Time to abolish interest on reserves

Patrick Sullivan directed me to a very interesting essay by Ben Bernanke.  As you’d expect, the article is well thought out and mostly accurate.  But there is one issue on which I strongly disagree:

Prior to the crisis, the Fed set short-term interest rates through open-market operations that varied the quantity of bank reserves in the system, a technique which involved on average low levels of reserves—perhaps $10 billion or so. Today, the level of bank reserves is much higher, which makes it impossible to manage interest rates through small changes in the supply of reserves. Instead, the Fed manages short-term interest rates by setting certain key administered interest rates, such as the rate it pays bank on reserves held with the Fed. This “floor system” (called that because rates like the interest rate on bank reserves set a floor for the policy rate) was adopted out of necessity but seems to be gaining favor with the FOMC as a better way to manage monetary policy.

The phrase “adopted out of necessity” caught my attention.  I think this is a very misleading way to describe what Ben Bernanke and I both think happened in October 2008. Presumably Bernanke means that given the Fed had decided to inject a large amount of reserves into the banking system in September 2008, and given the Fed had decided that it was unwise to reduce the interest rate target below 2% in September 2008, the IOR policy was necessary to keep the market fed funds rate close to the policy target.  But I think the average reader would not understand this very restrictive meaning of “necessity”.  The average reader might assume that Bernanke was saying something more like, “looking back on things, the imposition of IOR in October 2008 was necessary to meet the Fed’s policy mandate.”  In fact, it was just the opposite.  The decision to adopt IOR helped to prevent the Fed from achieving its policy goals, by making the Great Recession more severe than otherwise.  That’s not just my opinion; unless I am mistaken that’s the implicit message of Bernanke’s memoir, where he indicated that, in retrospect, the Fed did not move quickly enough to cut rates in the fall of 2008.

The world would be a better place today if the Fed had never instituted its policy of IOR in 2008.  I really don’t see how anyone can seriously dispute this claim.  If you want to dispute the claim, what specific way did IOR make the world a better place? When the policy was adopted in 2008, the New York Fed explained it to the public as a contractionary policy.  Can anyone seriously argue that the world would be worse off if monetary policy had been less contractionary in 2008-12?  Why?

Now of course its possible that in the future a policy of IOR could be helpful, and Bernanke provides several reasons:

As I noted here, there are reasonable arguments for keeping the Fed’s balance sheet large indefinitely, including improving the transmission of monetary policy to money markets, increasing the supply of safe short-term assets available to market participants, and improving the central bank’s ability to provide liquidity during a crisis.

What Bernanke sees as an advantage, I see as a disadvantage.  In a technical sense, the Fed actually has more ability to add liquidity in a world without IOR, because the balance sheet will be smaller at the onset of a crisis, and hence have more room to grow to its effective maximum size.  Presumably Bernanke would respond that IOR allows the Fed almost unlimited ability to inject liquidity without sacrificing their other macroeconomic targets.  In other words (a cynic might say), IOR will allow the Fed to make the same mistake in future crises that they made in October 2008—trying to rescue Wall Street without rescuing Main Street.  OK, that’s probably too cynical, but I think it’s important for people to think about Bernanke’s argument in terms of what happened in the Great Recession.  Bernanke may be 100% correct with regard to future crises, but it’s clear that his rationale for IOR was 100% wrong for 2008.

In my view the Fed should refrain from IOR, and I hope that causes the Fed to focus like a laser on macroeconomic stability.  If the problem is solvency, then leave bailouts of banks to the Treasury or FDIC, or better yet, don’t bail out banks at all.  There are some very promising proposals being developed that would allow for bondholders to be “bailed in” via debt to equity conversions during a crisis.  If we move away from IOR, it’s more likely that the authorities will be forced to come up with an alternative method for dealing with large bank failures.  As long as the Fed is supplying enough liquidity to keep expected NGDP growth at about 4%, I’m not at all worried about bank failures—let them fail.

If the banking system has a problem of liquidity but not solvency, then the usual Bagehot rules apply. IOR is not needed, as the size of base injections appropriate for meeting a surge in demand for liquidity is the same as the size of base injections needed to keep NGDP on track.  If banks truly do “need” more liquidity, then injections of liquidity will not be inflationary.  Let base supply grow as base demand grows.

My second reason for opposing IOR is that it moves us even further away from a quantity theoretic approach to monetary policy.  The Fed already puts too much focus on nominal interest rates when considering the stance of monetary policy—IOR will make this problem even worse.  One of the causes of the Great Recession was that low interest rates led the Fed (and almost everyone else) to falsely assume that policy was “accommodative” in 2008 and 2009, when it fact it was highly contractionary.  With IOR, the quantity of money is even less informative. Let’s go back to the pre-2008 situation, where 98% of the base was currency.



76 Responses to “Time to abolish interest on reserves”

  1. Gravatar of Jerry Brown Jerry Brown
    14. March 2017 at 18:19

    I think I agree with everything you say here, which might concern you 🙂

    One question- is there really a reason to worry about the size of the Fed balance sheet?

  2. Gravatar of ssumner ssumner
    14. March 2017 at 18:55

    Jerry, Not really, unless it’s so big they are buying stocks, junk bonds, etc.

  3. Gravatar of dtoh dtoh
    14. March 2017 at 18:59

    Agree and would also note and comment.

    1. I have repeatedly said that when looking at policy you need to look at MO – ER. If I recall correctly, you were dismissive of that earlier, but at least now you recognize that looking just at MO is not informative. Good for you.

    2. If banks need liquidity, the Fed can easily lend money or most of the time just say they are willing to lend money. IOR is an extremely round about way of providing liquidity.

    3. I think the biggest problem with IOR is that it allows critics of the Fed to claim Fed policy is ineffective by arguing that the Fed injected $2 trillion into the system and it had minimal effect.

    As I have said repeatedly the only thing that matters is how much assets the Fed buys from the non-financial sector.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. March 2017 at 19:24

    ‘My second reason for opposing IOR is that it moves us even further away from a quantity theoretic approach to monetary policy. The Fed already puts too much focus on nominal interest rates when considering the stance of monetary policy—IOR will make this problem even worse.’

    I’m not so sure you’re right about that. It could be that IOR, used to adjust the amount of money circulating via banks, is MORE ‘quantity theoretic’ than targeting the Fed Funds rate.

    In fact, Bernanke is admitting that the FFR is more or less moot now. Something I’ve been saying for a while.

  5. Gravatar of dtoh dtoh
    14. March 2017 at 19:36


    I’m agreeing with what you say, but I think the FFR is useful but only if you know what the rate is relative to the Wicksellian rate.

    I also agree that with such a huge balance of ER. The Fed could use IOR instead of OMO as their primary policy tool for the foreseeable.

