Re: the Fed: comment from weblog

I think I'm going to have to break this discussion up into chunks in
order to deal with specific issues (and partly due to time
constraints).

>>In reviewing your earlier comments, this is the one I found most untenable:

>>>When the Fed buys bonds from banks, it gives them money that was not saved by any saver. The banks can lend that money because it is a part of their excess reserves.

>>That it is quite misleading in terms of how the monetary system functions. It is wrong in two important respects: (1) It implies that banks are dependent on Fed injections of reserves in order to make loans, which is not true. (2) Banks lend by creating deposits. They don't lend reserves (base money), which is what they must hold to back their deposit liabilities.

>>If banks have excess reserves, they can use them to back further lending without borrowing, or they can sell them in the Fed funds market to earn interest, or they can buy interest-bearing securities like T-bills. But the reserves are not what is loaned.


>>From the above, sir, you seem to be telling me that banks cannot lend
the money they receive from bond sales because the only time banks will
ever sell a bond is when they need the proceeds to cover the Fed's
reserve requirement and so those Fed monies will only become a part of
the system's unloanable required reserves.

This would also necessarily mean that the only banks that ever sell
bonds are those that are also net borrowers in the FF market (or would
be if their bond sales had not taken place). I submit that IF only
banks that are net *suppliers* of FF in the overnight market ever sold
bonds, then ALL of the money that the Fed creates out of thin air for
bond purchases ends up as part of a bank's loanable funds.

The question is if those assumptions are true or to what extent they do
not reflect the whole truth. If the empirical facts are that
commercial bank bond sales are "largely" made by banks that are
otherwise net suppliers of reserve balances in the FF market, then my
case is made. If on the other hand the empirical fact is that the
conditions I established above are correct, then your argument is
unquestionably correct. If at least some of the money that banks
receive [ultimately] from the Fed is not needed to cover the reserve
requirement, then that "extra" money would unquestionably become a part
of the system's total loanable reserves, wouldn't it?

Since I believe the whole weight of your argument rests on these
implicit assumptions, can you produce any evidence that they are
correct?

.

Relevant Pages

  • Re: the Fed: comment from weblog
    ... >>>But the Fed is the monopoly suppier of bank reserves. ... the Federal funds rate goes down. ... >>>money, changes in the supply of bank reserves affect the money supply ... transferred between banks. ...
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  • Re: the Fed: comment from weblog
    ... >But the Fed is the monopoly suppier of bank reserves. ... "The Fed sets a target for the Fed funds rate, ... >money, changes in the supply of bank reserves affect the money supply ... The banks can lend that money because it is a part ...
    (sci.econ)
  • Re: the Fed: comment from weblog
    ... > relation to its primary targets -- inflation rate and unemployment. ... > It now targets the overnight lending rate, and leaves both the money ... > supply and banking system reserves as residuals. ... The banks can lend that money because it is a part ...
    (sci.econ)
  • Re: Bush busts Social Security with massive deficits
    ... >Demand for loans is not the only affect on the money supply. ... The Fed "injects" reserves for only two reasons: ... Banks are not the only entity that create money. ... >> money multiplier hypothesis is not just another myth. ...
    (sci.econ)
  • Re: the Fed: comment from weblog
    ... >> It now targets the overnight lending rate, and leaves both the money ... >> supply and banking system reserves as residuals. ... The banks can lend that money because it is a part ... The Fed must accommodate or lose control of the Fed funds rate. ...
    (sci.econ)