reserve velocity) but are not destroyed as demonstrated from the system's perspective (unless Federal Reserve Bank credit on the Fed’s balance sheet changes).

CB/FRB reserves may be depleted (if not offset by the “trading desk”), as “factors that affect reserve balances change” (as currency is issued or as System Open Market Account securities are sold or “run off”, etc).

So without other evidence to the contrary, correlation implies causation by default. I.e., pledging & re-pledging (the velocity of collateral) allows the CBs & shadow banks to create lawful (re-hypothecated) money (& then clean cash is swapped for equities), but not legal tender (like the unregulated, prudential reserve, Euro-dollar banking system).

In the E-D market, t-bills represent a medium of exchange, a unit of account, & a standard of value, (though not a store of value). And treasuries have a common repository for pyramiding (offshore banks). Fractional reserve banking is a function of the velocity of money, & not a function of its volume.

Commercial bank credit didn't expand at corresponding rates to excess reserves because the composition of CB credit changed conterminously (loans were replaced by securities). Likewise QE changed the composition of SOMA's portfolio by swapping the shorter-dated securities used for creating clean cash for longer-dated ones (re-invigorating the repo-feeding frenzy propping of riskier assets).

The QE evidence relies on how much the Fed buys & when it buys vs. when stock prices move.

[flow5]

SEE: Margin For Error: Margin Debt, Quantitative Easing, And Future S&P 500 Returns

Analysis (QE -> margin debt). It's not QE per se that lifts stock prices. The CBs need clearing balances to lend (e.g., excess reserves). The turnover of IBDDs is statistically important.

The BOG defines reserve velocity as the ratio of the average daily value of transactions on FEDWIRE, divided by the daily average value of IBDDs. The Fed's technical staff could come up with a much more relevant number.

The metrics aren't covariant.

[Aman A.K.A. Ahamburger]

Jan 23, 2013 20:05:42 GMT -5 flow5 said:

No, the BOG failed to ease at all. And Greenspan never tightened (just like Volcker).  Dec. 2007 should have been one of William Bretz's "Juncture Recognition" points. 

In Dec. 2007 the roc in MVt incontestably projected that its path would inevitably lead to a recession in the 4th qtr of 2008. Then in July 2008 the unregulated, prudential reserve, money creating, Euro-dollar banking system (not the ECB system) started to contract. As U.S. gDp started falling, the BOG introduced the payment of interest on reserves - to offset its liquidity funding facilities' growth on the asset side of the Central Bank's balance sheet. This was the 3rd time it literally withdrew liquidity from the financial markets (i.e., safe-assets or short-term gov't securities). 

If people understood this there would be all sorts of conspiracy theories - antisemitism (Friedman, Greenspan, & Bernanke are Jewish). And I think Bernanke would be assassinated. 

I have the incriminating evidence. But I have not published it as it would be censored - just like McCarthyism. Academic freedom is a barbarous relic. 

The atmosphere at the Fed has always been one of arrogance & ignorance.

  You mean more BS conspiracy stories than there are now?? LOL....

I'm sorry but what your saying doesn't add up flow.  The facts are there, by December '07 they were pumping liquid into the markets. The fact is that the housing crash was the worst financial crisis in modern history and you keep skirting around that. There really was no where to squeeze out GDP growth in '08 and '09 because for 10 years prior the housing market had been such a big part of GDP growth. Again, this is something that your not addressing. If your point is that by '11 they could have stopped paying the extra interests on reserves, then I would tend to agree with you.  However, at the same time it's now a tool that the FED has that will help boost growth in the future, without having to print more money.

As an aside, I have to laugh my ass off, anyone who thinks that these evil Jews are ruining our way of life is out to lunch.  Can we plz go back to being peasants working the fields for our Lords and Ladies,  WTF   Ben B. has done an amazing job of managing the hubris that infected the entire financial word.  The result of that is going to be seen as things like this January surplus because of oil exports keep popping up. The bull market in bonds is not even close to being over.  

[flow5]

"The facts are there, by December '07 they were pumping liquid into the markets"

No, the roc in MVt was a negative figure.  That's contractionary, not expansionary.  This was the 2nd contractionary program.  The one that burst the housing market lasted for 29 consecutive months beginning in Feb 2006.  I.e., the roc in MVt was negative for 29 consecutive months.