    Further, I don’t think you actually need ER as policy tool. The Fed could simply adjust required asset/equity ratios to force the banks to lend more or less. You don’t really need a separate institution to implement monetary policy, you could do it entirely through commercial institutions with the Fed just setting asset/equity rations and acting as lender of last resort.

  6. Gravatar of Benjamin Cole Benjamin Cole
    14. March 2017 at 19:58

    Excellent blogging!

    But 2017 is a lot like 2008 in one regard: The Fed is still too tight.

    BTW, real estate markets have flattened. Bank lending gone flat too. Time to raise rates?

    PCE YOY at 1.7% and the Fed supposedly has a 2% average target, undershot for years.

    Would 2.5% on the PCE for a few years be the right policy? Why not?

    Scott Sumner has posited the Fed, a public agency, was too tight in 2008, and asked about institutional biases. Has anything changed in eight years?

    Is the USDA different from eight years ago, or still pro-ag industry-rural subsidy?

    Does the Defense Department say threat levels are much reduced from eight years ago? Will they ever say that?

    Is the Fed a different animal than eight years ago? Or even more ossified?

  7. Gravatar of Jerry Brown Jerry Brown
    14. March 2017 at 20:21

    Benjamin Cole, you have a lot of good questions that I do not know the answers to but would like to learn also.

    I would just say that I think a 5% NGDPLT would be better than a 2.5% PCE target, which, in itself, would be better than current policy (apparently) of 2% PCE ceiling.

  8. Gravatar of Ray Lopez Ray Lopez
    14. March 2017 at 21:09

    Sumner: “The phrase “adopted out of necessity” caught my attention.
    – a routine cliche caught Scott’s attention? Wow, Scott is nuts. Every little word takes on a new meaning because of the movie playing in his mind, where in 2008 if only Bernanke had injected a bit more money into the economy, we’d all be OK now. Poor Scott. I feel sorry for the man. He’s caught in a loop like in the film Groundhog Day. I really should not troll him with stuff about money neutrality (even if true). Really, the man is bonkers. Henceforth I am turning a new leaf. I will be a lot more polite with Sumner, as befitting talking to a crazy man.

    “I told my wife the truth. I told her I was seeing a psychiatrist. Then she told me the truth: that she was seeing a psychiatrist, two plumbers, and a bartender.” ― Rodney Dangerfield

  9. Gravatar of Cloud Yip Cloud Yip
    14. March 2017 at 22:21

    I agree with your argument that “The Fed already puts too much focus on nominal interest rates when considering the stance of monetary policy—IOR will make this problem even worse.”

    But I still think that IOR can give the Fed a technical advantage in controlling the monetary stance. For example, this work by Ricardo Reis argues that targeting IOR can help pinned down the inflation rate, at least theoretically: http://en.econreporter.com/en/2017/02/ricardo-reis-explains-central-banks-can-use-interest-reserve-target-inflation/

    “… reserve is a very special asset that has one particular property – reserves are the unit of account in the economy. One dollar of reserves defines what the dollar is. It is one unit of deposit in the central bank that defines what a dollar is…

    …Now imagine that instead of promising to pay them the nominal interest rate, you promise that the interest rate, i.e. the remuneration of the reserves, is indexed to the price level. So, in de facto, the reserve essentially pay a real payment in the same way that the inflation-indexed government bonds do…

    …If the central bank promises a real payment, under the no-arbitrage condition, this pinned down the real value of the reserves today, as the real payment tomorrow divided by the real value (of the reserve) today is equal to the real return (of the economy)…

    … back at the beginning, we realized that the reserve is worth a dollar. So, if we have pinned down the real value, what also have we pinned down? We have pinned the price level. This is because the real value of one dollar of reserves is precisely given by the price level.So, by choosing this remuneration of reserves, and making it a real payment indexed to the price level, you have de facto pinned down the real value of reserve today, which is nothing but the price level…”

    My argument is actually IOR may be a technically better option as a monetary tool. The problem is that neither IOR, FFR not inflation rate is a good measure of monetary stance.

    So, instead of abandoning them as a monetary tool, we can adopt them as a tool, but just change to a better measure of monetary stance, namely the NGDP of the economy.To some extents, those tool can even help us better control the NGDP, and its balance between inflation and Real Growth.

  10. Gravatar of Michael Byrnes Michael Byrnes
    15. March 2017 at 02:41

    Off topic question:

    Thoughts on this monetary policy idea from John Cochrane:


  11. Gravatar of flow5 flow5
    15. March 2017 at 03:54

    Ha ha. Neither you nor Bernanke knows a debit from a credit. Enough said.

  12. Gravatar of flow5 flow5
    15. March 2017 at 03:58

    Bernanke mentions Bagehot 10 times in his book. Under Volcker, when inflation needed quelled the discount rate was not a penalty rate. But under Bernanke, when the bottom was falling out, the discount rate was a penalty rate. How stupid.

  13. Gravatar of Fred Fred
    15. March 2017 at 04:01

    Ray Lopez, you said:

    “Every little word takes on a new meaning because of the movie playing in his mind, where in 2008 if only Bernanke had injected a bit more money into the economy, we’d all be OK now. Poor Scott.”

    This is a distortion of Scott’s position. Did you not read his piece from the other day? Go read it: it’s entitled ” Complacency,” and in it he reiterates once more that he DOES NOT believe this to be the case, i.e., that more aggressive QE/guidance would not have done the trick, regime change was necessary. I’ve been a longtime reader of his, and this is a position I’ve seen him consistently articulate. It’s probably why people often label him, much to his displeasure, as “the NGDP guy.”

  14. Gravatar of Alex Godofsky Alex Godofsky
    15. March 2017 at 05:24


    Given the way the Fed has actually behaved in the recent past, I agree with this, but I think there is a case against it.

    In the world where IOR is paid at the policy rate, the distinction between reserves and short-term government bonds essentially vanishes. This is obviously a problem for a quantity-theoretic monetary policy but it in some ways simplifies an interest-rate-based policy, which can then be implemented essentially by fiat without even OMOs. And while there are a lot of cognitive traps lying around an interest-rate-based policy, we do know that it is capable of being done correctly (Krugman 98); I don’t see any clear reason it couldn’t be used to implement NGDPLT.

    More abstractly, the weakness I see in the quantity-theoretic policy is it means that the central bank’s ultimate power lies in the slim wedge between the rate of return on reserves and the rate of return on short-term government debt. And I’m worried that this is growing less and less powerful over time, not just because of the secular decline in nominal interest rates but because the financial sector seems to have increasingly transformed this debt and other “safe assets” into pseudo-money. This led to the (IMO fairly confused but indicating a real thing) complaints about a “safe asset shortage” during the recession. When you buy pseudo-money with reserves you aren’t really increasing the “money supply” nearly as much as it looks, and possibly barely at all.

