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Fed Will Continue Economic Stimulus

RDS

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Good to see the bull run taking place in the stock markets in the region right now.
The Federal Reserve has postponed any retreat from its long-running stimulus campaign, saying that it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth.
AP reports the Fed said it was concerned that fiscal policy once again "is restraining economic growth," threatening to undermine what the Fed had described just months ago as a recovery gaining strength.
The program involves the Fed unleashing money into the economy by buying up bonds. Federal Reserve Board Chairman Ben Bernanke had previously signaled the central banking organization would taper off purchases starting in late 2013, ending in mid-2014.
Stock markets jumped after the announcement, with the Standard & Poor's 500-stock index touching a record high and the Dow Jones industrial average ahead more than 100 points.
In the statement, the Fed said that the economy is growing moderately and that some indicators of the job market have shown improvement. But it noted that rising mortgage rates and government spending cuts are restraining growth.
Fed Will Continue Economic Stimulus
 

gavinfielder

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Good. I was afraid the Fed would cut their "stimulus". The real economy aside, banks and financial markets not having excess trillions would just be disastrous.
 

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Good. I was afraid the Fed would cut their "stimulus". The real economy aside, banks and financial markets not having excess trillions would just be disastrous.


That sure seems like a contradiction. The Feds started paying interest on the banks excess reserves in 2008. But it's turned out to be an incentive for the banks not to lend because they profit more just off the interest than they would lending. How can the Feds stimulate the economy if the banks aren't lending?
 

gavinfielder

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That sure seems like a contradiction. The Feds started paying interest on the banks excess reserves in 2008. But it's turned out to be an incentive for the banks not to lend because they profit more just off the interest than they would lending. How can the Feds stimulate the economy if the banks aren't lending?
The Fed can't really do **** to stimulate the economy anyway, not in ZIRP. I did see the news that banks are contracting credit too, which seems contradictory but in the end it's just a double stone wall.

Fiscal policy is the only way out of this mess. Of course, less than 15% of congress knows **** about that.
 

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I understanding the reasoning behind the FED's decision (weakness of housing recovery, unemployment numbers skewed by people dropping out of the labor market, relatively low inflation, lack of confidence, ...) but I think this was driven by very short-term thinking. In the long run the continued postponement of a return to normal monetary policies will only create a greater bubble and a greater risk of shock to the system when the inevitable scaling back begins.
 

RDS

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The stark truth is spelt out here. So don't paint a rosy picture.
The decision to put off scaling back QE was a tacit acknowledgment that the US and world economy, far from recovering, is weakening. Five years after the Wall Street crash, none of the underlying contradictions that led to the disaster have been addressed, let alone resolved. Instead, the global financial system has become completely dependent on virtually unlimited subsidies by central banks and governments, exacerbating the contradictions that led to the crisis in the first place.

The budget and debt crises resulting from the diversion of trillions in public funds to prop up the banks are used, in turn, to justify a brutal assault on the living standards of the working class and the gutting of social programs upon which working people depend.

The decision also illustrated the immense power wielded by the major banks, which largely dictate government policy. On the eve of the Fed meeting, Wall Street, acting through its stooges in Congress from both parties, engineered the withdrawal of former Obama economic adviser Lawrence Summers from consideration to replace Bernanke when the current Fed chairman retires at the end of this year. The big banks considered Summers insufficiently committed to continuing the colossal public subsidies of their profits, and sent a shot across the bow of the Fed by torpedoing his bid to become the new chairman.

What Bernanke did not say at his press conference—but which was demonstrated by the market reaction—is that Wall Street is utterly addicted to the financial stimulus provided by the Federal Reserve bond purchases. Any significant cutback could trigger a new financial collapse that would dwarf the 2008 crisis that followed the bankruptcy of Lehman Brothers.
http://www.wsws.org/en/articles/2013/09/19/econ-s19.html
 
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That sure seems like a contradiction. The Feds started paying interest on the banks excess reserves in 2008. But it's turned out to be an incentive for the banks not to lend because they profit more just off the interest than they would lending. How can the Feds stimulate the economy if the banks aren't lending?

This isn't true at all.
 
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What a bizarre piece. WSWS can be really weird sometimes, they aren't the most knowledgeable. Fed maintaining the program has nothing to do with the economy "weakening" which really isn't that true.

Second, wtf does he next sentence even mean in the context of the US? What subsidies are banks "relying on" from central banks? ZIRP isn't a "subsidy".

Third, the "budget and debt crises" don't even exist, and it's frankly bizarre that socialists would be trotting out such an extreme-right argument that puts them in line with congressional conservatives and tea party types (which is comical considering they then in the same sentence attack cutting social programs).