The "administered" prices would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks

[flow5]

"The facts are there, by December '07 they were pumping liquid into the markets"

NO, these are the facts:

At the height of the Doc.com stock market bubble, Greenspan initiated a "tight" monetary policy (for 31 out of 34 months). A “tight” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is no greater than 2-3% above the rate-of-change in the real output of goods & services.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p></o:p>

Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), & reverted to a very "easy" monetary policy -- for 41 consecutive months (i.e., despite 17 raises in the FFR, -every single rate increase was “behind the inflationary curve”). I.e., Greenspan NEVER tightened monetary policy.<o:p></o:p>

Then, as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a "tight" money policy (ending the housing bubble in Feb 2006), for 29 consecutive months, or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression). <o:p></o:p>

The FOMC continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007 -- as they had lost nearly all of their value), the FED maintained its “tight” money policy (i.e., credit easing, not quantitative easing). <o:p></o:p>

I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. <o:p></o:p>

And Greenspan didn't start "easing" on January 3, 2000, when the FFR was first lowered by 1/2, to 6%. Greenspan didn't change from a "tight" monetary policy, to an "easier" monetary policy, until after 11 reductions in the FFR, ending just before the reduction on November 6, 2002 @ 1 & 1/4% (approximately coinciding with the bottom in equity prices).<o:p></o:p>

I.e., Greenspan was responsible for both high employment (June 2003, @ 6.3%), & high inflation (rampant real-estate speculation, followed by widespread commodity speculation).<o:p></o:p>

Bernanke then relentlessly drove the economy into the ground, creating a protracted un-employment, & under-employment rate, nightmare.  <o:p></o:p>

[Aman A.K.A. Ahamburger]

Feb 17, 2013 8:59:43 GMT -5 flow5 said:

"The facts are there, by December '07 they were pumping liquid into the markets"

No, the roc in MVt was a negative figure.  That's contractionary, not expansionary.  This was the 2nd contractionary program.  The one that burst the housing market lasted for 29 consecutive months beginning in Feb 2006.  I.e., the roc in MVt was negative for 29 consecutive months.

The "administered" prices would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks

Flow, by Dec of 2007 the Fed was pumping money into the markets to try and stop the bleeding they missed in Aug of 07.

It says right in the FED notes that in Aug of 07 they didn't think there was a systemic risk. This jives with what you're saying my friend. The only thing you seem to be missing in your theory is that it was too late by Dec 07. Again this is what it says in the FRB notes.

So while I don't dissagree with you that the monetary system was in contraction mode, I do think you're missing the fact it was too little too late. This goes back into what I'm trying to explain, hubris.

I don't think we are disagreeing on what happened, I think that you need to overlap the notes from '07 and what you're saying.

[flow5]

	2008
	Dec 16	-.75	0.50	1.00	-1 to -.75	0.00 - 0.25
	Oct 29	-.50	1.25	1.75	-.50	1.00
	Oct 8	-.50	1.75	2.25	-.50	1.50
	Apr 30	-.25	2.25	2.75	-.25	2.00
	Mar 18	-.75	2.50	3.00	-.75	2.25
	Mar 16	-.25	3.25	3.75
	Jan 30	-.50	3.50	4.00	-.50	3.00
	Jan 22	-.75	4.00	4.50	-.75	3.50
	2007
	Dec 11	-.25	4.75	5.25	-.25	4.25

[flow5]

"Since no one in the Fed tracks reserves"

This was e-mailed to me by one of the V.P.s at the Fed.  Economists think reserves are a "tax". 

[Aman A.K.A. Ahamburger]

Which economists, the same morons that missed the housing bubble?!?

Banks could have been lending for more money on home loans the whole time, they had 12 MILLION+ foreclosed home to deal with a TRILLIONS in NONFUNDED MBS! What aren't you seeing here my friend?

Feb 17, 2013 12:43:54 GMT -5 flow5 said:

Prior to 2008, the market & the economy responded immediately to an injection of liquidity (legal reserves) into the commercial banking system.  The proxy for real-output is 10 months.  This was plently of time to counteract the recessionary tendencies.

Flow, you cannot have an "immediate" reaction, and a 10 month output proxy. They were trying to STOP the housing bubble from growing. By the time they realized just how WRONG they were, it was TOO LATE, the BIGGEST bubble that had been created in the post war era was already POPPED.

If the FED doesn't track funds, where r u getting your numbers from???

