Exit is easy

David Price sent me an interesting article that he wrote for the Richmond Fed.  This caught my eye:

If banks believe that they can earn more by reducing their excess reserves, and if they appear likely to use their excess reserves to expand their activities faster than the economy is growing, the Fed can avoid the torrent of money simply by raising the interest rate that it pays on reserves. That is why high excess reserves do not necessarily set the stage for high inflation.

But is there a risk of the Fed getting the timing wrong? If it doesn’t act quickly enough to raise IOR, or if it doesn’t raise the rate enough, an unwanted rise in inflation or inflationary expectations could be the result.

For some economists, the likelihood of such a sequence of events is remote. “The FOMC [Federal Open Market Committee] meets every six weeks,” says Stephen Williamson of Washington University in St. Louis. “You’re not going to have a huge inflation instantaneously. They can head it off if they’re willing to tighten at the appropriate time.”

Ennis and Wolman of the Richmond Fed suggest, however, that high excess reserves create a greater timing challenge for the Fed than it normally faces. “Absent the excess reserves, banks would have to raise funds to make new loans,” Wolman says. “People argue about whether the large quantity of reserves materially changes the sensitivity of the economy to the Fed messing up.”

The issue is that with high excess reserves on tap, banks can increase lending quickly “” “without having to sell assets, raise deposits, or issue securities,” Ennis and Wolman wrote. Thus, they suggested, high excess reserves mean that an expansion can take place more quickly, perhaps before the Fed is ready to act on signals that it is happening.

Williamson’s right, it’s not a problem.  And the mistake Ennis and Wolman make is an interesting one.  Individual banks are not constrained in making loans in the short run, as they can always borrow needed reserves in the fed funds market.  If they do so that will put upward pressure on interest rates, and the Fed will supply the needed reserves to maintain their fed funds target.

In the long run banks are constrained, as the Fed will adjust the monetary base to prevent economic overheating.  The endogenous money folks, who are right about the period between Fed meetings, overlook this longer run problem with their theory.  Six weeks is not a long enough period to have major macroeconomic consequences.  But in the very short run the banks are not constrained by a lack of reserves, if the Fed is targeting the short term interest rate.  The base is endogenous during that period.

I was also struck by Price’s description of the onset of IOR during the fall of 2008.  Before quoting from the paper, let me explain my mindset.  Suppose you found the following account of someone’s day:

I got up and had eggs for breakfast.  Got in the car and went to the grocery store to buy some milk.  While driving down Elm Street I pulled out a AK47 and shot 3 children on a playground.  Then I went to the dry cleaners, to pick up my shirts.  I pointed out that the shirts were still a bit wrinkled, and one had a stain that had not been removed.  Then I got an oil change at Valvoline . . .

Most people would go “Whaaat!?!?!” when they read about the shooting.  That was roughly my reaction when I read Price’s matter of fact description of the Fed’s decision to pay interest on reserves, made in early October 2008:

In the Financial Services Regulatory Relief Act of 2006, Congress authorized the Fed to begin paying IOR on Oct. 1, 2011. In May of 2008, however, in the midst of the financial crisis, the Fed asked Congress to move up the effective date. During the crisis, the Fed had been carrying out emergency lending to financial institutions on a large scale. The Fed neutralized this process in monetary terms by “sterilizing” the money that it was creating; that is, as it created money, it sold the same amount of Treasury bonds from its holdings to absorb an equal amount of money. (Technically, the New York Fed, acting on behalf of the Federal Reserve System, would sell the bonds and the reserve account of the trading counterparty would be debited, causing those reserves to, in effect, disappear.) The Fed was selling off its supply of Treasury securities quickly, however, and it was foreseeable that it would run out of sufficient Treasuries with which to sterilize its lending.

“The Fed had sold so many securities that most of those left in its portfolio were encumbered in one way or another,” says Alexander Wolman, a Richmond Fed economist who co-authored a 2012 working paper on excess reserves with colleague Huberto Ennis. “Given that the Fed wanted to continue expanding its credit programs without lowering market interest rates, the answer was to start paying interest on reserves.”

