The Scariest Graphic I Made All Week, or, Still More on Excess Reserves and "Money"
One of the nice things about the Kauffman Foundation’s Blogger Conference is the time to let the mind wander and look at data after having your brain scoured.
One of the worst things is realizing too late that you’ve got a Really Ugly Graphic, and most of the people who could help with it are gone.
Four hours ago at dinner, I was sitting between Brad DeLong and Tim Duy (who pointed out some good contemporary performers of Real Country Music), but I didn’t have this graphic with me. Now Tim is on a plane and Brad is teaching students, and my best option is to ask the AB commentariat if the following graphic scares them as much as it does me.
Even given my hobby-horse attitude toward Excess Reserve (i.e., the Sheer Unmitigated Contempt with which I treat the idea that reserves in general—let alone Excess Reserves—should “earn” interest), the dropping-off-a-cliff impression (and the overall downward trend, even keeping in mind that we do not Seasonally Adjust Excess Reserves, and therefore Seasonal Effects are clear) almost seems to explain why the 32nd month of the “recovery” feels as if it’s just possibly starting something.
To be fair—and a hearty “thank you” to Jeff Miller of A Dash of Insight for reminding me that most people believe the Fed concentrates on M2, not M1—the broader index shows an upward trend (again, discounting the recent decline as a Seasonal Effect):
Otoh, an overall ca. 5% increase in “Net M2,” as it were, over a year in which the dollar has increasingly appeared to be the only reasonable “Safe Haven” doesn’t seem all that large either.
I’ve yet to play with the data beyond this, so I leave it to the AB comentariat:
- Do you believe there is something here?
- If so, any guesses what it is? Or anything you want to know about it?
- If not, what else should we be looking at where Excess Reserves may/should/will (depending upon your degree of certainty) affect the value of the data and/or Real Economic Growth?
Well, the St. Louis Fed shows that the M1 has gone verticle since a little before 2010.
http://research.stlouisfed.org/fred2/series/M1SL
So, how high is excess reserves? In this 7/9 Fed bank NY “Current Issues” asking why have excess reservse climbed they say it purely do to Feb Policy and note that the dumpping of money into the banks by the Fed. The banks did not then send it out their doors.
http://www.newyorkfed.org/research/staff_reports/sr380.pdf
So, there is a pile of money in 2009. We know the vast majority of people have less cash, which is basically what M1 is? M1 is the People’s measure of their money. The people are cash strapped. You don’t get record number of kids on food stamps if in whole the People have at least equal cash to their cost of living (cost of living including food, fuel).
So, are we seeing in your 2 charts the decline of the “middle class” do to the recession and in M2 the slow conversion of the Fed cash to the Banks into the hands of the 1%. We know the top 1% has gained something like 93% of the rise of the economy since the bottom of the recession. We know that the means used to date to “fix” the economy has been the Fed dumping money into the Banks. And, we know that businesses prime concern is their ability to sell their goods and services which means I’m not the only one not feeling the Fed Monetary love.
Are we seeing in your 2 charts the actual picture of the dual economy we currently have? Thus we are seeing why so many people hear the data releases (job reports, inflation, GDP etc) and cry “bull shit” on them?
I don’t really have any problem with IOR. And it’s not a question of whether banks should be permitted to “earn” interest. Here a re a few points I would make:
1. The very concept of excess reserves only makes clear sense relative to a reserve requirement. If there were no reserve requirement, there would be no obvious meaning to the question, “Are the banks carrying excess reserves?”
2. The reserve requirement is a more-or-less arbitrary percentage set by the government. Some countries don’t have them. If it were raised by a policy change, the government would have thereby reclassified excess reserves as non-excess reserves. Similarly, if they lowered the reserve rquirement, they would thereby create excess reserves.
3. The only real question should be whether the banks in aggregate are carrying the reserves they need to make their daily payments, and provide themselves with a reasonable liquidity buffer. Any quantity of reserves in excess of that amount is only a problem to the extent that they cause the interbank lending rate to fall too low. I don’t think there are many people calling for a higher interbank lending rate right now.
4. Banks don’t “lend their reserves”. If a bank can make money by creating a loan, it will do so. Reserve only play a role in that their quantity and distribution determines the interbank lending rate, which plays a role in loan profitability to the extent that banks sometimes need to acquire additional reserves as a consequence of expanding their loan books.
5. There is no finite stock of loanable funds such that if the funds are directed toward reserve accounts to accummulate interest, they are thereby shunted away from lending. So there is no reason to worry that by making the holding of reserves more attractive, one thereby makes loans less attractive.
6. IOR is just a tool for managing the interbank lending rate. We can even imagine a future in which IOR policy completely replaces open market policies as the CB tool for setting the interbank lending rate.
7. One way or another, the volume of payments in the country is able to expand and the economy can grow because the Fed provides additional reserves to the system in the form of bank asset/government liability. The current method is purchase of government securities from the private sector. IOR is another way.
100% of all economists don’t understand the implications of paying interest on reserve balances.
Dan –
That all sounds good in the abstract. But look at actual lending activity.
http://research.stlouisfed.org/fred2/series/BUSLOANS
An increase of less than $200 billion since the bottom.
And excess reserves.
http://research.stlouisfed.org/fred2/series/EXCRESNS
$1.6 trillion sitting idle.
Interest on reserves has no effec on that?
JzB
Is there some evidence that interest on reserves has an impact, jazzbumpa? I would assume that if banks aren’t lending money it is primarily because there are fewer opportunities for making money by lending: people who used to want to borrow aren’t borrowing as much, and some who want to borrow can’t make the business case to their banker that the loan will be a good investment by the bank.
Businesses are sitting on record amounts of savings. Why do they want to borrow?
Despite some pieces of the assortment of bank bailouts that included swapping of poor quality assets for Treasuries, banks still have a lot of poor quality assets on their books. My guess is that in general, banks don’t know howmany of the loans are going to implode, or the shape of real estate which they will or have foreclosed upon. A lot of it is very, very bad stuff worth literally pennies on the dollar. There is a bit of a Hail Mary for them out there these days – hedge funds are now buying foreclosures from banks in bulk (look for some of these hedge funds to post enormous losses in a few years!!), but in general, banks know they’re sitting on a big hole of their own making and they don’t know when they’re going to be asked to fill that hole. Imagine if, say, the state of Florida were to put some teeth into regulations that force banks to pay the property taxes on homes they foreclosed on but have, er, neglected to change the name on the title.
I’d be hoarding liquid assets too if I was in that position too.
hey,
I think it is tme we make up some derivatives on bank paper and then insure against them?
On the other hand, banks have never before – or at least not in many decades – had any interest in hanging on to excess reserves. The Fed started paying them interest, and they suddenly got very interested indeed.
Only a coincidence perhaps.
But the timing is really quite remarkable.
All that QE money that was intended to stimulate the economy ended up under metaphiric matresses. Because nobody either wants to borrow or can make a good case for getting a loan.
Isn’t this a pretty severe failure on monetary policy at the ZIRB?
Cheers!
JzB