[flow5]

The commercial banking system responded immediately to an injection of liquidity or Reserve Bank credit (e.g., legal reserves) prior to the 3^rd qtr of 2008 (ever since 1942).  The roc in money flows is a cumulative figure.  The proxy for real-output doesn’t reach its zenith for up to 10 consecutive months.  There was more than enough time to offset the recessionary trajectory of MVt.

The last reduction in the Fed Funds rate prior to the recession in the 4^th qtr of 2008 by the FOMC was on April 30^th.  The FOMC didn’t lower the target rate again until Oct. 8^th.

[flow5]

"They were trying to STOP the housing bubble from growing"

The housing bubble burst when Bankrupt you Bernanke first tightened monetary policy in Feb 2006.

The roc in MVt = nominal-gDp (Fisher's "equation of exchange). The Fed does not try to contract gDp.  Bernanke is ignorant.  What the V.P. at the District Bank meant was that reserves weren't a metric that their economists thought to be meaningful & therefore monitored.

[flow5]

"Banks could have been lending for more money on home loans the whole time"

Commercial bank credit is composed of both loans & investments.  The Fed stopped the growth of commercial bank credit (i.e., they stopped economic/gDp growth). That was a mistake. 

[flow5]

"they didn't think there was a systemic risk"

Those Ph.Ds are stupid.  They work for the bankers anyway.  You can't make miscalculations when it comes to forecasting economic growth.  Contrary to Milton Friedman monetary lags are not "long & variable".  They have been mathematical constants for 100 years.  Boom/busts are the result of economic ignorance.


CBs pay for what they already own.  The CBs would be more profitable if they were prohibited from paying depositors/savers any interest on their bank accounts.  This would increase the supply of loan funds as saver/holders would transfer their savings through the non-banks which would lower long-term interest rates & match savings with investment. 

Nothing will change until the CBs are nationalized.  This will happend when the U.S. defaults.

[flow5]

Month  required reserves  10 month roc   24 month roc

You can only evaluate the roc ex-ante, not ex-post (because of true-ups & the "trading desk's" attempted corrections)  The yearly reconstructions degrade the correlations.  But you can still see what happened:

