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The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. When the Fed buys assets (government

The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. When the Fed buys assets (government bonds, Fannies, etc.) from a bank, the bank gets back 'bank reserves', which are just a number in the bank's Federal Reserve account somewhere. Those reserves can't be lent out. The bank can make no change to its lending, because it's a one-to-one swap (highly liquid government treasury -> bank reserve). A bank's constraint against lending more is its equity reserve ratio, which is unchanged by Fed asset purchases. Again, this is not printing money; functionally speaking, US Treasuries are already 'money' to a bank (they are extremely liquid, widely traded internationally, safe, and in many contexts actually preferable to cash), so swapping a US Treasury with cash is just turning one type of money into another; no net creation. There's a simple reason the Fed doesn't clear up this confusion: the central bank prefers people to think they are printing money, because credibility is important to their effectiveness. And the Fed doesn't actually print money, because they don't have the legal authority to do so. This is why Powell is regularly getting in front of Congress to urge more stimulus spending: he knows it's the only way to get dollars directly into the hands of ordinary Americans.

neffy 6y ago
I'm sorry, that is flat out incorrect. They are printing asset and liability money this time around. Observe: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 The is (give or take money market funds) the total sum of money in US bank accounts. Compare and contrast with 2008 for example, where the asset money creation was restricted to the asset side because it was used to take dodgy loans out of the banking system and put them into runoff. As to why there isn't much inflation yet, well there is. The stock market is considerably inflated due to this, and inflation will creep into the rest of the financial system over time, as this works its way into regulatory capital. but tldr: it is absolutely printing money - arguably it was the only thing they could do at the time, and the European Central Bank has done similar although less dramatic things, but the longer term consequences will definitely be interesting.
- smallnamespace 6y ago
  Bank reserves are counted in M2, but US Treasuries and other highly liquid assets aren't. The fact that these are functionally the same to a bank is ignored (or deliberately obscured). I mean, this is just common sense: if M1 or M2 expansion were printing money, then a rapid doubling of M2 should cause CPI inflation. But it doesn't.
  - jgalt212 6y ago
    I think you're sort of trying to have it both ways here. The Fed has been printing money for 12 years in hopes of increasing CPI. But real people, who buy the stuff in the CPI basket, don't have M2, so no CPI bump. It took a long time for central banks to realize this. And even astute minds like John Paulson got tripped up on this one. Starting in 2009, he bought as much gold as he could because he feared rampant CPI inflation (which never came).
    - dternyak 6y ago
      Yup, this gets it right. As a thought experiment, imagine someone builds a real, functional money printer in their basement and dialed it to print 10% of current M1. Would prices at the grocery suddenly skyrocket? Obviously not. Even though the money printer is running, and the money supply has grown, no one really knows about it. Even if a press release was put out about the increase in M1, there would likely not be CPI inflation (putting aside any concern about the money printer itself). Now, to take the example further, let's say the owner of the money printer started buying up real estate with the cash. Would you see CPI? Still, no. You'd probably see some inflation in the local areas where the real estate was being purchased, if it was done in sufficient volume. Now, to bring the argument to a close, what if you started buying junk bonds and securitized mortgages? Would you see CPI inflation? No. Would you see asset price increases? Yes, probably. It would be hard to correlate the asset price increases to the money printing, which might be the point. Mortgage originators can start climbing the risk ladder now that the money printer is buying up all these securitized mortgages, and companies can also behave in more risky ways and know that they'll get the financing from the money printer. Increased risk can drive an increase in earnings, which will be rewarded with stock appreciation. With the money printer stepping in and providing loose financing, the cost of money goes down. Now, previous money lenders have a harder time getting yield, and may climb the risk ladder as well to find the yield they need. This will also be seen in asset appreciation, across bonds, stocks, real estate, & more.
JSavageOne 6y ago
Functionally there's little to no difference between what you've described and what is colloquially known as "money printing". You've essentially just redefined "money" to include U.S. treasuries and mortgage-backed securities, and then stated that it's just an asset swap and not money printing. You can use whatever terminology you want, but at the end of the day, the Federal Reserve is creating money out of thin air and using it to buy real assets. You can argue that the effect of this is not as dramatic as printing money to buy a bunch of luxury condos or sports cars, but at that point we're just debating the degree of influence. The whole point of Fed money printing is to influence the economy, so if it didn't anticipate any difference, it wouldn't be doing it.
- SonOfThePlower 6y ago