  15. Gravatar of Benjamin Cole Benjamin Cole
    15. March 2017 at 05:25

    Ray Lopez–love the Rodney D. joke.

    I tell you I do not get any respect, no respect at all. I walked down to the local drugstore and a little short guy held me up with a knife that still had peanut butter on it. I don’t get any respect at all.

  16. Gravatar of ssumner ssumner
    15. March 2017 at 06:10

    dtoh, I think you missed my point. I agree that currency is more informative than the base, when you have IOR. My point was that currency is still not the right indicator of the stance of monetary policy. Rather it makes the transmission mechanism more transparent than an interest rate oriented approach.

    Patrick, Where is Bernanke saying that interest rates don’t matter? Perhaps he said that IOR is a better indicator than the fed funds rate—but that’s still an interest rate.

    Cloud, Excellent comment. That system was first proposed by Robert Hall back in 1983. I could support that sort of IOR, which is similar in spirit to my NGDP targeting proposal.

    Michael, Robert Hetzel proposed that back in 1989. It’s an interesting idea, but I like the futures market approach better, as the TIPS spread can be distorted by liquidity shocks.

    Alex, I agree that monetary policy can be done with IOR, my complaint is that 2008-type mistakes are more likely to occur with an interest rate approach to policy. With a quantity theoretic approach you do not have to convert to a completely separate regime at the zero bound, you just keep doing OMOs.

  17. Gravatar of Majromax Majromax
    15. March 2017 at 06:19

    Interest on reserves is not a bad policy regime: the Bank of Canada manages just fine by paying a discount rate that is currently 0.25% less than its target for the interbank rate.

    The policy “innovation” of the Fed is to maintain an interest rate on reserves that is well in excess of the effective Federal Funds rate.

    With this foolish gift of arbitrage, the Fed broke the interbank lending mechanism: interbank lending levels (in raw, nominal terms!) are an order of magnitude lower than persisted before the financial crisis (the scale of that graph may be incorrect when the link is opened: I’m looking at the 20y period from 1997 to present).

    About a third of this fall in interbank lending has occurred since 2014, so it’s not just a response to the financial crisis itself.

  18. Gravatar of SG SG
    15. March 2017 at 06:20

    Yeah it’s absolutely stunning how the financial press has sent the original justification for IOR down the memory hole, even though the official explanation for IOR was that it made policy contractionary. It’s all right there on the Fed’s website: http://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/


    Paying interest on reserves gives policymakers more control over the federal funds rate

    The Fed’s new authority gave policymakers another tool to use during the financial crisis. Paying interest on reserves allowed the Fed to increase the level of reserves and still maintain control of the federal funds rate. As the Board’s website states, “Paying interest on excess balances should help to establish a lower bound on the federal funds rate.” The Board’s October 6, 2008, Press Release described the new policy this way:

    The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.

    This was compelling in the months after September 2008, as the financial crisis deepened, Fed lending from the discount window soared, lending from the newly created liquidity facilities spiked, and excess reserves climbed into the hundreds of billions of dollars range, far exceeding depositories’ required reserves.

    In this situation, the Federal Reserve Bank of New York said that the Open Market Desk

    …encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate.

    Essentially, paying interest on reserves allows the Fed to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves.12 This allows the Desk to keep the federal funds rate closer to the FOMC’s target rate than it would have been able to otherwise.

  19. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    15. March 2017 at 07:43

    Dr. Sumner,

    1) The Federal Reserve Bank (FRB) began the effort to be allowed to offer interest on reserves (IOR) long before 2008. IOR was first proposed by Dr. Milton Friedman almost exactly fifty years ago in “A Program for Monetary Stability” [1]. Dr. Friedman’s goal was to reduce the degree of control that the Federal Reserve Bank over commercial banks (“The Chicago Plan”) to make a 100% reserve system. Dr. Friedman wrote:”[The Chicago Plan] would be necessary to go in the radical direction of eliminating controls over individual banks, in the direction of 100% reserve banking. This move would tend to eliminate all control over the lending and investing activities of banks and would separate out the two functions of banking….On the one hand, we would have banks as depository institutions, safe-keeping money and arranging for the services of transferring liabilities by check. They would be 100% reserve banks, pure depository institutions… our present banks would be sliced off into other branches operating like small – scale investment trusts. They would be lending and investment agencies in which private individuals would invest funds as they now do in investment trusts and other firms, and these funds would be used to make loans. Such organizations could be completely exempt from the kind of detailed control over financial activities that banks now are subject to.”

    Dr. Friedman believed that paying interest on reserves would for the half of the new banking system that was strictly savings oriented would create greater price stability. So the idea is an old one that does not have its roots in the Crash of 2008 or the Great Recession.

    2) The FRB has been working for nearly 20 years to make Dr. Friedman’s proposal for IOR a reality. Their current authority was introduced into legislation in 2001 in what later became the Financial Services Regulatory Relief Act of 2006 [2]. The FRB did not have authority to offer IOR under the Federal Reserve Act. IOR was not supposed to go into effect until 2011 but with the Crash of 2008, the FRB was able get emergency legislation through congress to allow them to offer IOR immediately [3].

    3) The FRB did not really have the sort of emergency response to an economic melt down in mind when it proposed adopting Dr. Friedman’s idea of IOR and proposed it to Congress. IOR was a useful tool in as much as it did allow the FRB vastly increase the supply of narrow money / monetary base (M0). Between September 2008 and September 2014 the supply of M0 quadrupled from 950 BUSD to 4,084 BUSD [4]. This created intense inflationary pressures. This was important as monetary velocity was decreasing quite rapidly at the time [5]as was Nominal Gross Domestic Product[6]. These were indicators of intense deflationary pressures [7]. However, by creating these inflationary pressures the FRB were able to counter-balance the deflationary pressures. While inflation remained tepid at best, there was little outright deflation.

    Without IOR this would not have been possible.

    [1] http://bit.ly/1AAHb6v

    [2] http://bit.ly/1F2KLO7

    [3] http://bit.ly/17SIG0G

    [4] http://bit.ly/2msPvp1

    [5] http://bit.ly/29gv8rZ

    [6] https://fred.stlouisfed.org/graph/fredgraph.png?g=d1Dy

    [7] https://fred.stlouisfed.org/graph/fredgraph.png?g=d1DD

  20. Gravatar of Patrick Sullivan Patrick Sullivan
    15. March 2017 at 07:47

    ‘Patrick, Where is Bernanke saying that interest rates don’t matter? ‘

    Where did I say that Bernanke said interest rates don’t matter?

  21. Gravatar of ssumner ssumner
    15. March 2017 at 07:54

    Majromax, I agree that it would be better to set IOR below the fed funds target.

