Please. If I think that reserves are “special”, then it’s only because I see what banks and the Fed all did to pump them up when faced with a crisis! The numbers obviously got a lot bigger — that’s what we’ve been talking about here.

The banks and the Federal Reserve obviously don’t see reserves to be as irrelevant as do you, given the efforts made to increase them. I’m looking at the facts of what happened and assessing them accordingly. I understand that the Fed has a monetary explanation to offer that it uses to explain it, but I am pointing out that its story is incomplete.

But we see advanced countries operate without reserve rqmnts every day.

As I keep pointing out, the United States DOES have reserve requirements, so clearly the Fed does use reserves as a monetary policy tool, even if others don’t. We’re talking about the US here, so let’s stick with us for the moment.

But more importantly, the point that I have made here is that the Fed was deploying a back door approach to increase reserves without actually formally announcing a change. Despite their apparent irrelevance, there sure has been a fair bit of effort to grow them.

You think reserves are special because that’s what some MBA professor taught you. But we see advanced countries operate without reserve rqmnts every day. Hell, I even provided direct quotes from the BIS and the NY Fed explaining this in clear detail to you. Yet you still try to save face by denying stone cold facts.

You’re not interested in finding answers. You’re just arguing to argue with no direction, no proof (none) and no point other than to convince yourself that you understand something you clearly don’t. And that is why I am not interested in continuing this discussion.

That is false. I’m not changing my argument, I’m repeating it. My argument hasn’t changed at all: in Q4 2008, the Fed purposely wanted the banks to build reserves for the sake of repairing their balance sheets.

The decision to pay interest on reserves was not, as the Fed claimed and you agreed, simply a matter of adding another tool that the Fed could use to hit the target rate, but rather an attempt to rebuild the banks themselves. The Fed has other means of hitting the target rate without explicitly encouraging excess reserves.

In effect, the reserve requirement — the thing that you claim to be irrelevant — was implicitly, informally increased. But instead of explicitly raising the requirement, the Fed instead used a carrot in the form of interest payments on excess reserves, so as to encourage the banks and feed them more cash. This is exactly what I have said from the start.

You keep insisting that reserves don’t matter, when it’s quite obvious that the opposite is true. Increased reserves were seen as one of the critical pieces in the Fed’s effort to fix the banks. The theory was that Main Street could be fixed later once the banks had been repaired.

You’ve imported this MMT notions re: reserves being irrelevant into this, when it’s pretty clear that neither the bankers nor the Fed share your views. The Fed understandably attempts to spin it their way, but their actions make it clear what motivates them.

Just YESTERDAY you said this:

“Banks absolutely are reserve constrained.”

Now you’re singing a totally different tune and changing your argument for obvious reasons (your original premise was wrong). So let me remind you what your original argument was:

“My belief is that it was a mechanism to inject cash into banks, so that they would build reserves without the Fed needing to change the reserve requirement, which has created a disincentive to lend.”

But now you’re admitting that banks aren’t reserve constrained. I’ve already proven the point that more reserves don’t = a greater willingness to lend, but don’t take it from me this time. Take it from the NY Fed:

“In other words, the quantity of excess reserves [here] reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.”

This should be reiterated by an even more important fact. Reserves are a function of govt action NOT bank lending. The banks alone do not alter the amount of reserves in the banking system:

“The general idea here should be clear: while an individual bank may be able to decrease the level of reserves it holds by lending to firms and/or households, the same is not true of the banking system as a whole. No matter how many times the funds are lent out by the banks, used for purchases, etc., total reserves in the banking system do not change. The quantity of reserves is determined almost entirely by the central bank’s actions, and in no way reflect the lending behavior of banks.”

Paying interest on reserves does not alter a banks decision to lend. This should be crystal clear to you by now. Therefore, there is no reason to think that increasing (or decreasing) reserves will spur (or detract) lending. This simple fact shows that you are wrong and that the payment of interest is really just a tool to help the Fed target interest rates.

And the NY Fed’s conclusion:

“the excess reserves [here] were not created with the goal of lowering interest rates or increasing bank lending significantly relative to pre-crisis levels. In fact, the central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions.”

I think that just about sums up this conversation.

The two issues are related, not wholly separate.

Capital adequacy ratios include capital as a numerator and risk-weighted assets as a denominator, such as CAR = (Tier 1 + Tier 2)/ Risk-Weighted Assets

If excess reserves are turned into loans, the risk weighting of the assets changes accordingly. (Loans, of course, get a higher risk rating than does cash.) With an increase in risk, capital adequacy declines; with lower risk, capital adequacy improves.