  No, FED does not print money - bank reserves are not legal tender. If they had printed money, inflation would have skyrocket. My only question is why banks agree to this deal: exchanging U.S. treasuries for bank reserves (which they only can use as a collateral for lending) ?
  - Qasaur 6y ago
    Because they are pocketing the difference by arbitraging between the government (who issue the treasuries) and the Fed (who is the ultimate buyer) since the Fed cannot buy treasuries directly from the government. It's just a complicated way for the government to print money and hand it out and in this case banks are able to act as the middleman and earn money on the spread. It's a disgraceful system that is extremely morally questionable.
  - lambdasquirrel 6y ago
    It's inflation through other means. You get asset price inflation instead of commodities / consumer goods inflation. It's a slow death rather than a quick one.
  - freeone3000 6y ago
    Inflation (in the consumer goods sense) only happens when the value of money goes down for the average person. The price of lettuce isn't going to rise because the fed isn't buying lettuce with faerie money, they're buying securities. And the stock market has gone up and to the right, despite all logical indicators on the ground indicating it should go solidly opposite. Securities are hugely inflated.
pedro_hab 6y ago
Isn't the FED at the very least creating money by buying treasuries above the market value? If the FED weren't buying, banks would have to bid the market to sell, lowering the price. Kinda makes the banks whole and also makes the Treasury market higher, lowering rates for the ever increasing US deficit.
- Qasaur 6y ago
  They are, the argument that the poster above you put forward is such a tired argument and I really do not understand why people are trying to hide the fact that the Fed is actually creating money out of thin air and buying assets from banks for it. The Fed doesn't technically "print" the Federal Reserve Notes, but for all intents and purposes it is legitimately money that is being created, only digitally. You are entirely correct in your assessment that they are manipulating the market by being an agent with unlimited amounts of cash and can therefore provide options for banks that they otherwise wouldn't have in a free market. Also bank reserves can be used as collateral for further loans, just because you don't lend out the actual reserves doesn't mean more money isn't being created, it's just done in a roundabout fashion.
  - RobertoG 6y ago
    >>"Also bank reserves can be used as collateral for further loans [..]" What do you mean by that? I don't think that it how it works.
    - Qasaur 6y ago
      Collateral is the wrong term, apologies for that - what I mean is that expanded bank reserves can be used to back an expansion of credit from the bank in question.
      - jbverschoor 6y ago
        There are no reserve requirements anymore
      - 6y ago
darawk 6y ago
Creating bank reserves absolutely creates money. Bank reserves are the fulcrum around which bank leverage ratios operate. Yes, they can margin treasuries to borrow reserves from other banks, and in that sense, they are fungible. But the total amount of bank reserves in the system at any one time is still what bounds the total amount of money creation that can happen via leverage. Increasing the absolute amount of bank reserves increases the money supply, by a factor roughly equal to the current reserve requirement ratio (up to demand for credit, etc, etc.).
- RobertoG 6y ago
  New money, enters the economy by two ways: banks lean to households/business or government direct spending. New reserves in the system doesn't create money. The quantity of reserves in the system limit the quantity of money that the private banks can lend to the real economy (actually, not really, but that's another discussion), but the existence of reserves doesn't make the bank to lean. For the banks to lean, it's necessary that there is demand for credit first. Because there is not demand for credit, never mind the number of reserves in the system. The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly.
  - Qasaur 6y ago
    >The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. Sounds very political for a supposedly independent central banking system! This system is a disgrace and is governed by unelected technocrats who are able to yield a crazy amount of power over the economy without ever being subject to inquiries from the public, all in the interest of experimenting on the population with highly questionable economic models. In my opinion we would never have been in this situation in the first place were it not for the artificial credit growth and consequent boom caused by central bankers.
    - throw0101a 6y ago
      >> The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. > Sounds very political for a supposedly independent central banking system! The phraseology makes it sound political, but it is not political. Basically when a central bank cuts its rate down to 0.25%, 0%, or even negative (e.g., Switzerland), it's a signal that the central bank has done all it can do to get the economy going. (There are some other mechanism employed in recent years as well ("quantitative easing"), but the message is the same: we are at the limits of monetary policy.) After that it is up to governments, if they so choose, to also do fiscal policy initiatives, e.g., Keynesian economics: create economic demand through public spending (since private business spending/demand is in the toilet). Of course government are free not to do anything at all, which would generally entail lower economic growth and higher employment. But central banks have a mandate to make sure the economy is in a certain middle-ground: not too hot to induce a lot of inflation, and not too cold to have a lot of people out of work.† Everyone agrees to these goals ahead of time: > The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. * https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm https://www.federalreserve.gov/faqs/what-economic-goals-does... The "unelected technocrats" are doing what they were hired to do. They each have a fixed term (though renewable), and if they don't do what they're supposed to they are replaced. They did not sneak into these positions: they were told to work towards certain goals, and they are using the tools at their disposal. They are no different than the Board of a corporation hired by the shareholders of the company: it's just that the "shareholders" are elected representatives (Congress, parliaments, etc). If the Board is not doing a satisfactory job it can be sacked with cause if necessary. † Sometimes you actually have both: see "stagflation".