    SG, Yes, “memory hole” is exactly right.

    David, I’m aware of the history, and don’t agree that IOR was necessary for the large increase in the balance sheet.

    Patrick, OK, where did he say the ffr rate is moot now?

  22. Gravatar of Michael Rulle Michael Rulle
    15. March 2017 at 08:15

    I do not understand the policy objective of quantitative easing coupled with IOR. They appear to be an offset. QE money in the banking system (i.e., securities on Fed Balance Sheet) seems to have directly gone into excess reserves if I read the Fed Balance Sheet correctly.

    I recall many commenters suggesting the QE had the potential to lead to significant inflation, as they assumed that the excess money would be lent. But the free 50 basis points on excess reserves has resulted in a counter effect for a riskless arbitrage for the banks.

    Therefore, is it possible that by eliminating IOR we also need the Fed to sell some assets to prevent significant inflation? IOR was definitely contractionary, but wasn’t QE designed to provide easing?

    I do not understand what the Fed was trying to accomplish.

  23. Gravatar of Jerry Brown Jerry Brown
    15. March 2017 at 08:33

    I always had a suspicion that IOR was really instituted as part of the bailouts of the banks and as a way to recapitalize some of them. Or at least to let some of them survive long enough that they could regroup themselves. I never understood any other economic reason for the Fed to pay interest on reserves other than to prop up some of these banks. I realize this sounds like some conspiracy thing and have hoped I was wrong about it, but could never figure out the justification for it in any other way.

  24. Gravatar of Matt McOsker Matt McOsker
    15. March 2017 at 08:41

    Scott – need clarification on this

    ” In fact, it was just the opposite. The decision to adopt IOR helped to prevent the Fed from achieving its policy goals, by making the Great Recession more severe than otherwise.”

    Are you saying they should not have used IOR to support a target rate higher than zero, and just let the rate go to zero as a result of the reserves added?

    Michael Rulle –
    The banking system does not lend excess reserves, in fact the system cannot get rid of ER. If you eliminate IOR then you need to use open market operations to hit the target – which means buying or selling assets. See this explanation https://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#7bc525c87d20

  25. Gravatar of Michael Rulle Michael Rulle
    15. March 2017 at 10:29


  26. Gravatar of Michael Rulle Michael Rulle
    15. March 2017 at 10:30


    I mean thanks to you, not Scott!


  27. Gravatar of Max Max
    15. March 2017 at 10:37

    If the Fed wanted to arbitrarily expand its balance sheet without affecting interest rates, it doesn’t need IOR to do this. It can simply fund its purchases with open market overnight borrowing instead of reserves.

    So IOR doesn’t add a new tool to the Fed’s toolbox. It’s easy to see why banks like IOR, though, because they get paid for holding reserves that they would otherwise be happy to hold (or required to hold) without interest.

    The real argument for IOR (which nobody is making) is efficiency. But IOR should never be equal or higher than t-bills or other relevant benchmarks, it should always be significantly lower. So go ahead and pay IOR, but don’t try to use IOR to support interest rates.

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. March 2017 at 10:41

    ‘Patrick, OK, where did he say the ffr rate is moot now?’

    Right here (note his word, ‘impossible’);

    Prior to the crisis, the Fed set short-term interest rates through open-market operations that varied the quantity of bank reserves in the system, a technique which involved on average low levels of reserves—perhaps $10 billion or so. Today, the level of bank reserves is much higher, which makes it impossible to manage interest rates through small changes in the supply of reserves. Instead, the Fed manages short-term interest rates by setting certain key administered interest rates, such as the rate it pays bank on reserves held with the Fed.

  29. Gravatar of Michael Rulle Michael Rulle
    15. March 2017 at 12:24

    To Matt

    From the Fed of Minneapolis 11/2015

    Executive Summary
    Banks in the United States have the potential to increase liquidity suddenly and significantly—from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio.

    This is the question I was getting at. I don’t get it

  30. Gravatar of Michael Rulle Michael Rulle
    15. March 2017 at 12:52

    To Matt

    Read a good explanatory essay from S&P. What I do not get is how the Minn Fed could say what they wrote.

  31. Gravatar of Brian Donohue Brian Donohue
    15. March 2017 at 12:56

    Well, the Fed upped IOR to 1% today. Do you think they should have kept it at 0.75%?

    If so, do excess reserves dry up? If so, how does the Fed pay the banks, by reducing its balance sheet (contractionary?) or (at long last) printing money?

  32. Gravatar of ssumner ssumner
    15. March 2017 at 13:26

    Matt, You asked:

    “Are you saying they should not have used IOR to support a target rate higher than zero, and just let the rate go to zero as a result of the reserves added?”

    Yes, the economy needed that liquidity—so why sterilize it?

    Max, Yes, a lower IOR is better.

    Patrick, OK, but he’s not saying the ffr is a moot point, he’s saying it must be managed in a different way. But it’s still as important (or unimportant) as it always was.

    Brian, I don’t have any problem with the rate increase today.

    The balance sheet can be reduced by selling bonds, or even not re-investing when existing bonds mature.

  33. Gravatar of Brian Donohue Brian Donohue
    15. March 2017 at 13:41

    I’m not talking about the FFR increase today, I’m talking about the corresponding increase in IOR. It sounds like you are saying that was a bad idea (abolish IOR), which is funny, because when I raised this matter with you a couple months back, I’m pretty sure you were against getting rid of IOR at the time.

  34. Gravatar of ssumner ssumner
    15. March 2017 at 14:11

    Brian, Two issues:

    1. If you are going to have an IOR system, then an increase today is fine.

    2. I’d prefer a non-IOR system.

    But you can’t just abolish IOR right now without removing excess reserves, otherwise policy would become too expansionary.

  35. Gravatar of dtoh dtoh
    15. March 2017 at 15:55


    You could just abolish IOR right now, but the Fed would need to sell a lot of assets to the banks in order to prevent inflation from soaring. Alternatively the Fed could totally suspend OMP (for about 50 years), and drop the rate on IOR gradually to let M0-ER expand as needed to meet the growth of NGDP; however this would take a long, long time.

    I do agree it’s a big, big mistake to focus on rates though. What drives changes in NGDP is the marginal increase in the exchange of assets for money by the non-financial sector. M0-ER is an OK but not great indicator of that.

    IMHO the need for a perfect indicator (e.g. NGDP futures) is not really relevant when the Fed has been consistently and intentionally below its targets for a decade. A speedometer is useless if you won’t put your foot on the gas pedal.

  36. Gravatar of Patrick Sullivan Patrick Sullivan
    15. March 2017 at 16:23

    ‘What I do not get is how the Minn Fed could say what they wrote.’

