Comments on: Chart of the day: Excess Reserves http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Edward Harrison http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html#comment-1138 Edward Harrison Sun, 07 Dec 2008 01:54:30 +0000 http://www.creditwritedowns.com/?p=1766#comment-1138 <p>@Denis:</p> Your friend is right that much of these funds are tied up in repo agreements with the Fed with dodgy mortgage backed securities as collateral. John Mauldin has a good article on this: http://www.frontlinethoughts.com/article.asp?id=mwo120508 While the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place. Nevertheless, I would argue that these repo agreements could be rolled forward and that the excess reserves could be lent against as a result. After all, the banks did own the collateral they exchanged with the Fed. You should also note the similarity in money velocity decline from the 1930s to the present episode -- further evidence that lending is excessively restrictive. @Denis:

Your friend is right that much of these funds are tied up in repo agreements with the Fed with dodgy mortgage backed securities as collateral. John Mauldin has a good article on this:
http://www.frontlinethoughts.com/article.asp?id=mwo120508

While the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place.

Nevertheless, I would argue that these repo agreements could be rolled forward and that the excess reserves could be lent against as a result. After all, the banks did own the collateral they exchanged with the Fed. You should also note the similarity in money velocity decline from the 1930s to the present episode — further evidence that lending is excessively restrictive.

]]> By: Denis http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html#comment-1137 Denis Sun, 07 Dec 2008 01:13:57 +0000 http://www.creditwritedowns.com/?p=1766#comment-1137 A friend pointed out that much of these reserves are actually locked in repo - Fed "bought" securities form banks, with a repurchase agreement for 1-20 days. So far the Fed was rolling the repo, but if it didn't any bank without money on hand will immeidately become bankrupt. These money can not be lended out. A friend pointed out that much of these reserves are actually locked in repo – Fed “bought” securities form banks, with a repurchase agreement for 1-20 days. So far the Fed was rolling the repo, but if it didn’t any bank without money on hand will immeidately become bankrupt. These money can not be lended out.

]]> By: Edward Harrison http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html#comment-1102 Edward Harrison Fri, 05 Dec 2008 19:43:02 +0000 http://www.creditwritedowns.com/?p=1766#comment-1102 @thomas crown: sorry for the delayed response. you make a great point and that is very much the case that the Fed's paying interest is partly to blame. Read the post from Macroblog from back in October: <a href="http://macroblog.typepad.com/macroblog/2008/10/why-is-the-fed.html" rel="nofollow">“Why is the Fed Paying Interest on Excess Reserves?”</a> to see corroboration of your thesis. When I get a moment I o intend to write a follow-up demonstrating that excess reserves were also a hallmark of the depression and need to be addressed. Apparently, the excess reserves have now increased to over $600 billion, which translates into $6 trillion of lending capacity. I don't know where I have that figure, so if someone has the link, please post it. thanks for the comment, thomas. Cheers. Ed @thomas crown:
sorry for the delayed response. you make a great point and that is very much the case that the Fed’s paying interest is partly to blame. Read the post from Macroblog from back in October: “Why is the Fed Paying Interest on Excess Reserves?” to see corroboration of your thesis.

When I get a moment I o intend to write a follow-up demonstrating that excess reserves were also a hallmark of the depression and need to be addressed. Apparently, the excess reserves have now increased to over $600 billion, which translates into $6 trillion of lending capacity. I don’t know where I have that figure, so if someone has the link, please post it.

thanks for the comment, thomas.

Cheers.

Ed

]]> By: thomas crown http://www.creditwritedowns.com/2008/12/chart-of-the-day-excess-reserves.html#comment-1073 thomas crown Thu, 04 Dec 2008 19:50:30 +0000 http://www.creditwritedowns.com/?p=1766#comment-1073 you don't suppose the huge spike in reserves held at the Fed has anything to do with the Fed recent change to now pay interest on reserves, do you? the excess reserves banks used to lend out in the overnight market (with counterparty risk), they can now leave all warm and snugly at Father Fed? could that be the reason? you don’t suppose the huge spike in reserves held at the Fed has anything to do with the Fed recent change to now pay interest on reserves, do you? the excess reserves banks used to lend out in the overnight market (with counterparty risk), they can now leave all warm and snugly at Father Fed? could that be the reason?

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