Tier 1 and Tier 2 capital include items such as equity, retained earnings and loan loss reserves. These are the sorts of items that could not be expected to improve quickly during a financial crisis. The crisis of 2008 made it next to impossible to do anything to remedy the numerator of the capital adequacy ratios used to stress test banks.

This left the remedy to the denominator, the risk component of the equation, which meant reducing risk, which meant building reserves. And yes, I would call that a reserve constraint, in that the failure to build up that cash would have resulted in failures of stress tests, which would have tanked the real-world equity value of those securities (and, if enough of them fell, pulled down the entire financial system with them.)

The choice was to either improve capital adequacy by building reserves, or else to worsen it by reducing reserves. It is not the either/or situation that you are suggesting that it is.

In fact, the level of reserves hardly figures in banks’ lending decisions.

In the United States, larger banks are subject to reserve requirements. These requirements are used by the central bank as part of its toolkit to manage monetary policy. That is just a fact.

Now, if you want to state that banks are currently not reserve constrained in the sense that the reserve requirements are not forcing them to withhold loans that they would otherwise make, then I would agree with you. But it’s clear from my previous comments that wasn’t the point I was making.

Rather, I was pointing out that the Fed was cooperating with the banks in their efforts to build their reserves, and obviously wanted the banks to increase them. I can appreciate that the Fed wouldn’t want to admit that they wanted to use reserves to rebuild the banks, as to state this would have served as tacit acknowledgment that the banks were in worse shape than had been previously admitted.

The Fed were obviously encouraging US banks to increase reserves. Regardless of other nations’ policies about avoiding the use of reserve requirements, the US obviously operates differently.

10% of $1 Trillion AUM = $100 billion reserve

$100 billion * 0.25% * (15/360) = $10,416,666 roughly every 2 weeks. That’s a few hundred million dollars of RISK FREE PROFIT, per bank. And that’s if they don’t hold excesses and only have $1 trillion in profits. This isn’t paid in 2, 5 or 10 years either.

This could turn out to be up to 5% of profits per bank….not chump change

This has nothing to do with MMT or any other belief. You don’t have to believe anything I write. But this is how the banking system really works. You act as if I am spewing some theory about how the banking system works. This is fact that you blindly don’t understand. It’s painfully obvious that you have almost zero experience in the actual banking sector and that you don’t understand how the system really works. Ask any bank manager if they check their reserve account before they lend to a customer. They will say no. Better yet, take it from the central bank of all central banks, the BIS:

“In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”

That paragraph kills your entire argument swiftly. You’re confusing capital with reserves and generalizing in a way that detracts from the conversation. Then you’re attacking me and accusing me of being wrong (for stating facts) as you backpedal your way into a corner.

I appreciate your comments, but this constant argumentative behavior just for the sake of arguing is counterproductive. And when you accuse me of being some insane theorist whose ideas are not backed by any real facts it is downright insulting.

This has nothing to do with MMT or any other belief. You don’t have to believe anything I write. But this is how the banking system really works. You act as if I am spewing some theory about how the banking system works. This is fact that you blindly don’t understand. It’s painfully obvious that you have almost zero experience in the actual banking sector and that you don’t understand how the system really works. Ask any bank manager if they check their reserve account before they lend to a customer. They will say no. Better yet, take it from the central bank of all central banks, the BIS:

“In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”

That paragraph kills your entire argument swiftly. You’re confusing capital with reserves and generalizing in a way that detracts from the conversation. Then you’re attacking me and accusing me of being wrong (for stating facts) as you backpedal your way into a corner.

I appreciate your comments, but this constant argumentative behavior just for the sake of arguing is counterproductive. And when you accuse me of being some insane theorist whose ideas are not backed by any real facts it is downright insulting.

You actually want to deny that the banks were hoarding money, and that they had their own motivations for doing it?

Honestly, you’re taking your commitment to MMT way too far. Regardless of what you think of it, it’s really obvious that neither those operating the Fed nor those operating the banks believe in it.

Both of those groups act based upon their viewpoints of how the monetary system works, not based upon yours. You may wish to believe that they’re all insane or ridiculously stupid to disagree with you, but they certainly believe that they need reserves, so they build them.

If you’d like to, feel free to tell them how they’re all dopes who don’t understand money. But if you want to understand what motivates their actions and why they are doing what they do, then you need to put yourself in their shoes and try to see things from their vantage point, instead of rehashing a monetary theory that almost nobody holds.