    It’s because the Minneapolis Fed’s president, Neel Kashkari, is a politician, not an economist.

  37. Gravatar of Patrick Sullivan Patrick Sullivan
    15. March 2017 at 16:40

    Here’s the actual Fed order from today–note what comes first;


    The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on March 15, 2017:

    The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 1.00 percent, effective March 16, 2017.

    As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

    “Effective March 16, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 3/4 to 1 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

    The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

    More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website.

    In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 1.50 percent, effective March 16, 2017. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco.

    I.e., the interest rate the Fed ‘controls’, the one they pay on reserves, is 1%. The FFR is just a target of .75-1%.

  38. Gravatar of Bonnie Bonnie
    15. March 2017 at 19:14

    The program used to sterilize additional bank lending by selling assets had nearly depleted the portfolio and was unsustainable, and the point of the IoR was almost entirely to stabilize the FF rate.

    The below quote is from the Sept 29, 2008 FOMC conference call, but there are mentions of it in the June call as well.


    “MR. MADIGAN. Thanks, Mr. Chairman.

    “As the Chairman indicated, the TARP legislation includes a provision that accelerates the effective date of the authority to pay interest on reserves from October 1, 2011, to October 1, 2008. The Federal Reserve staff believes that we’re ready to start paying interest on reserve balances beginning with the reserve maintenance period that starts on October 9. Assuming that the legislation is passed by the Congress and signed by the President later this week, we plan to recommend shortly thereafter to the Board that the Board direct the Reserve Banks to begin paying interest on reserves on October 9. Specifically, we plan to suggest that required reserve balances be remunerated at a rate of the target federal funds rate less 10 basis points, and more significantly in current circumstances, that excess reserve balances be remunerated initially at a rate of the target federal funds rate less 50 basis points. We anticipate that the spread between the excess reserves rate and the target federal funds rate may well need to be adjusted over time, but we’re suggesting a 50 basis point spread initially. We’re proposing no other significant changes to the reserve maintenance framework at this time, although we’ll be recommending a few relatively technical changes that are motivated by the ability to pay interest on reserves. In more normal circumstances, we’d think of the system that we’re recommending at this time as being a type of a corridor system but with required reserves. The primary credit rate should set the ceiling for the federal funds rate; the excess reserves rate should set the floor.

    “In the current circumstances, though, it may turn out that the system will operate more like what we have been calling a floor system in which the gap between the target federal funds rate and the excess reserves rate is narrow. This is because, as was discussed earlier, our tools to absorb reserves provided by, again, various lending operations could be constrained given the limited remaining capacity to sell securities and possibly reluctance on the part of Treasury to expand further the supplementary financing program. In any case, the interest rate on excess reserves should put a floor – possibly a soft floor, but a floor— under the funds rate and thereby allow the Federal Reserve to conduct monetary policy appropriately while providing liquidity consistent with financial stability. I would note that the overall reserve maintenance framework will remain very complex, possibly overly complex. The staff plans to continue the study that we presented to the Reserve Bank presidents and the Board members earlier this year, and at some point, we expect to bring significant further changes to the policymakers for consideration. But for now, we think that the changes that we’re proposing will make effective use of the authority that we expect we’ll have beginning on October1.

    “Thanks, Mr. Chairman.”

  39. Gravatar of Jon Jon
    15. March 2017 at 19:16


    When the fed adopted IOR it was when the news articles said the Fed was out of ammunition for containing the liquidity crisis without jeopardizing control of inflation.

    In particular, the fed had a policy of providing liquidity to banks … As they expanded this liquidity facility they 1:1 sold off their stock of tbills. Interest rates fell but during this time but the money supply did not expand.

    They ran out of tbills to sterilize the liquidity auctions. At that point they moved to the IOR system–with the stated purpose of having a mechanism to sterilize the injection the reserves and avoid loosening policy. This is printed in the extemporaneous statement !

    They did this while the fed funds rate was quite positive and while they still had 500B in five to seven year notes. This was one of the first moments that I realized the academic community was hosed … It was not widely understood at the time that the fed held anything except tbills.

    This is the necessity mentioned … And it was completely wrong.

  40. Gravatar of Max Max
    15. March 2017 at 23:30

    By the way, yet another method available to the Fed of propping up interest rates without selling assets and without IOR would be to increase required reserves. The banks wouldn’t like it, but it would work.

  41. Gravatar of ssumner ssumner
    16. March 2017 at 05:54

    Jon, That’s right.

    Max, Yes, but that would impose a pretty (implicit) big tax on banks.

  42. Gravatar of flow5 flow5
    16. March 2017 at 06:21

    Remunerating IBDDs guarantees ever more financing will be accomplished by the creation of new money (of which most expenditures will be for existing assets, not the addition of an offsetting volume of new products and services).

    It guarantees more inflation, less income, and higher indebtedness. Its mechanics guarantee economic failure.

    It is a incontrovertible fact that all economists don’t know a debit from a credit.

  43. Gravatar of flow5 flow5
    16. March 2017 at 06:32

    This “blue print” (theoretical approach) was presented in “Should Commercial Banks Accept Savings Deposits?”, Savings and Loan League’s, proceedings of the 1961 Conference on Savings and Residential Financing, May 11 & 12, 1965, pg. 40-48, by Professor Lester V. Chandler:

    Chandler: “But surely a more basic and, over a longer run, a far more important objective is to secure some desired behavior of the level of spending for output—to achieve a certain level of gDp, or to cause the level of gDp to increase at some desired rate (sounds analogous to Scott Sumner’s N-gDp targeting?).

    Chandler’s theoretical explanation was: (1) that monetary policy has as an objective a certain level of spending for gDp, and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits.

    And Chandler was exactly right, i.e., up until the saturation in commercial bank deposit financial innovation (saturation in deposit turnover, bank debits) with the wide-spread introduction of ATS, NOW, and MMDA accounts in 1981.

  44. Gravatar of Philo Philo
    16. March 2017 at 07:52


    I don’t understand your answer to Brian. You want to abolish IOR, which means reducing it to zero, yet you endorse yesterday’s rise from 0.75% to 1%. Wouldn’t it have been better from your point of view had IOR been kept at 0.75%, or even reduced, while the Fed simultaneously undertook to sell assets as necessary to keep NGDP from accelerating excessively?

