Center of the Universe Blog
November 9th, 2009 8:37 am | by John Jansen |I posted a story by well respected Market News International Federal Reserve watcher Steven Beckner which dealt with the topic of reverse repos and the primary dealers.
The aforementioned blog has a posting of an analysis of the need (or lack thereof ) for reverse repos and the post follows with lots of discussion about the topic.
The original analysis is from a Goldman Sachs piece. The comments following the post are top shelf. One of the commenters JKH I believe drops by this blog intermittently.
It is a worthy read, in contrast, to some other stuff circulating through the blogosphere.
20 Responses to “Center of the Universe Blog”
By Cedric on Nov 9, 2009 | Reply
Yes, well, setting aside the issues of whether reverse repos are the way to go or not, does quantity of money matter or not, why bother having reserves (excess or required), and is monetary policy (and having a central bank trying to implement it) a waste of time and effort or not, and does expansion of base money have anything to do with credit expansion or contraction, I guess it’s pretty easy to understand how gold went to $1100, and why many private investor/depositors/savers are turning to commodities as a “store of value” and maybe even a real return on savings and/or investment. Keep this up and we may even get a housing boom.
By John Jansen on Nov 9, 2009 | Reply
I was going to argue with you and say that as long as the V in MV = PQ is declining then there is no need to worry.
I just checked at the Saint Louis Fed and it looks as though that V has stopped falling and might be turning upward.
That would be a problem.
By Cedric on Nov 9, 2009 | Reply
You wouldn’t have got an arguement from me. I know V is the wildcard.
By Cedric on Nov 9, 2009 | Reply
Besides, I have this nagging, unsubstantiated, suspicion that excess reserves may not be excess after all, and may in fact be loan loss provisions.
By Hondo on Nov 9, 2009 | Reply
I agree with Cedric that excess reserves have been sopped up by worthless assets on the books of these institutions. If in fact no one wants or has the capacity to borrow what is the purpose of the excess reserves except to let the bank use (at taxpayer expense) to repair said balance sheet and equity? If no one wants to borrow the reserves then why not have the Fed take them back and use them when individuals and corporations that are qualified to borrow want to borrow…..that is unless my first premises is correct and the banks need the assets to invest to coin profits to rebuild a completely worthless balance sheet they now have from bad risk management and banking practices.
By Bob on Nov 9, 2009 | Reply
+1 Cedric.
By John Chauvin on Nov 9, 2009 | Reply
It is all about the V. I have to tell you though. A lot of people are going to be scrutinizing your views a lot more now that you admitted to attending the Treasury meeting with the bloggers. Any change in views will look like you are a mouth piece for them.
By Martin on Nov 9, 2009 | Reply
Karl responded in case you didn’t see:
http://market-ticker.org/archives/1602-Followup-On-Extortion-By-Banks.html
By Bob on Nov 9, 2009 | Reply
Karl appears to have nailed it.
By Tom Hickey on Nov 9, 2009 | Reply
Martin has already posted a link to Denninger’s response. I had come to the same conclusion independently, (but I’m not a professional working in this area. I’d be interested in hearing an informed counter to clear up the matter.
BTW, I follow the modern monetary theory blogs of Bill MItchell (billy blog), Warren Mosler (Center of the Universe), and Randy Wray (Economic Perspectives from Kansas City). The commenters are excellent, such as JKH (mentioned above) and Scott Fullwliler, . HIghly recommended.
By John Jansen on Nov 9, 2009 | Reply
Tom,
When I worked at Chase in the early 1980s, I believe that Mr Mosler was a client and traded at a Chicago based firm called William Blair.
By John Chauvin on Nov 9, 2009 | Reply
Karl usually does nail it, way before the rest of the pundits.
By Bman on Nov 9, 2009 | Reply
You guys can continue to argue over the subtleties and semantics of reserves in the system. Click on http://www.usdebtclock.org/ and call it what you want.
By Cedric on Nov 9, 2009 | Reply
I think recently both Roubini and the IMF put US bank losses at about $1 Trillion so far. To translate that to the topic here, we should define that amount as “banking system credit losses”.
I fully understand the point that Karl is trying to make, tho he should probably flesh out the distinction between “reserves” and our various tiers of bank capital. They come from different places and exist for different reasons. Reserves are a result of depositors putting demand deposits in banks.(I’m stating it this way because I know Mosler followers love to get into chicken and egg discussions over what happened first…deposits or loans…the right answer according to them is loans. At least JKH pointed out that this is why we have overnight interbank lending) Banks are required to have reserves because some demand depositors may want to take some of their money back out of banks. There is no reserve requirement for things like time deposits and bank CDs however, so we are very close to zero reserve banking already.(Wiki is my source of this info) Then there is bank capital which comes from equity and bond investors. (note that bank depositors fall into the “customer” class rather than investor class). Here the Tier capital requirements are a buffer to bank insolvency. Also note that the FDIC insures depositors, but no one insures investors, unless you are “too big to fail”, of course.
Additionally I’ll point out that QE was open market purchases of treasuries and MBS, so the primary dealers didn’t get all the QE money. I think I may have got a little when I sold my small position in a mortgage bond fund. Also the Fed said they were trying to manipulate long term interest rates with QE, which Karl wasn’t mad about, but should be.
So that’s my addition to Karl’s take on the picture.
