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Bank reserves update

Just a quick post to once again revisit the issue of whether or not the Fed is "printing" massive amounts of money and thus threatening the world with some sort of financial Armageddon. This chart compares total bank reserves with excess reserves. The two series move in lockstep. Reserves have increased by about $1.45 trillion since Sep. '08, and Excess Reserves have increased by about $1.43 trillion. In other words, banks have effectively decided to hold on to virtually all of the increased reserves that have flooded the system. One big reason they are doing this is that reserves now pay interest, whereas before they didn't. That makes reserves a close substitute for T-bills. The Fed has essentially accommodated banks' desire to reduce the risk inherent in their balance sheets. As long as banks continue to hold their reserves and not use them to greatly expand the money supply, the Fed is not "guilty" of printing money. In order to tighten monetary conditions, the Fed can either withdraw those reserves by selling its massive holdings of Treasuries and MBS, or it can simply raise the interest rate it pays on reserves. Mark Perry has a similar post which adds to the discussion.

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