nostrademons 6y ago
Bank reserve ratios [1] operate as a percentage, so by creating more bank reserves, you create more money that can be lent out. Say that the reserve ratios requirement is 10%, which it currently is. Then for every dollar it has in reserves, the bank may create $10 in loans. The bank reserves don't themselves circulate as money, but they let the bank create more credit, which does circulate as money. [1] https://www.investopedia.com/terms/r/reserveratio.asp https://www.investopedia.com/terms/r/reserveratio.asp
- jbverschoor 6y ago
  The reserve requirements are 0% as of earlier this year. https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/#719d42f96aa8 https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fir... https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-t...
  - neffy 6y ago
    And as it happens everything is regulated by bank capital and the Basel framework these days, rather than the old gold standard of asset reserves. OP gave the correct textbook description - but that description has been superceded by changes in bank regulation since the 1980's.
- RobertoG 6y ago
  Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer. The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate. Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620
UncleEntity 6y ago
> There's a simple reason the Fed doesn't clear up this confusion... There is no confusion, the term is called "monetizing debt" where they create 'money' out of thin air to buy government debt from banks who then use this money to create even more money via fractional reserve lending.
- jbverschoor 6y ago
  You mean unlimited, as the reserve requirements are 0%
User23 6y ago
Everything you say is correct as I understand things, but some elaboration is in order. "Printing money" is a factually inaccurate rhetorical term meant to emotionally manipulate people with visions of Zimbabwe or Weimar Germany, but fact is that under current law the Federal Reserve and the US Treasury can work in concert to add net financial assets to the private sector's aggregate balance sheet without new fiscal policy. For example while the Fed isn't buying public company equity directly yet, the bond market provides a transmission mechanism for a company to create otherwise worthless or at least discounted equity and sell it at face value to the Fed. Sure from a balance sheet perspective it all balances, because that's how bookkeeping works, but as a practical matter it means more money available to the private sector.
throw0101a 6y ago
> The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. > When the Fed buys assets (government bonds, Fannies, etc.) from a bank, the bank gets back 'bank reserves', which are just a number in the bank's Federal Reserve account somewhere. The money in my saving (or chequing) account is just a number in the bank's account somewhere, but it is still "money" that I have with them. Similarly the Federal Reserve is a bank account for the banks: so your bank (BoA, Chase, Wells Fargo, etc) has money at the Fed just like I have have money at (e.g.) Citibank. Otherwise, your statement "the Feds buys assets" makes no sense: with what exactly does the Fed buy the assets if not money? "Money" in the modern economy is (1) a means of exchange, (2) a unit of account, and (3) a store of value. In this case we are using (1). Just because the "money" is in digital form does not change its essence. > […] so swapping a US Treasury with cash is just turning one type of money into another; no net creation. Can US Treasury bills be used for reserve calculation purposes? Because if they cannot, then the higher reserve accounts mean that banks would be able to create more loans (assuming they can find borrowers). While reserve holdings and T-bills may have similar net values, each may be have restrictions on how they can be used in various circumstances, which could have knock-on effects.
aidenn0 6y ago
If you were to change "US Treasuries" to "British Pounds" everything you state about liquidity &c. remains true, but it's perhaps more clearly creating new dollars that weren't there before.
dogman144 6y ago
I think you need to discuss the role of excess reserves and lending on them to make this a complete picture, actually.
whytaka 6y ago
> the bank gets back 'bank reserves' > bank's constraint against lending more is its equity reserve ratio Wait, isn't this the same reserve? IE. By putting more capital in the reserve, the banks are able to lend proportionally more?
deleted 6y ago
[deleted]
floatingatoll 6y ago
This helps put a bit more nuance on the two questions I wish we'd see answered from this in thirty days: What percentage of dollars issued in bank loans, whose issuance depended on this increase in Fed reserves, are expected to be issued to individual citizens who make $72,900 or less (the AMT threshold for 2020, iirc)? What percentage of dollars are expected to be issued to businesses with gross revenue of $1mil/year or less?
deleted 6y ago
[deleted]