I have read Mosler & Company once and a while, so I know how they love to order economics in an unconventional way, the result sounding, well, unconventional and enlightening. So I thought of another enigma for them to unravel.
Of the 1 Trillion in bank credit losses, what percentage of that is represented by a change in reserves, and would that be a positive or negative change, and while we are at it, would it have affected excess reserves, required reserves, or both?
For what I hope are obvious reasons, I’ll leave that to the experts to figure out.
By pebird on Nov 10, 2009 | Reply
Denninger says:
“Why would the primary dealers demand relief from Tier Capital requirements in order to engage in reverse repos with The Fed, when they were recipients of the original “excess reserves” that occurred when the money was printed in the first place?”
First of all, we shouldn’t confuse tier capital with reserves, and second, why would anyone be surprised that the banks would try to reduce regulatory control when they have an opportunity? The government has bent over pretty far so far, what do the banks/PDs have to lose?
And if the excess reserves “no longer exist”, then the Fed would be the first to know about it. I imagine that what Karl is trying to say is that the excess reserves have been “reserved” for write-offs, hence a reduction (even for a test reverse repo) requires reducing capital tier requirements.
I might believe that – but I wish it were phrased a little differently than it is.
Lending cannot increase until incomes increase. The battle is whether government will start to spend to create real public assets (instead of consumption-based rebates) for employment to rise, or whether a small group of financial monopolists will finally get the hint and start to invest.
By Warren Mosler on Nov 10, 2009 | Reply
‘Banks are required to have reserves because some demand depositors may want to take some of their money back out of banks.’
THAT’S ONLY WITH FIXED FX. WITH NON CONVERTIBLE CURRENCY AND FLOATING FX THAT’S INAPPLICABLE. CANADA HAS HAD NO RESERVE REQUIREMENTS FOR A LONG TIME AND IT MAKES NO DIFFERENCE, FOR EXAMPLE.
‘Of the 1 Trillion in bank credit losses, what percentage of that is represented by a change in reserves, and would that be a positive or negative change, and while we are at it, would it have affected excess reserves, required reserves, or both?’
LOSSES REDUCE CAPITAL, NOT RESERVES. THE GOVT IS THE MONOPOLY SUPPLIER OF NET RESERVES TO THE BANKING SYSTEM. ONLY IT CAN CHANGE TOTAL RESERVE BALANCES. LENDING AND LOSSES DON’T ALTER TOTAL RESERVES
By Cedric on Nov 10, 2009 | Reply
“THAT’S ONLY WITH FIXED FX. WITH NON CONVERTIBLE CURRENCY AND FLOATING FX THAT’S INAPPLICABLE. CANADA HAS HAD NO RESERVE REQUIREMENTS FOR A LONG TIME AND IT MAKES NO DIFFERENCE, FOR EXAMPLE.”
I know that Canada imposes no reserve requirements on their banks, but that is not the same thing as operating a bank with no money. Obviously a bank manager would not try and do that, on purpose at least. In America however, we have found it to happen by accident quite often. But Canada does impose “capital ratios” on their on banks.
I’m completly clueless what FX has to do with a regulatory requirement that the (domestic) fractional banking system must keep 8% of demand deposits in cash in case a customer writes a check.
Unless of course this has something to do with international banking, in which case I’m completely scared in general because I believe the next financial crisis will be triggered by the news that Citi has bad commercial real estate investments in Zimbabwe, BA has bad subprime loans in the Congo, and after Goldman Sachs buys the Caspian Sea, Russia invades and takes it back. And who knows how Fannie and Freddie will be involved, but they will be.
“LOSSES REDUCE CAPITAL, NOT RESERVES. THE GOVT IS THE MONOPOLY SUPPLIER OF NET RESERVES TO THE BANKING SYSTEM. ONLY IT CAN CHANGE TOTAL RESERVE BALANCES. LENDING AND LOSSES DON’T ALTER TOTAL RESERVES”
FDIC insurance works!
By Cyril Wilkinson on Nov 10, 2009 | Reply
Regards “excess reserves”
“”"
In today’s ongoing financial crisis, however, the base is not being used as
the basis for monetary expansion. The accumulation of excess reserves behind
the explosion of the monetary base is the result of the weak state of many
banks and the fear of bankers that they won’t have enough liquidity to meet
deposit withdrawals. In other words, the reserves that are excess in a
regulatory or legal sense, aren’t excess at all in the minds of the bankers.
They represent the prudent hoarding of bank cash in uncertain times.
Measures to reduce “excess” reserves could, therefore, have disastrous
results as banks liquidate assets to restore their liquidity.
“”"
This movie has been shown before. It played a significant role in the 1930s when the Fed acted to “mop up” excess reserves in the banking system by raising reserve requirements in 1936 and again in early 1937.
“”"
taken from
http://taxesandbudget-blog.ncpa.org/the-feds-balance-sheet-and-excess-bank-reserves/
Besides, I have this nagging, unsubstantiated, suspicion that excess reserves may not be excess after all, and may in fact be loan loss provisions.
Correct. They are not for credit expansion since the banks have saturated the public with debt and there are few to whom they can issue the more credit.
By Bman on Nov 10, 2009 | Reply
yes – the next leg down in housing and the commercial real estate implosion has only just begun. The Fed has this on their radar screens.