  45. Gravatar of flow5 flow5
    16. March 2017 at 12:27

    @ Philo:

    See: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series:

    “Monetary Policy: Why Money Matters and Interest Rates Don’t”


  46. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. March 2017 at 12:34

    The new fashion in monetary aggregates seems to be ‘Divisia’ (ala Hanke and Congdon);


    …we describe an alternative approach to the specification of a targeting rule by focusing on the central bank’s ability to set a path for the quantity of money and exploiting the connection between variations in the quantity of money and other nominal magnitudes. The general approach taken is due to Working (1923) and is in the same spirit as a modified version of the P-star model due to Orphanides and Porter (2000). Finally, because discussions like those in Fair and Howrey (1996), Svensson (2003, 2005), and McCallum and Nelson (2005a, 2005b) explain the difficulties associated with any effort to determine whether one type of rule is superior to the other, we use this general framework to investigate how the
    behavior of nominal income or the price level is related to rule-based paths for the money supply.2 If a rule of this type is shown to be tractable it will offer a policy framework in which
    the zero lower bound constraint is irrelevant, or at least less important than it is popularly thought to be. In fact, our statistical results establish particularly tight links between the path of nominal GDP and those of several Divisia monetary aggregates and, especially, a revised measure of the monetary base due to Tatom (2014). These statistical links appear consistently throughout a sample of data running from 1967:1 through 2015:4 and show little or no signs of weakening in shorter and more recent subsamples dominated by the financial crisis and Great Recession of 2007 through 2009 and the slow recovery that followed. We interpret these
    results as evidence that, even working within existing institutional arrangements, the Fed could effectively adopt and follow a targeting rule for nominal income, using its power to influence the monetary base or one of the broader monetary aggregates, even when short-term
    interest rates are at or near their zero lower bound.3 Alternatively, our analytic framework could be used to complement the Fed’s existing strategy of manipulating the federal funds rate
    by providing a “cross-check” based on the link between money and nominal income within a “two-pillar” approach like that used, at times, by the European Central Bank.

  47. Gravatar of flow5 flow5
    16. March 2017 at 13:43

    @ Patrick R. Sullivan:

    Neither Barnett (New Measures Used to Gauge Money supply WSJ 6/28/83), nor the St. Louis Fed’s technical staff Anderson:

    “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy WAS ACCOMMODATIVE before the financial crisis when judged in terms of liquidity.

    — use accurate money supply metrics reflecting changes to AD.

    I discovered the Gospel in July 1979 (using bank debits). Now one must use a surrogate metric after Ed Fry discontinued the G.6 release.

  48. Gravatar of flow5 flow5
    16. March 2017 at 13:46

    I should be awarded the Nobel Prize in economics. My discovery is worth trillions of economic $s. It should be classified as top secret by the CIA.

    I sold bonds short on 2/11. I bought them back on 3/14.

    -Michel de Nostredame

  49. Gravatar of Scott Sumner Scott Sumner
    16. March 2017 at 16:38

    Philo, Yes, it would have been better if they had done that. I thought Brian was asking me a different question, whether the actual decision was better than the status quo.

  50. Gravatar of flow5 flow5
    17. March 2017 at 02:36

    There are 2 things you don’t mess with: a man’s meal and his paycheck. Bankrupt u Bernanke violated both sacraments.

    Ben Bernanke in his book “The Courage to Act”: “Money is fungible. One dollar is like any other”.

    “I adapted this general idea to show how, by affecting banks’ loanable funds, monetary policy could influence the supply of intermediated credit” (Bernanke and Blinder, 1988).”
    “For example, although banks and other intermediaries no longer depend exclusively on insured deposits for funding, non-deposit sources of funding are likely to be relatively more expensive than deposits”
    “The first channel worked through the banking system…By developing expertise in gathering relevant information, as well as by maintaining ongoing relationships with customers, banks and similar intermediaries develop “informational capital.”
    “that the failure of financial institutions in the Great Depression increased the cost of financial intermediation and thus hurt borrowers” (Bernanke [1983b]).

    Keynesian economists have finally achieved their objective: that there is no difference between money and liquid assets.

  51. Gravatar of flow5 flow5
    17. March 2017 at 03:26

    All savings (funds held beyond the income period in which received), originate endogenously within the payment’s system. The source of all time (savings) deposits is other bank deposits, provisionally and parsimoniously, via the currency route, or thru the extended build up in the DFI’s undivided profits accounts (retained earnings).

    Time (savings) deposits, rather than being a source of loan funds for the commercial banking system, are the indirect consequence of prior bank credit creation. And the source of bank deposits can be largely accounted for by the expansion of Reserve bank credit (manna from Heaven, obviously there’s not a tax on costless IBDDs, Nobel Laureate Dr. Milton Friedman was dimensionally confused).

    From the standpoint of the entire economy (from a systems’ belvedere), the DFIs, as contrasted to NBFIs: never loan out, & can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item.

    When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) – somewhere in the banking system. I.e., the DFI’s bank deposits are the result of lending, not the other way around. Thus all bank-held savings are un-used and un-spent (impounded and ensconced).

    Unless savings are indirectly or directly expeditiously activated by their owners (put back to work), via a non-bank conduit (completing the circuit income and transactions velocity of funds), their payment’s velocity is zero. Indeed with non-bank dis-intermediation, the savings velocity becomes less than zero.

    This is the singular source of both British politician Iain Macleod’s stagflation and Great Depression era economist, Alvin Hansen’s secular strangulation (chronic condition of “sagging investment & buoyant savings”). What Martin Wolff (chief economics’ commentator at the Financial Times, London) calls “chronically deficient AD”.

    In case you completely disregarded it, the remuneration of IBDDs exacerbates this contractionary, drag and decay, phenomenon. There are 3 major prior prologues and paradigms: (1) The 1966 S&L credit crunch, or a lack of funds and not their cost, (2) and as David Andolfatto pointed out: “in 1979-81 it rendered insolvent about two-thirds of US thrift institutions, who were financing 30-year fixed-rate mortgages with 1- and 2-year deposits“, (3) the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995, the S&L crisis was yet another artillery shot across the bow.

    These events lead to the greatest monetary policy blunder in all of history, BuB destroyed the savings-investment process (savings velocity). He destroyed NB lending/investing. I.e., Bernanke literally destroyed the non-banks, causing the NBFIs to shrink by 6.2T and the DFIs to be expanded by 3.6T (preventing both the commercial paper market, and the repurchase agreements from recovering).

  52. Gravatar of flow5 flow5
    17. March 2017 at 03:54

    See: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis:

    “Lending rates will continue to INCREASE POINT FOR POINT (emphasis mine) with the IOER. Consequently, increasing the IOER will do little, if anything, to stem the rise in M1.”

    See: Goldman Sachs: ” “, our factor model for discerning monetary policy surprises from the co-movement of different asset prices scored today’s price action as the third-biggest dovish surprise at an FOMC meeting since 2000, at least outside the financial crisis. (The only two non-crisis meetings that were clearly bigger were the August 2011 move to calendar guidance and the September 2013 decision not to taper QE; the March 2015 and March 2016 cuts in the dots were similar to today’s move.”