Yes, given they wanted to continue expanding credit without lowering interest rates (which were at 2% at the time.)  But we are talking about October 2008!  To me that like saying; “Given I had decided to eliminate those three little children, the solution was to pull out my AK47.”

Is it any surprise the stock market crashed in early October?  I mean if you are having to go to Congress for emergency powers because the economy is going down the toilet, I’m not sure “below target interest rates” is the number one thing the Fed should have been worrying about.

PS.  I should say that despite my lame attempts at humor, the Price article itself is fine.



42 Responses to “Exit is easy”

  1. Gravatar of Squints Palledorous Squints Palledorous
    12. June 2013 at 04:41

    How does David Price find time to do this AND pitch for the Tampa Bay Rays?

  2. Gravatar of Michael Michael
    12. June 2013 at 04:53

    ” Individual banks are not constrained in making loans in the short run, as they can always borrow needed reserves in the fed funds market. If they do so that will put upward pressure on interest rates, and the Fed will supply the needed reserves to maintain their fed funds target.”

    A lot of people seem to be getting this point wrong. There seems to be an assumption that with the Fed funds rate so low, banks will not lend reserves to each other (why bother for so little return), and therefore banks that would like to lend money cannot do it because they are constrained by lack of reserves which they cannot borrow. “Evidence” for this, I guess, is an extremely low level of interbank lending of reserves. According to this argument if the Fed raised the Fed funds rate, banks would again find it profitable to lend reserves and we would see more lending.

    This is a bizarre argument (but not half as weird as the Fed trying to expand credit without lowering the FFR).

    People are very confused about the zero-bound, in the sense that they think raising rates (or keeping them above zero) will solve the zero bound problem.

  3. Gravatar of 123 123
    12. June 2013 at 05:05

    Scott, interest rates were above the target after Lehman. Indeed, due to the severe problems in interbank markets, it was not even clear what the interest rates were.

  4. Gravatar of Petar Petar
    12. June 2013 at 05:09

    So in October 2008 the Fed wanted to be more like ECB(?) Worrying about bank’s funding liquidity and keeping interest rate put as if the economy is same as some quarters ago? ECB started doing full allotment on 15th on october, a full month after Lehman…(Im not even mentioning the rate hike in the summer)

    Maybe im interpreting this wrong – im not really expert on this, but weren’t even some “failing” models indicating a slowdown?


  5. Gravatar of John John
    12. June 2013 at 05:41


    If the Fed is just looking at the past and not targeting the forecast, any type of idiocy is possible. You’ve clearly argued that point about 2008. Why are you so sanguine about it not being able to happen this time?

    Here’s anti-2008. In the summer of year 20__, inflation appears thoroughly under wraps with low oil prices due to the expansion of fracking and a large productivity boom brought about by new 3D printing technology. In their September meeting, the Fed sees that inflation is at 1% (a result of production increases not tight money!!) and decides to leave interest rates unchanged despite a surge in bank lending and a drawing down of excess reserves…

    You see where I’m going with this. Inflation numbers in the past which the Fed looks at could be misleading in either direction. Just because they were misleading to the high side in 2008 doesn’t mean the opposite couldn’t happen later.

  6. Gravatar of ssumner ssumner
    12. June 2013 at 05:46

    Michael, It would be like saying; “with gasoline prices so low, Exxon won’t want to sell consumers any gas” after a major oil discovery.

    123, Maybe for a few days, but most of the time they were below 2%. In any case, why try to prevent rates from falling? Why is that a good idea?

    Petar, Everyone knew the global economy was plummeting in late 2008, it was in the headlines every day. It was in the TIPS spreads, stock prices, etc. There wasn’t even a need for “models.”

  7. Gravatar of ssumner ssumner
    12. June 2013 at 05:48

    John, I agree that idiocy is possible, my point was that the specific technical problem that Ennis and Wolman referred to is not a problem at all, or at least it’s not specific to the IOR regime.