neffy 6y ago

I'm sorry, that is flat out incorrect. They are printing asset and liability money this time around. Observe: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 The is (give or take money market funds) the total sum of money in US bank accounts. Compare and contrast with 2008 for example, where the asset money creation was restricted to the asset side because it was used to take dodgy loans out of the banking system and put them into runoff. As to why there isn't much inflation yet, well there is. The stock market is considerably inflated due to this, and inflation will creep into the rest of the financial system over time, as this works its way into regulatory capital. but tldr: it is absolutely printing money - arguably it was the only thing they could do at the time, and the European Central Bank has done similar although less dramatic things, but the longer term consequences will definitely be interesting.

smallnamespace 6y ago
Bank reserves are counted in M2, but US Treasuries and other highly liquid assets aren't. The fact that these are functionally the same to a bank is ignored (or deliberately obscured). I mean, this is just common sense: if M1 or M2 expansion were printing money, then a rapid doubling of M2 should cause CPI inflation. But it doesn't.
- jgalt212 6y ago
  I think you're sort of trying to have it both ways here. The Fed has been printing money for 12 years in hopes of increasing CPI. But real people, who buy the stuff in the CPI basket, don't have M2, so no CPI bump. It took a long time for central banks to realize this. And even astute minds like John Paulson got tripped up on this one. Starting in 2009, he bought as much gold as he could because he feared rampant CPI inflation (which never came).
  - dternyak 6y ago
    Yup, this gets it right. As a thought experiment, imagine someone builds a real, functional money printer in their basement and dialed it to print 10% of current M1. Would prices at the grocery suddenly skyrocket? Obviously not. Even though the money printer is running, and the money supply has grown, no one really knows about it. Even if a press release was put out about the increase in M1, there would likely not be CPI inflation (putting aside any concern about the money printer itself). Now, to take the example further, let's say the owner of the money printer started buying up real estate with the cash. Would you see CPI? Still, no. You'd probably see some inflation in the local areas where the real estate was being purchased, if it was done in sufficient volume. Now, to bring the argument to a close, what if you started buying junk bonds and securitized mortgages? Would you see CPI inflation? No. Would you see asset price increases? Yes, probably. It would be hard to correlate the asset price increases to the money printing, which might be the point. Mortgage originators can start climbing the risk ladder now that the money printer is buying up all these securitized mortgages, and companies can also behave in more risky ways and know that they'll get the financing from the money printer. Increased risk can drive an increase in earnings, which will be rewarded with stock appreciation. With the money printer stepping in and providing loose financing, the cost of money goes down. Now, previous money lenders have a harder time getting yield, and may climb the risk ladder as well to find the yield they need. This will also be seen in asset appreciation, across bonds, stocks, real estate, & more.

JSavageOne 6y ago

Functionally there's little to no difference between what you've described and what is colloquially known as "money printing". You've essentially just redefined "money" to include U.S. treasuries and mortgage-backed securities, and then stated that it's just an asset swap and not money printing. You can use whatever terminology you want, but at the end of the day, the Federal Reserve is creating money out of thin air and using it to buy real assets. You can argue that the effect of this is not as dramatic as printing money to buy a bunch of luxury condos or sports cars, but at that point we're just debating the degree of influence. The whole point of Fed money printing is to influence the economy, so if it didn't anticipate any difference, it wouldn't be doing it.

SonOfThePlower 6y ago
No, FED does not print money - bank reserves are not legal tender. If they had printed money, inflation would have skyrocket. My only question is why banks agree to this deal: exchanging U.S. treasuries for bank reserves (which they only can use as a collateral for lending) ?
- Qasaur 6y ago
  Because they are pocketing the difference by arbitraging between the government (who issue the treasuries) and the Fed (who is the ultimate buyer) since the Fed cannot buy treasuries directly from the government. It's just a complicated way for the government to print money and hand it out and in this case banks are able to act as the middleman and earn money on the spread. It's a disgraceful system that is extremely morally questionable.
- lambdasquirrel 6y ago
  It's inflation through other means. You get asset price inflation instead of commodities / consumer goods inflation. It's a slow death rather than a quick one.
- freeone3000 6y ago
  Inflation (in the consumer goods sense) only happens when the value of money goes down for the average person. The price of lettuce isn't going to rise because the fed isn't buying lettuce with faerie money, they're buying securities. And the stock market has gone up and to the right, despite all logical indicators on the ground indicating it should go solidly opposite. Securities are hugely inflated.

pedro_hab 6y ago

Isn't the FED at the very least creating money by buying treasuries above the market value? If the FED weren't buying, banks would have to bid the market to sell, lowering the price. Kinda makes the banks whole and also makes the Treasury market higher, lowering rates for the ever increasing US deficit.

