There’s an interesting summary of views on the Federal Reserve’s balance sheet and whether it presents a problem over at John Cochrane’s blog.
My own view is that some leakage from the Fed’s balance sheet into the real economy is inevitable and, indeed, unless there is the Fed’s strategy is nonsense. They’re assuming there is. It doesn’t a lot of billions worth of leakage to make a relative handful of bankers and financiers insanely wealthy, aggravating our existing problems with income inequality.
The commenter snowball1205 is the only one that has a clue of how the world works. In addition, banks lend money they do not have. @Ben Wolf can explain the reality of how it works.
The Fed was encouraging excess reserves because many banks were insolvent.
The reason that leakage can take place is that money is fungible and the net effect of the Fed’s propping banks up is to effectively decrease the reserves they’re required to hold.
The article and discussion does not go into what part of the Fed’s balance sheet or alphabet soup of programs they have going. The Fed is paying interest on Reserves to induce banks to keep a higher Reserve Ratio, and when their worthless assets go bust, they will have a cushion. If the Reserve Ratio was simply raised, the worthless assets going bust would cause the banks to become actually insolvent.
The asset exchanges were to get some of the garbage off of the bank’s balance sheets, and the QE’s are to get capital into the economy for investment and lending. This is pushing on a string, and the rich are borrowing at zero interest. Then, they are buying and selling the same hat.
The reserves are for the ratio, or they are lent to other banks. With a credit backed monetary system, all money must be used to support the credit that is being created. There is no extra money. There is only less money.
With fractional reserve lending, the system is always technically bankrupt. The money supply is always a fraction of the credit supply, and therefore, it would never sit idly in an Fed account. Some bank somewhere would pay some interest rate to have the cash to issue for the credit it has extended as debt.
The Fed needs to expand the money supply to meet the demand of the credit supply, but somewhere along the way, the Fed got the horse and the cart mixed-up. Today they are trying to expand the credit supply by expanding the money supply, and all that is happening is that the rich keep getting richer.
@Dave Schuler
Hopefully, I did not come off as an a$$hole. The comment was more for the general audience, and I probably should have worded it better.
My dog was having a bad day, and I was between vet visits.
Nah. We’re in material agreement. We just phrase it differently.