  8. Gravatar of Max Max
    12. June 2013 at 05:49

    “”Absent the excess reserves, banks would have to raise funds to make new loans,” Wolman says.”

    This makes my head hurt. Funding refers to liabilities (deposits, bonds, stocks, etc). Reserves are funding for the Fed, not for banks.

  9. Gravatar of Jon Jon
    12. June 2013 at 06:27

    Price makes several technical errors…

    The fed sterilized by selling bills not bonds. They started with about half of their portfolio in bills. Price suggests they ran out of treasury paper to sell but this is false. They still had 500B in notes and bonds. The “encumbered” portion he describes is a small sliver of the tBill holdings that was left.

    Rather than continue sterilizing by selling the longer date issues, the fed turned to supplemental funding account (using treasury sales of debt to sequester reserves). Then they turned to IOR.

    All the while, their pile of notes and bonds remained.


    Operating procedure. Contrary to academic teachings, the fed viewed its notes and bonds as being the primary open market tools of monetary policy. Whereas it viewed its holdings of tbills as a complement to discount window to sterilize discount window activity. The auctions to banks stood in the place of the discount window which had a stigma.

    Why do these details matter? Because they speak to the mind set of the fed at the time having a singular focus on liquidity as the crisis. The fed completely missed that expectations of an recession were driving a solvency crisis which in turn drove the liquidity crisis.

    They viewed themselves as having the hand off the monetary policy lever rather than viewing their portfolio and the money supply holistically. Functional fixedness ruled the day, and that functional fixedness tells us what they were thinking.

  10. Gravatar of 123 123
    12. June 2013 at 07:06

    there were two problems at that time. First, their interest rate decisions were wrong. Second, markets feared that the actual rates are going to be higher than the targets. IOR has nothing to do with the first problem as it was just a technical measure, and it helped with the second one.
    Most of the time market forecast of interest rates was higher than the target, it is only for a brief period in November 2008 when markets forecasted rates lower than FFR target. This brief period ended when the fed equalized the FFR and IOR rates. It was a mistake, they should have cut the FFR rate instead, which they did after a week or so.
    So please do argue that interest rate targeting is the cause of the crisis. But IOR is a measure which you use to reduce the harm of interest rate targeting.

  11. Gravatar of jknarr jknarr
    12. June 2013 at 07:30

    First, the Fed Funds interbank market had a major advantage in that it was a market mechanism. Perhaps reserve scarcity and interbank trading will again accelerate with lending, but I am not holding my breath. There is no comparable market feedback for IOR, which makes the decision matrix more opaque and error-prone. Hence, not so easy. They certainly can, but like a sledgehammer, not like tweezers.

    Second, the Fed has a remarkable pattern of power grabs early in crisis, which very likely causes the crisis. IOR in ’08, and abandoning the commercial paper market in ’29-’34 in favor of Treasurys. They changed the entire terms of monetary provision at a stroke, and coincidentally consolidated power in DC, at the expense of economic meltdown and unemployment for the rest of us.

    Just as Treasurys on the Fed balance sheet profoundly changed the shape of monetary-fiscal policy outcomes, so will IOR – in more ways than we expect. I look for federal reserve commercial banks reintermediation, which will swallow much of the capital-money markets.

  12. Gravatar of Doug M Doug M
    12. June 2013 at 07:52

    I see a few almost unrelated elements in this post to comment on.

    Fed exit — yes it is easy enough for the Fed to raise interest on reserves. It is easy enough for them to sell Treasury securities, too. Tightening is tightening.

    The question is if they can achieve the “soft landing.” I know that you have enormous confidence in the Fed’s ability to hit a GDP target. I don’t share that confidence. The Fed has had mixed results in achieving the soft landing, pulling it off in 1994 (but killing us bond investors) and failing in 1999, briefly seeming to have done it ’06 before hitting the floor.

    Sterilized intervention in ’08. Why did the feel the need to sterilize? I wondered then, and I wonder about it now. The times called for unsterilized intervention. Japan performed a sterilized intervention on the currency in the late ’90s. I puzzled on the merits of sterilization, then too.