Qasaur 6y ago
They are, the argument that the poster above you put forward is such a tired argument and I really do not understand why people are trying to hide the fact that the Fed is actually creating money out of thin air and buying assets from banks for it. The Fed doesn't technically "print" the Federal Reserve Notes, but for all intents and purposes it is legitimately money that is being created, only digitally. You are entirely correct in your assessment that they are manipulating the market by being an agent with unlimited amounts of cash and can therefore provide options for banks that they otherwise wouldn't have in a free market. Also bank reserves can be used as collateral for further loans, just because you don't lend out the actual reserves doesn't mean more money isn't being created, it's just done in a roundabout fashion.
- RobertoG 6y ago
  >>"Also bank reserves can be used as collateral for further loans [..]" What do you mean by that? I don't think that it how it works.
  - Qasaur 6y ago
    Collateral is the wrong term, apologies for that - what I mean is that expanded bank reserves can be used to back an expansion of credit from the bank in question.
    - jbverschoor 6y ago
      There are no reserve requirements anymore
    - 6y ago

darawk 6y ago

Creating bank reserves absolutely creates money. Bank reserves are the fulcrum around which bank leverage ratios operate. Yes, they can margin treasuries to borrow reserves from other banks, and in that sense, they are fungible. But the total amount of bank reserves in the system at any one time is still what bounds the total amount of money creation that can happen via leverage. Increasing the absolute amount of bank reserves increases the money supply, by a factor roughly equal to the current reserve requirement ratio (up to demand for credit, etc, etc.).

RobertoG 6y ago
New money, enters the economy by two ways: banks lean to households/business or government direct spending. New reserves in the system doesn't create money. The quantity of reserves in the system limit the quantity of money that the private banks can lend to the real economy (actually, not really, but that's another discussion), but the existence of reserves doesn't make the bank to lean. For the banks to lean, it's necessary that there is demand for credit first. Because there is not demand for credit, never mind the number of reserves in the system. The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly.
- Qasaur 6y ago
  >The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. Sounds very political for a supposedly independent central banking system! This system is a disgrace and is governed by unelected technocrats who are able to yield a crazy amount of power over the economy without ever being subject to inquiries from the public, all in the interest of experimenting on the population with highly questionable economic models. In my opinion we would never have been in this situation in the first place were it not for the artificial credit growth and consequent boom caused by central bankers.
  - throw0101a 6y ago
    >> The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. > Sounds very political for a supposedly independent central banking system! The phraseology makes it sound political, but it is not political. Basically when a central bank cuts its rate down to 0.25%, 0%, or even negative (e.g., Switzerland), it's a signal that the central bank has done all it can do to get the economy going. (There are some other mechanism employed in recent years as well ("quantitative easing"), but the message is the same: we are at the limits of monetary policy.) After that it is up to governments, if they so choose, to also do fiscal policy initiatives, e.g., Keynesian economics: create economic demand through public spending (since private business spending/demand is in the toilet). Of course government are free not to do anything at all, which would generally entail lower economic growth and higher employment. But central banks have a mandate to make sure the economy is in a certain middle-ground: not too hot to induce a lot of inflation, and not too cold to have a lot of people out of work.† Everyone agrees to these goals ahead of time: > The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. * https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm https://www.federalreserve.gov/faqs/what-economic-goals-does... The "unelected technocrats" are doing what they were hired to do. They each have a fixed term (though renewable), and if they don't do what they're supposed to they are replaced. They did not sneak into these positions: they were told to work towards certain goals, and they are using the tools at their disposal. They are no different than the Board of a corporation hired by the shareholders of the company: it's just that the "shareholders" are elected representatives (Congress, parliaments, etc). If the Board is not doing a satisfactory job it can be sacked with cause if necessary. † Sometimes you actually have both: see "stagflation".