2000-01	42215	-0.01	-0.03
2000-02	40999	-0.06	-0.07
2000-03	38567	-0.06	-0.15
2000-04	39474	-0.03	-0.10
2000-05	40646	0.00	-0.07
2000-06	38287	-0.05	-0.12
2000-07	38786	-0.03	-0.10
2000-08	38488	-0.03	-0.10
2000-09	38099	-0.06	-0.11
2000-10	37681	-0.11	-0.12
2000-11	37536	-0.08	-0.14
2000-12	37101	-0.04	-0.18
2001-01	38327	-0.03	-0.14
2001-02	37818	-0.07	-0.10
2001-03	36354	-0.05	-0.15
2001-04	37354	-0.04	-0.15
2001-05	38410	0.00	-0.07
2001-06	36921	-0.03	-0.09
2001-07	38009	0.01	-0.07
2001-08	38551	0.03	-0.04
2001-09	38662	0.04	-0.03
2001-10	43434	0.13	0.09
2001-11	38749	0.02	-0.05
2001-12	39526	0.09	-0.06
2002-01	42303	0.13	0.03
2002-02	41102	0.07	0.07
2002-03	38883	0.05	-0.01
2002-04	39683	0.04	-0.02
2002-05	38965	0.01	0.02
2002-06	37302	-0.04	-0.04
2002-07	37945	-0.13	-0.01
2002-08	38117	-0.02	0.00
2002-09	37254	-0.06	-0.01
2002-10	36996	-0.13	-0.01
2002-11	37416	-0.09	0.01
2002-12	38117	-0.02	-0.01
2003-01	41124	0.04	0.09
2003-02	39907	0.02	0.10
2003-03	38857	0.04	0.04
2003-04	39477	0.04	0.03
2003-05	39945	0.05	0.08
2003-06	39719	0.07	0.04
2003-07	41333	0.12	0.07
2003-08	41944	0.12	0.08
2003-09	42472	0.11	-0.02
2003-10	41140	0.00	0.06
2003-11	40595	0.02	0.03
2003-12	41412	0.07	-0.02
2004-01	44517	0.13	0.08
2004-02	42632	0.07	0.10
2004-03	42302	0.07	0.07
2004-04	44142	0.07	0.13
2004-05	44491	0.06	0.19
2004-06	43599	0.03	0.15
2004-07	44817	0.09	0.18
2004-08	43977	0.08	0.18
2004-09	44535	0.08	0.20
2004-10	43566	-0.02	0.16
2004-11	43452	0.02	0.14
2004-12	44612	0.05	0.08
2005-01	48630	0.10	0.22
2005-02	45105	0.01	0.16
2005-03	44107	0.01	0.12
2005-04	44801	0.00	0.12
2005-05	44686	0.02	0.13
2005-06	44099	-0.01	0.07
2005-07	45130	0.04	0.08
2005-08	43671	0.01	0.03
2005-09	43915	-0.02	0.07
2005-10	42629	-0.12	0.05
2005-11	42602	-0.06	0.03
2005-12	43240	-0.02	-0.03
2006-01	45509	0.02	0.07
2006-02	43092	-0.04	0.02
2006-03	41264	-0.06	-0.07
2006-04	42971	-0.05	-0.03
2006-05	43785	0.00	0.00
2006-06	43430	-0.01	-0.03
2006-07	43482	0.02	-0.01
2006-08	41309	-0.03	-0.07
2006-09	41001	-0.05	-0.06
2006-10	40149	-0.12	-0.08
2006-11	40597	-0.06	-0.09
2006-12	41500	0.01	-0.15
2007-01	43046	0.00	-0.05
2007-02	41145	-0.06	-0.07
2007-03	39078	-0.10	-0.13
2007-04	40941	-0.06	-0.08
2007-05	42651	0.03	-0.03
2007-06	42153	0.03	-0.07
2007-07	41320	0.03	-0.05
2007-08	40147	-0.01	-0.09
2007-09	40988	-0.01	-0.04
2007-10	40646	-0.06	-0.05
2007-11	40960	0.00	-0.05
2007-12	41694	0.07	-0.08
2008-01	43211	0.06	0.00
2008-02	42192	-0.01	0.02
2008-03	41105	-0.02	-0.04
2008-04	43248	0.05	-0.01
2008-05	44955	0.12	0.04
2008-06	43493	0.06	0.00
2008-07	43945	0.08	0.06
2008-08	43769	0.07	0.07
2008-09	43254	0.04	0.08
2008-10	47457	0.10	0.17
2008-11	50108	0.19	0.21
2008-12	53327	0.30	0.24
2009-01	63330	0.46	0.54
2009-02	58787	0.31	0.50
2009-03	54836	0.26	0.34
2009-04	58806	0.34	0.38
2009-05	60191	0.38	0.43
2009-06	59781	0.38	0.45
2009-07	63581	0.34	0.58
2009-08	62241	0.24	0.52
2009-09	61722	0.16	0.52
2009-10	61081	-0.04	0.49
2009-11	63289	0.08	0.52
2009-12	63855	0.16	0.48
2010-01	66453	0.13	0.58
2010-02	63589	0.06	0.55
2010-03	64046	0.07	0.48
2010-04	67110	0.06	0.49
2010-05	66400	0.07	0.53
2010-06	64097	0.04	0.46
2010-07	65877	0.08	0.51
2010-08	65227	0.03	0.51
2010-09	66731	0.05	0.41
2010-10	65761	-0.01	0.31
2010-11	66709	0.05	0.25
2010-12	70990	0.11	0.12
2011-01	73806	0.10	0.26
2011-02	73580	0.11	0.34
2011-03	72525	0.13	0.23
2011-04	75680	0.15	0.26
2011-05	76818	0.18	0.28
2011-06	76514	0.15	0.20
2011-07	77725	0.18	0.25
2011-08	82338	0.23	0.33
2011-09	91495	0.29	0.50
2011-10	92650	0.26	0.46
2011-11	93330	0.27	0.46
2011-12	95196	0.31	0.43
2012-01	99543	0.32	0.57
2012-02	99711	0.30	0.56
2012-03	96589	0.26	0.44
2012-04	100257	0.29	0.51
2012-05	100658	0.22	0.57
2012-06	97454	0.07	0.48
2012-07	100163	0.08	0.54
2012-08	103760	0.11	0.55
2012-09	107290	0.13	0.63
2012-10	106424	0.07	0.60
2012-11	109790	0.10	0.55
2012-12	110684	0.15	0.50
2013-01	117326	0.17	0.59
2013-02	123615	0.23	0.70

[flow5]

What happened to all of the comments?

Between 1942 & Oct 9, 2008 the commercial banking system responded immediately to an injection of liquidity (whatever Reserve bank credit was required to create new inter-bank demand deposits, i.e., member bank legal reserves), by the FRBNY's "trading desk" (our Central Bank). 