  53. Gravatar of flow5 flow5
    17. March 2017 at 04:01

    See: Lawrence K. Roos, past President, FRB-STL was cited, in the WSJ’s “Notable and Quotable” column, April 10, 1986, as follows:

    ”…I do not believe that the control of money growth ever became the primary priority of the Fed…

    [i.e., under Volcker’s unconventional monetary policy experiment, actually the same Paul Meek’s, FRB-NY assistant V.P. of OMOs and Treasury issues, described in his 3rd edition of “Open Market Operations” published in 1974]

    “I think that there was always and still is a preoccupation with stabilization of interest rates.”

  54. Gravatar of flow5 flow5
    17. March 2017 at 04:31

    Our monetary mis-management has been the assumption that the money supply can be managed through interest rates (c. 1965, the Fed Funds’ “bracket racket”). The prevailing hubris in the technical staff stemming from their Keynesian training: which advised them that interest was the price of money, not the price of loan-funds. They therefore decided that the money supply could be controlled through the manipulation of the federal funds rate.

    We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

    The effect of tying open market policy to a federal funds rate during a business expansion, is to supply additional (& excessive, & costless legal reserves) to the banking system when loan demand increases, and vice versa.

    The money stock (& DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit [or thru a series of temporary stair stepping or cascading pegging of policy rates, the ROI, or ROA, on government marketable securities; or thru “spreads”, “floors”, “ceilings”, “corridors”, “brackets”, IOeR, etc.]. Keynes’ liquidity preference curve is a false doctrine.

    What the FRB-NY “trading desk’s” technicians have actually plugged in is an open ended device through which the commercial bankers can decide (usurp the Fed’s “open market power”) whether or not there should be an expansion in the legal lending capacity of the banking system – the capacity to create credit (money) and to acquire additional earning assets. I.e., the Fed uses a price mechanism, a series of interest rate pegs, to ration Reserve Bank credit.

    The effect of the FRB-NY’s “trading desk” operations on interest rates (now via the remuneration rate), is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the banking system.

  55. Gravatar of flow5 flow5
    17. March 2017 at 04:35

    See e-mail response from senior economist and V.P. FRB-STL:
    Re: Savings are not a source of “financing” for the commercial bankers
    Dan Thornton
    Thu 3/9, 2:47 PMYou
    See the graph below.


    Daniel L. Thornton
    D.L. Thornton Economics LLC

  56. Gravatar of flow5 flow5
    17. March 2017 at 05:17

    Remunerating reserve balances, IBDDs, has emasculated the Fed’s “open market power”, viz., its sovereign right to create new money and credit: at once and ex-nihilo. I.e., “pushing on a string” should have only applied prior to the nominal legal adherence to the fallacious “Real Bills Doctrine” which was terminated in 1932 – due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

    Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-part)… is largely unpredictable, so too now is the volume and rate of expansion in the money stock on even a quarter-to-quarter basis. FOMC policy has now been capriciously undermined by turning excess reserves into bank earning assets.

  57. Gravatar of JP Koning JP Koning
    17. March 2017 at 05:45

    Scott, are you making a blanket statement against interest on reserves or only in the context of the US? The Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand (among others) have been paying interest on reserves for decades now. Do you think these central banks should end long-standing practices of paying interest?

  58. Gravatar of flow5 flow5
    17. March 2017 at 07:41

    Yet another great example of the difference between money and liquid assets (under the remuneration of IBDDs).

    Rates are being driven again, by FOMC schizophrenia (e.g., 3rd qtr. 2008 when inflation accelerates relative to real-output) in the latter stages of any business expansion).

    If the FOMC pursues a rather restrictive monetary policy (hikes policy rates), market interest rates tend to rise in concert. This places a damper on the creation of new money, but paradoxically, drives existing money out of circulation into the stagnant savings deposits (slowing savings velocity), a quickening of stop-go monetary mis-management). In a twinkling (with a knee-jerk market reaction), the economy begins to suffer.

    This is clearly demonstrated by the downward revisions in the forecasts of the FRB-ATL’s GDPNow model.

    After this bounce in bonds, we will be able to re-sell them short.

  59. Gravatar of flow5 flow5
    17. March 2017 at 08:20

    @ JP Koning:

    Obviously, the remunerating IBDDs by others, does not create ubiquitous global outcomes. But who needs to study stupidity? These are accounting principles period.

    Saver-holders never transfer their savings out of the commercial banking system – unless they hoard currency, or convert to other national currencies. The only way to activate savings is thru non-bank conduits.

    This results in a double-bind for the Fed, esp. in the latter stages of any business expansion. As rates rise, a higher proportion of savings become ensconced and impounded within the confines of the commercial banking system.

    Thus money velocity falls, R-gDp falls, and the Fed is confronted with FOMC schizophrenia (e.g., 3rd qtr. 2008 when inflation accelerates relative to real-output), do I stop? (because inflation is accelerating) or do I go (because the economy is slowing)?

    If it pursues a restrictive monetary policy, interest rates tend to rise in concert. This places a damper on the creation of new money, but, paradoxically drives existing money (voluntary savings) out of circulation into the stagnant savings deposits (destroying savings velocity and creating disequilibria / instability).

    In a twinkling, the economy begins to suffer (as evidenced by a deceleration in R-gDp during the same period), and / or with a monetary offset, subsequently generates higher levels of stagflation (drop in incomes).

    The recent rate hike by the Fed is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts have been repeatedly revised downward. I.e., large CDs on the H.8 release increased by 16.9 percent in January.

  60. Gravatar of ssumner ssumner
    17. March 2017 at 16:54

    JP, I don’t have a strong preference either way for those countries. They differ from the US in being able to rely more on exchange rates as a policy indicator, which is better than interest rates. And of course Australia doesn’t face the zero bound issue (not sure about NZ and Canada.)

    Another option is to only pay interest on required reserves.

  61. Gravatar of George George
    18. March 2017 at 06:33

    @ Flow5

    Tell us about how you sold bonds short on 2/11, it was Saturday! Markets were closed.

    “(of which most expenditures will be for existing assets, not the addition of an offsetting volume of new products and services). ”

    Unwarranted assumption, do you have any evidence for that?

  62. Gravatar of flow5 flow5
    18. March 2017 at 09:15

    Read my trade recommendation on SA.

    “Unwarranted assumption, do you have any evidence for that?”

    Yes. It comes from MARTIN WOLF.

  63. Gravatar of flow5 flow5
    18. March 2017 at 09:35

    @ George:

    Do you actually have any GOOD questions?

  64. Gravatar of George George
    18. March 2017 at 09:43

    You wrote about curve steepening on 2/11, that is nice but you said you SOLD ZN short on 2/11 which is apparently a piece of codswallop as markets were closed. You, the best bond trader ever, do not remember when you were selling?