nostrademons 6y ago

Bank reserve ratios [1] operate as a percentage, so by creating more bank reserves, you create more money that can be lent out. Say that the reserve ratios requirement is 10%, which it currently is. Then for every dollar it has in reserves, the bank may create $10 in loans. The bank reserves don't themselves circulate as money, but they let the bank create more credit, which does circulate as money. [1] https://www.investopedia.com/terms/r/reserveratio.asp https://www.investopedia.com/terms/r/reserveratio.asp

jbverschoor 6y ago
The reserve requirements are 0% as of earlier this year. https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/#719d42f96aa8 https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fir... https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-t...
- neffy 6y ago
  And as it happens everything is regulated by bank capital and the Basel framework these days, rather than the old gold standard of asset reserves. OP gave the correct textbook description - but that description has been superceded by changes in bank regulation since the 1980's.
RobertoG 6y ago
Actually, that it's not how it works in practice. The credit department of a bank, doesn't check if the bank have enough reserves before lending. They only check if the new lending make senses from a business perspective. If it does, it concede the credit to the customer. The bank is legally obliged to have the reserves, so, a posteriori (and not before) the bank will try to get the reserves in the inter-bank market (from other banks). If there are not enough reserves in the system the price of the reserves will go up. That's the interest rate. Central banks don't target the quantity of reserves, they only care about the interest rate. So, if they want to keep the interest rate in their target, they have to create new reserves. So, it's the lending what create reserves, not the other way around. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=6617 http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620

UncleEntity 6y ago

> There's a simple reason the Fed doesn't clear up this confusion... There is no confusion, the term is called "monetizing debt" where they create 'money' out of thin air to buy government debt from banks who then use this money to create even more money via fractional reserve lending.

jbverschoor 6y ago
You mean unlimited, as the reserve requirements are 0%

User23 6y ago

Everything you say is correct as I understand things, but some elaboration is in order. "Printing money" is a factually inaccurate rhetorical term meant to emotionally manipulate people with visions of Zimbabwe or Weimar Germany, but fact is that under current law the Federal Reserve and the US Treasury can work in concert to add net financial assets to the private sector's aggregate balance sheet without new fiscal policy. For example while the Fed isn't buying public company equity directly yet, the bond market provides a transmission mechanism for a company to create otherwise worthless or at least discounted equity and sell it at face value to the Fed. Sure from a balance sheet perspective it all balances, because that's how bookkeeping works, but as a practical matter it means more money available to the private sector.

throw0101a 6y ago

> The Fed is only creating bank reserves, which does not create more money. Therefore, the Fed has not been printing money. > When the Fed buys assets (government bonds, Fannies, etc.) from a bank, the bank gets back 'bank reserves', which are just a number in the bank's Federal Reserve account somewhere. The money in my saving (or chequing) account is just a number in the bank's account somewhere, but it is still "money" that I have with them. Similarly the Federal Reserve is a bank account for the banks: so your bank (BoA, Chase, Wells Fargo, etc) has money at the Fed just like I have have money at (e.g.) Citibank. Otherwise, your statement "the Feds buys assets" makes no sense: with what exactly does the Fed buy the assets if not money? "Money" in the modern economy is (1) a means of exchange, (2) a unit of account, and (3) a store of value. In this case we are using (1). Just because the "money" is in digital form does not change its essence. > […] so swapping a US Treasury with cash is just turning one type of money into another; no net creation. Can US Treasury bills be used for reserve calculation purposes? Because if they cannot, then the higher reserve accounts mean that banks would be able to create more loans (assuming they can find borrowers). While reserve holdings and T-bills may have similar net values, each may be have restrictions on how they can be used in various circumstances, which could have knock-on effects.

aidenn0 6y ago

If you were to change "US Treasuries" to "British Pounds" everything you state about liquidity &c. remains true, but it's perhaps more clearly creating new dollars that weren't there before.

dogman144 6y ago

I think you need to discuss the role of excess reserves and lending on them to make this a complete picture, actually.

whytaka 6y ago

> the bank gets back 'bank reserves' > bank's constraint against lending more is its equity reserve ratio Wait, isn't this the same reserve? IE. By putting more capital in the reserve, the banks are able to lend proportionally more?

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floatingatoll 6y ago

This helps put a bit more nuance on the two questions I wish we'd see answered from this in thirty days: What percentage of dollars issued in bank loans, whose issuance depended on this increase in Fed reserves, are expected to be issued to individual citizens who make $72,900 or less (the AMT threshold for 2020, iirc)? What percentage of dollars are expected to be issued to businesses with gross revenue of $1mil/year or less?

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