During this period the commercial banks minimized their non-earning assets so that they could maximize their profits. Hence they maintained minimal excess reserve balances at their District Reserve bank. The CBs continued to follow this practice up until the introduction of the payment of interest on IBDDs. The economic impact of this practice could be accurately measured through the money multiplier from 1942-1995).

This lead to Fed watchers to closely follow the weekly release of the money stock figures in the late 70's & early 80's.  Increases in commercial bank credit (loans or investments) & the corresponding liabilities (money stock), were immediately registered thru marked increases in bond yields.

In Dec 2007 the trajectory for money flows clearly showed that there would be a recession in the 4th qtr of 2008 without countervailing intervention. Contrary to Milton Friedman, monetary lags are not "long & variable". They have been mathematical constants for 100 years.

The rate-of-change in MVt is a cummulative figure. The lag for the proxy for real-output is exactly 10 months (its inflection point/zenith). There was ample time to forestall the inevitable recession. But the FOMC's stopped lowering the target FFR (their monetary transmission mechanism) on April 30, 2008. I.e., the FOMC (the Fed's policy making committee), stopped easing monetary policy just prior to the economy collapsing. Then when it collapsed it drove a knife into our backs (drained liquidity further thru their new IOeR policy).

The fact is the FED followed a contractionary monetary policy (where the roc in MVt was a negative figure).  I.e., the FED drained bank & money market liquidity when the economy was collapsing (roc's in MVt = roc's in nominal-gDp - Irving Fisher's "equation of exchange"). 

"Bankrupt you Bernanke" killed the housing market when he initiated his first contractionary monetary policy that began in Feb 2006 (& lasted for 29 consecutive months). I.e., the roc in MVt (the proxy for inflation/housing prices), had been negative (contractionary) for over well over 2 years. 

[flow5]

test

[Aman A.K.A. Ahamburger]

The housing bubble burst when Bankrupt you Bernanke first tightened monetary policy in Feb 2006.

 But at the time they were still acting like they had the situation all under control.  Just like Mr. Carney and Mr. Flatery did here in 2012, they tried to slow the growth of home prices and debt in 2006, remember at that time all these MBS were rated A+++.

Commercial bank credit is composed of both loans & investments.  The Fed stopped the growth of commercial bank credit (i.e., they stopped economic/gDp growth). That was a mistake. 

 The Fed didn't stop the growth of commercial credit, the housing bust did.  Which again, they thought wouldn't happen in 2006, and even by mid 2007 they still didn't think there was going to be a mass fall out, just like you said, at the time Ben B. was ignorant, aka HUBRIS.

The commercial banking system responded immediately to an injection of liquidity or Reserve Bank credit (e.g., legal reserves) prior to the 3^rd qtr of 2008 (ever since 1942). 

 Exactly, just as I have been saying this entire thread, the housing bust of 2008 was an UNPRECEDENTED situation, thank you for proving my point nicely.  Why didn't the commercial banking system react in the normal way?  MBS/CDS!  As soon as they poured liquid into the markets in Dec 2007 it drained, at this point Ben B. admitted that he was wrong, per the Fed notes.  Why did the banking system drain in 2008(contract)?  Bear Sterns/MBS/CDS's and the FACT that the USA was at a negative savings rate, aka, NO MONEY in the system at all.

My problem is this my friend. In '09 and '10 I was talking about how the US economy was going to have a renaissance(energy, farming, manufacturing). I think maybe two or three people believed in what I was saying.

Now, 2013, the housing market has bottomed already (2011, I have a thread for that, was called nuts by everyone) and all the economic factors that I said would come into play in '09 and '10, are now playing out; to the tune of a rare January 2013 budget surplus!!(I guess will see about the default eh?) Add in these facts; there is a space travel/exploration thread in this area of the boards(which again I was called nuts for), a thread about the New EU, a thread about the American Renascence, multiple threads about business and freedom growing in the developing economies, and a thread about the issues that 2013 would bring; the sum is where my economic forecasting is standing at.

Now, after almost 4 years of posting, you want me to believe that because everything isn't perfect again already, that Ben B. did a poor job of helping navigate the storm that was upon us? That he "killed" business during the recovery because he paid excess reserves to the banks? That there is some kind of "jew banker" conspiracy here? Please.  I agree that the Fed had part to do with the housing bust, but only because the Fed is the biggest part of the economy.  It took millions of "smart" people to get themselves into mountains of personal debt, and millions of "smart" people to buy MBS.  ( Just like in Canada currently, yes they are even selling MBS right now in Canada!!)

