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Jan 19, 2022Liked by Taylor Shiroff

Thanks for the article. I mostly agree, but the leverage ratio is a problem here. Unless reserves are exempt from the leverage ratio, the FED choosing to increase reserves also means it requires that leverage-ratio-bound banks increase capital or decrease their leverage ratio exposure measure in other ways - and don't forget that the LREM feeds into the G-SIB charge. This in turn creates an issue for the transmission of monetary policy, as even Carolyn Rogers has acknowledged. If the simple model that increasing reserves increases bank assets and liabilities with no increase in capital worked, we'd be good. Hence it's a shame that the FED's temporary change to exempt reserves from the SLR in wasn't made permanent.

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Jan 19, 2022·edited Apr 28, 2022Author

Totally agree re: regulation--I would very, very much support excluding reserves from leverage ratio requirements, it confused me (but I guess it didn't surprise me, considering who it came from) very much to see so much opposition to keeping the SLR reserve exemption in place. But that's politics for you, I guess!

I try to keep out of too much regulation talk here as it gets messy pretty fast (and I'm honestly a little underqualified to talk about it...), but thanks for raising this important point and thanks for reading!

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If QE worked why do I have to work twice as long to buy a home?

What econ labels growth means lower living standards for the plebs.

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I share the concern about the cost of housing, but I think that would be much better addressed through zoning reform and simply building housing! In the long term, at least.

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I think land value tax and zoning reform. LVT would force building more efficiently.

What the Fed have done so far is a total disaster for working people. If you get intern at Cleveland please consider kicking one of the Fed chairs very hard in the nuts as they are killing the working class, and it would be great for them to have that one moment in their ivory tower, beyond their little spreadsheets, where they feel the pain. Cheers :-)

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With you on the first counts there, especially the LVT! Thanks for commenting.

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Jan 19, 2022·edited Jan 19, 2022

Sorry but I'm afraid you've misunderstood what 'excess reserves' means. These are the reserves held with the Fed above and beyond the banks' capital requirements. The point is that these capital requirements are a quantity of reserves defined as a ratio to loans - that is, if loans increase then the reserve requirements increase too. Krugman is therefore not saying that if there were a sufficient quantity of good lending opportunities then the banks would lend the reserves themselves or destroy them in some way; rather, he's saying that banks would increase their loans and thereby *excess* reserves would no longer be *excess*.

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Hey there, I agree with you and another commenter that regulatory requirements get in the way and make the transmission process messier. I think Krugman's point on reserves is relatively clear though, I don't think he sees it as you do--for more examples, see this Twitter thread here: https://twitter.com/wonkmonk_/status/1481651413113446406

I wouldn't be as peeved if he meant it as you say, that banks would quite possibly lend more is reserves were treated more fairly (or better yet, realistically) by regulation. But Krugman (here and elsewhere) definitely seems to be asking the "why do banks hold so many reserves" question and answering it by saying "well, they aren't lending them out enough!". He sort of expands on that most directly in this piece (https://krugman.blogs.nytimes.com/2013/08/16/banks-and-the-monetary-base-wonkish/) which is *better* but I still think misses the mark a bit. In any case, apologies for being unable to hyperlink in comments, and thanks for reading! Best wishes with your new blog, and feel free to send anything my way over on Twitter (@taylorshiroff).

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Thanks for the reply and for the kind wishes. I'd first note that he doesn't actually use the phrase 'lending out reserves' in the example you give in the blog.

As for the other examples, he explains in your second link that in all of these cases he's using the phrase 'lending out reserves' as shorthand. Therefore the entire argument boils down to whether making new loans counts as "buying more securities" in the context of banks' portfolio rebalancing. I'd argue it does, especially viewed from an accounting angle - the company essentially creates a new security which the bank purchases.

Best wishes.

P.S. not really relevant but (as a former neoliberal) please keep an open mind on neoliberalism - looking at enough evidence one eventually comes to the conclusion that it's pretty evil...

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I am, to be fair, giving Krugman a little bit of a hard time--perhaps I shouldn't have focused too much on him. Your point on loans as securities is well-taken, but I'm not sure reserves are the most important binding restraint on lending (though I wouldn't take that to the extreme and suggest reserves don't matter at all). Perhaps my real criticism is the phrasing on this stuff--it is an often mentioned point, especially during the financial crisis. Even Bernie Sanders asked Bernanke about why banks were choosing to hold so many reserves!

Re: neoliberalism, I try to keep an open mind, but I haven't quite yet felt that it's all too evil. We'll leave it there though-thanks!

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