As for the final sentence, that will obviously be proven wrong when tapering does begin. By the end of that quote I couldn't even tell I was reading a socialist rag; sounds like it came straight from the Tea Party right-wing. Just really bizarre.
 

Moot

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This isn't true at all.

imposibru.jpg



Interest on Required Balances and Excess Balances

"...The Federal Reserve Banks pay interest on balances maintained to satisfy reserve balance requirements and on excess balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).

The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008 by the Emergency Economic Stabilization Act of 2008. The text of both Acts is available on the Library of Congress' THOMAS Legislative Information website.

The interest rate paid on balances maintained to satisfy reserve balance requirements is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.

The Board will continue to evaluate the appropriate settings of the rates paid on balances in light of evolving market conditions and make adjustments as needed.

The interest rates paid on balances maintained to satisfy reserve balance requirements and excess balances are published on the H.3 statistical release, "Aggregate Reserves of Depository Institutions and the Monetary Base" each Thursday at 4:30 p.m.

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
 
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sookster

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That sure seems like a contradiction. The Feds started paying interest on the banks excess reserves in 2008. But it's turned out to be an incentive for the banks not to lend because they profit more just off the interest than they would lending. How can the Feds stimulate the economy if the banks aren't lending?

If this is true, more reserves would allow The Fed to loan more money to the government because of fractional reserve banking. So even though less loans would be initiated throughout the economy, there would be more deficit spending using those excess resources. The Fed can stimulate the economy just as much as the community banks, but in other ways. When you want to contract the money supply, that is when you increase interest rates. So, the fed would probably decrease the interest rates on the reserves and increase the interest rates on loans. This creates an incentive for the banks to loan and therefore extract money from the money supply using the higher rates.

This isn't a big deal. This is probably what is going to be the new norm with how the banking sector works.
 
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imposibru.jpg



Interest on Required Balances and Excess Balances

"...The Federal Reserve Banks pay interest on balances maintained to satisfy reserve balance requirements and on excess balances. The Board of Governors has prescribed rules governing the payment of interest by Federal Reserve Banks in Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204).

The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008 by the Emergency Economic Stabilization Act of 2008. The text of both Acts is available on the Library of Congress' THOMAS Legislative Information website.

The interest rate paid on balances maintained to satisfy reserve balance requirements is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.

The Board will continue to evaluate the appropriate settings of the rates paid on balances in light of evolving market conditions and make adjustments as needed.

The interest rates paid on balances maintained to satisfy reserve balance requirements and excess balances are published on the H.3 statistical release, "Aggregate Reserves of Depository Institutions and the Monetary Base" each Thursday at 4:30 p.m.

FRB: Interest on Required Balances and Excess Balances

Bank reserves have absolutely nothing to do with whether or not a bank lends money.
 

imagep

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I found it interesting that the stock market soared upward that day. Seems like the market thinks it's a good move.
 

austrianecon

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I found it interesting that the stock market soared upward that day. Seems like the market thinks it's a good move.

Easy money. It's how the down jumped to 15k before the bubble in 2007.
 

austrianecon

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Banks are not reserve constrained from lending money. They lend first then obtain reserves later.

Here is just a few links from many leading econ guys:

https://www.google.com/search?q=ban...me..69i57j0l2.3820j0&sourceid=chrome&ie=UTF-8



Umm, doesn't matter if they have the reserves in the middle of the day or at the end of the day.. they are reserved constrained*. If they fail to meet standards at the end of close of day They are considered under-capitalized and FDIC, SEC and the Fed have a little pow wow about what to do with them. See.. Washington Mutual, MF Global, the National Bank of El Paso (failed 7 days ago) or the hundred or so banks that have failed since 2007.

* Reserve constrained means capital restrained. There is so much capital in the market. So that is the constraint. When the Fed increases the money supply it increase the threshold of reserve available.
 

head of joaquin

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Easy money. It's how the down jumped to 15k before the bubble in 2007.

More like tax cuts for the wealthy who have to put their vast capital somewhere.

The solution is a steep progressive tax on the top bracket. Then the top bracket may have to actually think before they invest in bubbles.
 

austrianecon

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More like tax cuts for the wealthy who have to put their vast capital somewhere.

The solution is a steep progressive tax on the top bracket. Then the top bracket may have to actually think before they invest in bubbles.

Or more like increase capital means larger capital returns at 0 risk.
 

JP Hochbaum

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Umm, doesn't matter if they have the reserves in the middle of the day or at the end of the day.. they are reserved constrained*. If they fail to meet standards at the end of close of day They are considered under-capitalized and FDIC, SEC and the Fed have a little pow wow about what to do with them. See.. Washington Mutual, MF Global, the National Bank of El Paso (failed 7 days ago) or the hundred or so banks that have failed since 2007.