    “Yes. It comes from MARTIN WOLF.”

    Very useful reply… Give us some empirical study. I see no a priori theoretical reason/law why bank borrowing should lead to a higher disposition to buy existing assets as opposed to investing into new ventures. And even if you found such a correlation, it would not necessarily imply causation.

  65. Gravatar of flow5 flow5
    18. March 2017 at 23:15

    @ George:

    (1) No. That’s a CIA trick (you can’t teach AI that). (2) You look it up. I believe he referenced it when he wrote it: “The Shift and the Shocks”.

    Obviously, it’s people like you who destroyed America.

  66. Gravatar of George George
    19. March 2017 at 02:48


    “I sold bonds short on 2/11. I bought them back on 3/14. ”

    No seriously I want to know how you sold them on Saturday…

    Apparently you have run out of arguments, offensive defence, projection. AI can do that. You do not remember your lies! You did not sell bonds on 2/11, you likely never sold any bond futures short in my opinion.

    Emperor is naked…

    PS: I am on the record predicting that your forecasts for this year will be roughly 50/50, perhaps a bit better than that but not much.

  67. Gravatar of flow5 flow5
    19. March 2017 at 03:12

    You already have egg on your face – simply by asking for empirical evidence. That means you don’t know stock from flow, a debit from a credit.

    Bonds rose because IBDDs are remunerated. “Stop-go” monetary mis-management has thus been exacerbated.

    See: JPM: “Turning Points In Market Trends Are Occurring At The Fastest Pace In History”

    We are headed towards an economic environment where all growth will be due entirely to inflationary growth. I.e., if you don’t understand flow, as opposed to stock, then you search for empirical evidence (when only theory is required). The U.S. golden Era in economics was the prologue and paradigm.

  68. Gravatar of flow5 flow5
    19. March 2017 at 03:13

    PS: I am on the record predicting that your forecasts for this year will be roughly 50/50, perhaps a bit better than that but not much.

    The last dumb motherfucker that made that claim was also denigrated. This too shall pass.

  69. Gravatar of flow5 flow5
    19. March 2017 at 03:22

    Since your handicapped, I’ll spell it out. We used to guarantee the pooled deposits of the non-banks. All savings are un-used and un-spent until they are activated outside of the payment’s system (via a non-bank conduit). Therefore no “matching” occurs (S ≠ I), until saver-holders decidem directly or indirectly, to invest their trusted savings thru a non-bank conduit.

  70. Gravatar of flow5 flow5
    19. March 2017 at 03:26

    “No seriously I want to know how you sold them on Saturday…”

    George, you still don’t get it. I looked my date up before I posted that comment. I sucked you in.

  71. Gravatar of flow5 flow5
    19. March 2017 at 03:35


    Like the Treasuries’ conclusion: “Diminishing market depth and a surge in volatility were both on display Oct. 15, when Treasuries experienced the biggest yield fluctuations in a quarter century in the absence of any concrete news. The swings were so unusual that officials from the New York Fed met the next day to TRY AND FIGURE OUT WHAT ACTUALLY HAPPENED”

    From: Spencer (@hotmail.com)
    Sent: Thu 9/18/14 12:42 PM
    To: FRBoard-publicaffairs@… (frboard-publicaffairs@frb.gov)
    Dr. Yellen:

    Rates-of-change (roc’s) in money flows (our “means-of-payment” money times its transactions rate-of-turnover) approximate roc’s in gDp (proxy for all transactions in Irving Fisher’s “equation of exchange”).

    The roc in M*Vt (proxy for real-output), falls 8 percentage points in 2 weeks. This is set up exactly like the 5/6/2010 flash crash (which I predicted 6 months in advance and within 1 day).

  72. Gravatar of George George
    19. March 2017 at 13:10


    You are mentally challenged and you are aware of it yourself. This is not how mentally balanced people react.

    You wanted to suck me in but you got sucked in yourself, nose-deep in prevarication.

    And of course you did not want to suck me in, otherwise you would have responded earlier when I pointed it out but you went silent, embarrassed.

    As for the rest, again assumptions.

    ” Therefore no “matching” occurs (S ≠ I), until saver-holders decidem directly or indirectly, to invest their trusted savings thru a non-bank conduit.”

    This is simply not true. It is to say that intermediation can only occur outside of the banking system? You are hiding behind your jargon… But it means nothing.

    As I said, the emperor is naked. The numerology works mostly ex post.

    PS: Tell me about sucking someone in.

  73. Gravatar of George George
    19. March 2017 at 13:11

    Or does anyone understand Flow5’s blabbering?

  74. Gravatar of flow5 flow5
    16. December 2017 at 06:50

    “It is to say that *intermediation* can only occur outside of the banking system? You are hiding behind your jargon… But it means nothing.”

    That’s dead wrong (and you have company:Thornton, Selgin, Gilbert, etc.)

    You’d better read Economist Phillip George:


    He comes to my same conclusion – via osmosis: “The riddle of money, finally solved” (it’s about the use or non-use of savings).

    Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

    F. Scott Fitzgerald: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

    You have to retain the cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

    John Maynard Keynes couldn’t do it:

    In “The General Theory of Employment, Interest and Money”, John Maynard Keynes’ opus “, pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

    In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct, viz., the Gurley-Shaw thesis.

    Commercial banks pay for their new earning assets with new money (not existing deposits, viz., savings)

  75. Gravatar of The Fed and the U.S. National Debt – Michigan Standard The Fed and the U.S. National Debt – Michigan Standard
    31. December 2018 at 20:06

    […] believe the Fed’s introduction of its policy to pay interest on reserves in 2008 is what transformed the 2008 recession into what we now call the Great Recession by sparking a greater contraction of […]

  76. Gravatar of Kaz Vorpal Kaz Vorpal
    6. December 2019 at 11:04

    It’s nice to see someone else point out the fact that paying interest on banking reserves helped create/exacerbate the crisis. What puzzles me most, though, is that a number of published economists I know agree with me on that in personal conversation, yet never mention it professionally.

    If you look at the chart of excess reserves over time, it’s almost always nil until 2008, then spikes up to several trillion dollars. These trillions are, essentially, money that is not being lent out. In other words, a tightening of credit at a time when tightening credit was causing the needlessly rapid implosion of a number of state-caused bubbles.

    Even the Fed’s Credit Easing program (misnamed “quantitative easing” by bad economists even though it did not focus on bank reserves) actually was an admission that the Fed knew it was causing this problem:

    The number of dollars it injected for “easing” came very close to consistently matching the excess reserves banks were holding.

    But, of course, that can’t fix the problem, because the Fed was picking different winners and losers during its credit easing than the marketplace would, causing malinvestment. Ergo one of the worst economic recoveries in recorded history.

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