    As we have pointed out, IOR has a tightening effect on money. Why does the Fed run an extraordinary QE program on one hand and tighten with the other. They are short-circuiting themselves.

  13. Gravatar of Tom Brown Tom Brown
    12. June 2013 at 07:58

    @ssumner, I have a question about this statement of yours:

    “Individual banks are not constrained in making loans in the short run, as they can always borrow needed reserves in the fed funds market. If they do so that will put upward pressure on interest rates, and the Fed will supply the needed reserves to maintain their fed funds target.
    In the long run banks are constrained, as the Fed will adjust the monetary base to prevent economic overheating.”

    What exactly do you mean by “monetary base” and is it different than what you mean by “reserves?”

    In the long run, if the Fed is targeting an inflation rate, then I can see where it would make adjustments to the Fed funds target, and likewise “supply the needed reserves to maintain their fed funds target” between “six-week” meetings.

    So if the Fed is adjusting its target every six weeks, and between times using OMOs or repos or discount window loans to adjust bank reserve levels to hit its Fed funds target rate… isn’t the “monetary base” (reserves?) determined by the Fed’s activity in supporting this series of FFR targets?

    Or have I gone wrong in assuming that

    reserves = monetary base

    Now technically bank vault cash is considered reserves, and as far as I know

    monetary base = vault cash + bank electronic Fed deposits + cash in circulation

    The first two items in this summation are forms of reserves (i.e. bank vault cash and bank electronic Fed deposits, although banks don’t get IOR on their vault cash).

    That means we can simplify and write:

    monetary base = bank reserves + cash in circulation

    So is the distinction the “cash in circulation?” If so, how would things be different (if the Fed were targeting inflation in the long run, and the FFR in the short run) if there was no cash? In other words, if we lived in a cash-free world, so that

    monetary base = bank reserves

    would you modify your statement here? Does it all come down to the existence of cash?

  14. Gravatar of Robert Robert
    12. June 2013 at 08:12

    Why some Post-Keynesians get angry?

  15. Gravatar of Cullen Cullen
    12. June 2013 at 08:23

    “In the long run banks are constrained, as the Fed will adjust the monetary base to prevent economic overheating.”

    This is incorrect and incredibly important. The Fed will not adjust the base to ease lending. In fact, less QE won’t impact loans at all.

    And if the Fed wants to raise the Fed Funds Rate they’ll just raise the IOR rate. Scott, your entire understanding is wrong.

  16. Gravatar of ssumner ssumner
    12. June 2013 at 08:48

    Jon, Very good points.

    123, I was comparing fed funds rate to the target, not the forecast of future fed funds rates to the target.

    In any case, my post addressed a different issue—why worry if rates fall?

    jknarr, Yes, they have a history.

    Doug, You said;

    “The question is if they can achieve the “soft landing.” I know that you have enormous confidence in the Fed’s ability to hit a GDP target. I don’t share that confidence. The Fed has had mixed results in achieving the soft landing, pulling it off in 1994 (but killing us bond investors) and failing in 1999, briefly seeming to have done it ’06 before hitting the floor.”

    This slightly misrepresents my views. They were not targeting NGDP in 1999. I’ve never claimed that the Fed’s operating technique prior to 2007 could prevent recessions.

  17. Gravatar of Robert Robert
    12. June 2013 at 08:48

    What do you think about the arguments of George Selgin in favor of god deflation?: http://www.youtube.com/watch?feature=player_embedded&v=S28ZMlR-gh0#at=736

  18. Gravatar of ssumner ssumner
    12. June 2013 at 08:55

    Tom, You said;

    “What exactly do you mean by “monetary base” and is it different than what you mean by “reserves?””

    The base is simple cash plus reserves. No, I would not modify my statement if the base was 100% reserves.

    BTW, prior to 2008 the base was more than 95% cash, reserves were trivial.

    I suppose you could say that the base supports a series of ffr targets, but that’s not very illuminating. It’s better to think of the ffr targets adjusting in such a way that the base adjusts in such a way as to target the price level.