* Reserve constrained means capital restrained. There is so much capital in the market. So that is the constraint. When the Fed increases the money supply it increase the threshold of reserve available.

Capital is different from reserves, FYI, but I wouldn't expect you to know that.
 

austrianecon

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Capital is different from reserves, FYI, but I wouldn't expect you to know that.

Actually, I note that.. capital is the amount of money out in the market. Reserves are what the banks are required to have. More capital means more reserves are available.
 

Moot

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Banks are not reserve constrained from lending money. They lend first then obtain reserves later.

Here is just a few links from many leading econ guys:

https://www.google.com/search?q=ban...me..69i57j0l2.3820j0&sourceid=chrome&ie=UTF-8

Banks reconcile their reserves on the interbank market, so they don't even take it into consideration when loaning money.

Bernake said that banks wouldn't have incentive to lend if they can profit more from the interest on their excess reserves. He even admitted that paying interest on the banks excess reserves is stifling lending. Thats pretty much what I said, too.



Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate.[11][12][13]

On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks would be unwilling to lend reserves at a rate lower than they can receive from the Fed. ......"[14]

Also on January 13, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending.[15]

On January 7, 2009, the Federal Open Market Committee had decided that, "the size of the balance sheet and level of excess reserves would need to be reduced."[16] On January 15, Chicago Fed president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves.

Some of this scaling back will occur naturally as market conditions improve on account of how these programs have been designed. Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil" [17]

At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion[18] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion.[19]

On March 20, 2013, excess reserves stood at $1.76 trillion.[19]

As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in interest on excess reserves (IOER) would cause when interest rates rise.

St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks."

Bankers quoted in the Financial Times said the Fed could increase IOER rates more slowly than benchmark Fed funds rates, and reserves should be shifted out of the Fed and lent out by banks as the economy improves. Foreign banks have also steeply increased their excess reserves at the Fed which the Financial Times said could aggravate the Fed’s PR problem.[20]

Excess reserves - Wikipedia, the free encyclopedia
 

Moot

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Capital is different from reserves, FYI, but I wouldn't expect you to know that.

Capital isn't really that different from the excess reserves because the corporations deposited their trillions in cash at commercial banks who in turn deposited it at the Federal Reserve as excess reserves to earn interest.

Neither the corporations or the banks have incentive to risk their capital to create jobs or lend if they can make more money risk free in interest than they would expanding or lending.
 
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Bernake said that banks wouldn't have incentive to lend if they can profit more from the interest on their excess reserves. He even admitted that paying interest on the banks excess reserves is stifling lending. Thats pretty much what I said, too.

I think you are confused. Banks cannot "withdraw" excess reserves; all they can do is loan it on the interbank market. IOER is simply an additional policy tool put in place to manipulate the fed funds rate, which is exactly what this Wikipedia article says, particularly in the sections you bolded. This is the same reason that QE didn't cause any inflation; reserves, explicitly speaking, don't enter the economy.

I highly recommend you read this entire article, penned by Paul Sheard, Chief Global Economist and Head of Global Economics and Research for Standard & Poor's:

The key point, however, is that the existence of excess reserves in the banking system does not loosen any reserve
constraint on the ability of banks to lend because there was no reserve constraint to begin with (of course, the stance
of monetary policy, notably the interest-rate policy decision, does affect the demand for bank lending and the
willingness of banks to lend, but, to repeat, given the interest-rate setting, the central bank supplies whatever reserves
are demanded).

It might be asked: if banks cannot lend the excess reserves that the central bank provides, what is the point of the
central bank supplying them? The answer to that question is simply that QE does serve to ease financial conditions.
Technically, QE allows the central bank to change the composition of the aggregate portfolio held by the private
sector; the central bank takes out of that portfolio the government debt and other securities it buys and replaces them
with reserves and bank deposits (the latter when it buys assets directly from the public or its nonbank financial
intermediaries) (10). This has an easing effect via so-called "portfolio rebalance effects," including but not limited to the
associated downward pressure that QE puts on the yield curve (11).

Just like any monetary easing, QE, and the supply of excess reserves that it entails, should lead, over time, to more
credit creation than would have occurred in the absence of the QE (12). Partly, this is because the easier financial
conditions should make borrowers a little bit more willing than otherwise to borrow. Part of the portfolio rebalancing
might also involve banks being a little bit more willing than otherwise to lend because they have fewer higher-yielding
or longer-duration assets on their balance sheet (as a proportion of their assets and likely in absolute amount, too).
Thus the fact that banks have excess reserves on their balance sheet should induce banks to lend a bit more than they
would otherwise have done. But this would occur as part of the "portfolio rebalance effect" and is a far cry from the
mechanical view of the world that sees bank reserves as the (direct) fodder for bank lending.

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf
 
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