Home » Economics » QE for the People

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Post Archives by Category

QE for the People

QE for the People

Myrmikan’s May letter discussed how the Fed had already begun to ease nancialconditions, though the method was so subtle that few understood what the central bank was doing.

Banks are required to keep required reserves at the Fed. Banks that nd themselves with a de cient reserve level have to borrow reserves from those with excess reserves,and the interest rate they pay is called the fed funds rate. The fed funds rate thereby sets the minimum level of funding for the banking system. The Federal Reserve used to set this rate through open market operations: buying Treasuries would add reserves to the banking system and lower the fed funds rate (and vice-versa).

Historically, reserves earned no interest, and so, before 2008, banks maintainedas few reserves as possible—they could always buy a Treasury bill with any excess cash. After the Fed ooded the banking system with reserves during the 2008 panic, banks found themselves with excess reserves, which peaked at $2.7 trillion. The Fedsets the general reserve requirement at 10%, which means the banking system couldhave added $27 trillion of credit to the economy. In fact, certain classes of assets (suchas Treasuries, mortgage-backed securities, etc.) have risk weightings that allow banks to hold as little as 2% reserves against them, which enables 50 times leverage on suchassets (which is how, for example, Citicorp was able to be levered up 48:1 in 2007).

In order to keep trillions of levered up credit from crashing into the economy, the Fed began paying interest on excess reserves (IOER). Given the level of excessreserves, the Fed could no longer use open market operations to manipulate the fedfunds rate.

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
Click on image to read excerpts

Olduvai II: Exodus
Click on image to purchase

Click on image to purchase @ FriesenPress