  19. Gravatar of ssumner ssumner
    12. June 2013 at 08:56

    Robert, I commented on that earlier. I agree with some of his arguments, not others.

  20. Gravatar of David Pinto David Pinto
    12. June 2013 at 09:05

    In reply to the first comment, Price is on the disabled list so he has plenty of time to pursue economics. 🙂

  21. Gravatar of colin colin
    12. June 2013 at 09:54

    “Adjusting the monetary base will not necessarily have any impact on the amount of loans the banking system can make.”


  22. Gravatar of Tom Brown Tom Brown
    12. June 2013 at 10:34

    @ssumner, thanks for your response. I follow you up until:

    “…as to target the price level.”

    Can you elaborate a little bit on that? Thanks!

  23. Gravatar of ssumner ssumner
    12. June 2013 at 10:57

    Cullen, Prior to 2008 the Fed did monetary policy by adjusting the supply of the medium of account. Now they adjust both the supply and the demand (QE and IOR).

    Colin, I’m afraid that post gets it wrong, but then almost everyone does. I’d suggest looking at this post if you want to understand money multipliers;


    There are all sorts of factors that play into the effect of changes in the base. Is it exogenous, or responding to a change in base demand? Is it temporary or permanent? Are you looking at the effects on nominal or real bank lending? Is it accompanied by a change in IOR? Are you at full employment? Etc, etc. Most observers, including that post, just fixate on one tiny part of the big picture.

    Tom, Suppose prices are rising too fast. Prior to 2008 the Fed would reduce the monetary base to slow the inflation (more precisely, they’d signal that they intend to reduce the growth rate of the monetary base over time–there is no instantaneous change.) This is done by raising the ffr target. In the future they might also raise the IOR.

  24. Gravatar of 123 123
    12. June 2013 at 11:20

    Scott, I agree with you in a sense that it would have been better if they targeted FFR range from 0 to 2 percent. Or even better, decided to cut rates to zero late summer. But that’s not what FOMC decided.
    And you should really care about the problem where FFR market forecasts had gone mad after Lehman.

  25. Gravatar of Tom Brown Tom Brown
    12. June 2013 at 14:36


    What is “nominal bank lending” as opposed to “real bank lending?”

  26. Gravatar of Spencer Spencer
    12. June 2013 at 15:25

    Contrary to the conventional wisdom, reserves are binding (be they prudential or otherwise). Every major downdraft in the economy, & every major downdraft in the financial markets, was the direct result of decelerating or negative rates-of-change (roc’s) in required reserves (RRs). The CBs are legally required to hold reserves contingent upon the level of transaction based accounts 30 days prior.

    “The close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits” – Daniel Thornton

    And 93%-96% of all demand drafts clear thru transaction based accounts (not thru M2). Further, roc’s in RRs mirror roc’s in nominal-gDp (though its R^2 is lower than bank debits). Manmohan Singh’s & Peter Stella’s papers on this are disingenuous.

    I.e., for the last 100 years, the lag effects for money flows have been mathematical constants. The 10 month roc in RRs equals the proxy for real-output & the 24 month roc in RRs equals the proxy for inflation. This is inviolate & sacrosanct. Bankrupt you Bernanke caused the Great-Recession by himself (regulatory malfeasance notwithstanding).

  27. Gravatar of W. Peden W. Peden
    12. June 2013 at 16:04

    Spencer (flow5, I presume?),

    Reserves are important even in banking systems with no reserve requirements: the UK, Canada, New Zealand, Sweden and Australia all have no legally binding reserve requirements, yet hold reserves. Reserves are held by banks (under normal circumstances) because deposits are claims on reserves.

  28. Gravatar of Tom Brown Tom Brown
    12. June 2013 at 16:38

    @W. Peden,

    Let’s take Canada for example. Do you happen to know the average ratio of reserves held in aggregate by the Canadian commercial banks to the demand deposits held in aggregate by the Canadian banks?

    If you don’t know the Canadian numbers, any other country will do. I’m just curious what that ratio is typically in a country with no reserve requirements.