Flow, you haven't offered up one example of how or where GDP growth would have happened in '08 and' 09 if the money wasn't being paid to the banks for excess reserves. Since you seem to keep playing the "what if" game without offering up some kind of timeline, then I absolutely refuse to accept that Ben B. didn't do a decent job, after his hubris was humbled.

It's almost been 5 years since the bust of Oct '08 and we are on the way to recovery. If there wasn't a bunch of new taxes and a new health care system on the way(politics), 2013 would have most likely been the next leg up in the American Renaissance. Ironically, this is why since 2010 have been saying that by 2015 there will be a big difference in the outlook in the USA, not 2013.(politics, aka, The Death of Socialism/Keynesian Economics). 
 

[flow5]

hat happened to all of the comments?

Between 1942 & Oct 9, 2008 the commercial banking system responded immediately to an injection of liquidity (whatever Reserve bank credit was required to create new inter-bank demand deposits, i.e., member bank legal reserves), by the FRBNY's "trading desk" (our Central Bank). 

During this period the commercial banks minimized their non-earning assets so that they could maximize their profits. Hence they maintained minimal excess reserve balances at their District Reserve bank. The CBs continued to follow this practice up until the introduction of the payment of interest on IBDDs. The economic impact of this practice could be accurately measured through the money multiplier from 1942-1995).

This lead to Fed watchers to closely follow the weekly release of the money stock figures in the late 70's & early 80's.  Increases in commercial bank credit (loans or investments) & the corresponding liabilities (money stock), were immediately registered thru marked increases in bond yields.

In Dec 2007 the trajectory for money flows clearly showed that there would be a recession in the 4th qtr of 2008 without countervailing intervention. Contrary to Milton Friedman, monetary lags are not "long & variable". They have been mathematical constants for 100 years.

The rate-of-change in MVt is a cumulative figure. The lag for the proxy for real-output is exactly 10 months (its inflection point/zenith). There was ample time to forestall the inevitable recession. But the FOMC's stopped lowering the target FFR (their monetary transmission mechanism) on April 30, 2008. I.e., the FOMC (the Fed's policy making committee), stopped easing monetary policy just prior to the economy collapsing. Then when it collapsed it drove a knife into our backs (drained liquidity further thru their new IOeR policy).

The fact is the FED followed a contractionary monetary policy (where the roc in MVt was a negative figure).  I.e., the FED drained bank & money market liquidity when the economy was collapsing (roc's in MVt = roc's in nominal-gDp - Irving Fisher's "equation of exchange"). 

"Bankrupt you Bernanke" killed the housing market when he initiated his first contractionary monetary policy that began in Feb 2006 (& lasted for 29 consecutive months). I.e., the roc in MVt (the proxy for inflation/housing prices), had been negative (contractionary) for over well over 2 years. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p></o:p>

[flow5]

The IOeR policy is obviously, simply a credit control device. The CB system's lack of security & loan demand was the direct result of transforming excess reserves (IBDDs) from cash (or non-earning assets), into earning assets - via the remuneration rate.

Commercial banks need clearing balances to lend (from an individual bank’s perspective), but these “reserves” are either re-deposited within the same institution, or shifted to (clear thru) other CBs (reflecting the distribution of reserves from the system’s perspective). I.e., they are either derivative or primary inter-bank demand deposits (IBDDs) to member banks, but just a change in the composition of (IBDDs) for the system. Even with CB credit expansion, total reserves remain the same, but their form may change if excess “or precautionary?” reserves need to be converted to legally “required” reserves (though today, for the CB system, reserves are no longer binding).

Thus IBDDs are indeed "lent" from the standpoint of an individual bank (have reserve velocity) but are not destroyed from a system's perspective (unless Federal Reserve Bank credit on the BOG’s balance sheet changes). Excess reserves may be depleted (if not offset by the “trading desk”), as “factors that affect reserve balances change” (as currency is issued or as System Open Market Account securities are sold or “run off”, etc). I.e., for the CB system, the whole is not the sum of its parts.

 

IBDDs now serve as "close substitutes" for Treasury bills in terms of safety & return. And the payment of interest on excess reserve balances today is analogous to the rate differential that existed in favor of the CBs during the 1966 credit crunch crisis (the shadow banking system today represents the S&L's & MSB's of yesteryear).