  29. Gravatar of Tom Brown Tom Brown
    12. June 2013 at 16:52

    @W. Peden,

    Adding to my question, is the answer different during the day compared to what’s held on an overnight basis? The reason I ask is because in the US a bank can overdraft its Fed deposit during the day if it pays it back by the end of the day. If Canada has similar rules and they have overdrafts during the day which are mostly resolved by the end of the day (through intra-bank lending), then that would be interesting to know. I’ve seen Nick Rowe get into a discussion about this on his blog with somebody that was very familiar with the details and it sounded like they have some sort of automated system in Canada matching reserve borrowers with lenders to minimize the amount of overnight reserves held by the banks, but it was a little tough to tell since I really just skimmed through those posts.

  30. Gravatar of Benjamin Cole Benjamin Cole
    12. June 2013 at 21:38

    Phd economists have lost their minds.

    Yeah, that is what I sit around and worry about: That banks will start lending too aggressively, setting of an economic boom. I lose sleep over this.

    I don’t worry about other things.

    Not that getting the economy up off the ZLB ice will be hard; in fact, Japan never has. No worries.

    Not that the USA economy is glacially growing, and not enough to put people to work. No worries. Those people can get SSDI. And they are.

    I worry about robust bank lending.

    Side Note: What is with the antique FOMC meeting every six weeks? Surely, a Fed chief who makes decisions with information online and real-time is a better way to go. Would anyone run a business this way?

  31. Gravatar of W. Peden W. Peden
    13. June 2013 at 03:19

    Tom Brown,

    The short answer is “No”, but Wikipedia says that, in 1998, the average UK bank cash reserve ratio was 3.1%.

    For Canada, I suppose the folks over at Worthwhile Canadian Initiative would be the first people to ask.

    Incidentally, Wikipedia also notes that there are no reserve requirements in the US for (a) foreign corporations or (b) governments, or for small financial institutions. Wikipedia also contains the hilarious line-

    “The timesÐ’, when banks ask for reserves, the central bank obliges. Reserves therefore impose no constraint.”

  32. Gravatar of W. Peden W. Peden
    13. June 2013 at 03:20

    Tom Brown,

    “Adding to my question, is the answer different during the day compared to what’s held on an overnight basis?”

    The short answer is that I don’t know.

  33. Gravatar of flow5 flow5
    13. June 2013 at 04:51

    W. Peden:

    Never confuse liquidity reserves with legal reserves (though prudential reserves exhibit similar behaviors). E.g., the prudential reserves of the Euro-dollar banks consist of various U.S. dollar-denominated liquid assets (U.S. Treasury bills, U.S. commercial bank CDs, Repurchase Agreements, etc.) & interbank demand deposits held in U.S. banks. All prudential reserve banking systems have heretofore “come a cropper”.

    In 2008, the reciprocal currency arrangements were established too late, & then were underfunded, causing the prudential reserve E-D market to implode, & the dollar’s exchange rate to strengthen.

  34. Gravatar of W. Peden W. Peden
    13. June 2013 at 05:12


    Actually I was specifically thinking of cash reserves (i.e. banks’ holdings of base money) whether legally required or not.

  35. Gravatar of ssumner ssumner
    13. June 2013 at 07:57

    123, I don’t care about ffr forecasts, I care about NGDP forecasts.

    Tom, It’s just bank lending in nominal and real terms. I’m not sure what you are asking.

    Spencer, ???????

  36. Gravatar of jknarr jknarr
    13. June 2013 at 09:43

    Flow5 — would you please point out a “legal reserve” time series? One look at the data would be worth many corrections of confusions.

  37. Gravatar of flow5 flow5
    13. June 2013 at 10:50


    Agreed. I’ve watched reserves since 1973 (after Pritchard, Ph.D., economics, Chicago 1933 explained their significance).

    But (1) e-mail 11/16/06: “Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…” senior V.P. Fed’s technical staff (Big Brother is watching). And (2) “Donald Kohn “I know of no model that shows a transmission from bank reserves to inflation”

    So you see the problem? Yes, I maintain a time series (for trading purposes), & it has to be periodically reconstructed (e.g., Reserve Simplification 7/11/13). I.e., it’s R^2 is affected as the weighted arithmetic average of reserve ratios & reserveable liabilities remains constant.

    Manmohan Singh, Peter Stella tried to make some kind of point: “that from 1981 to 2006 total credit market assets increase by 744%”. But Inter-bank demand deposits owned by the member banks held at the District Reserve banks fell by $6.5 billion?

    There are two different reserve figures. The BOG’s reserve figure fell by 61% from 1/1/1994-1/1/2001. The FRB-STL’s figure (based on its RAM calculations), remained unchanged during the same period. And the CBs ceased to be reserve “e-bound” c. 1995 (roc’s still work regardless).

    S&S neglect to point out that increasing levels of vault cash (ATM networks) & retail & commercial sweeps programs, etc., contributed to the decline.

    I’ve probably got something you could review in my Excel files – so give me an idea what your looking for.

  38. Gravatar of flow5 flow5
    13. June 2013 at 12:01

    The BEA’s latest estimate for the decline in real-gDp for the 4th qtr of 2008 was a decrease of 8.9%. I posted this in Dec 07 as the Commerce Department was saying retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006:

    POSTED: Dec 13 2007 06:55 PM |
    10/1/2007,,,,,,,-0.47,,,,,,, -0.22 * temporary bottom
    11/1/2007,,,,,,, 0.14,,,,,,, -0.18
    12/1/2007,,,,,,, 0.44,,,,,,,-0.23
    1/1/2008,,,,,,, 0.59,,,,,,, 0.06
    2/1/2008,,,,,,, 0.45,,,,,,, 0.10
    3/1/2008,,,,,,, 0.06,,,,,,, 0.04
    4/1/2008,,,,,,, 0.04,,,,,,, 0.02
    5/1/2008,,,,,,, 0.09,,,,,,, 0.04
    6/1/2008,,,,,,, 0.20,,,,,,, 0.05
    7/1/2008,,,,,,, 0.32,,,,,,, 0.10
    8/1/2008,,,,,,, 0.15,,,,,,, 0.05
    9/1/2008,,,,,,, 0.00,,,,,,, 0.13
    10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
    11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
    12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
    Trajectory as predicted:

  39. Gravatar of Tom Brown Tom Brown
    13. June 2013 at 12:30

    @ssumner …or anybody: this should be an easy one!

    I was referring to your sentence here:

    “Are you looking at the effects on nominal or real bank lending?”

    then you explained, when I asked the difference:

    “It’s just bank lending in nominal and real terms”

    Here’s what I understand about nominal GDP:

    NGDP = real GDP + inflation

    So then by analogy do we have:

    nominal ($ amount of) lending = real lending + inflation

    Sorry if my questions are at a low level here! … Just trying to understand.

  40. Gravatar of Spencer Spencer
    14. June 2013 at 04:12

    Those who don’t follow legal reserves aren’t aware that the Fed overlays their data. Any given a shortfall in RRs will be masked by the Fed’s attempts to rebalance the system. The flash crash of May 6th 2010 was the direct result of the Board’s mismanagement of the money stock. The 8% drop in RRs prior to the crash was later erased to reflect an increase in RRs. Anyone trying to run a time series will be fooled. I.e., the banks respond immediately to an injection of liquidity.

  41. Gravatar of 123 123
    14. June 2013 at 08:30

    When financial market forecasted rates that were higher than Fed intended as they feared that money markets are out of control by the Fed, this meant monetary policy was tighter than Fed fed intended, and NGDP forecasts crashed, as we know pretty well.

  42. Gravatar of ssumner ssumner
    14. June 2013 at 08:46

    Tom, Sorry, but I just don’t have time to teach the basics. I get a zillion comments. No, NGDP does not equal RGDP plus inflation. I’d suggest brushing up on basic macro with an intro text–they explain real and nominal variables.

    123, Yes, which is why the Fed needed to have a more expansionary policy.

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