Why does everyone hate mmt?

Fenton said:

QE was unprecedented. The Fed purchased large amounts of Govt bonds to drive up Bond prices and conversely to drive down yields and short term interest rates.

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You have it completely backwards, which is a testament of depth. QE is a policy where asset purchases are well in excess of the level necessary to bring interest rates to the zero-bound. The Fed raises and lowers interest rates using a channel/corridoor approach, i.e. interest on excess reserves, reverse repo, and the discount rate.

If the FED planned on making QE permanent, then yes, they're essentially monetizing the debt. All interest earned on Fed liabilities is remitted back to the Treasury in perpetuity, which means it cost nothing for the Fed Govt to borrow and spend

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The Fed can maintain a large balance sheet for as long as it needs without impacting interest rate targets. Again, your entire post is based on a severe knowledge deficiency, and therefore is simply dishonest and misleading.

Kushinator said:

You have it completely backwards, which is a testament of depth. QE is a policy where asset purchases are well in excess of the level necessary to bring interest rates to the zero-bound. The Fed raises and lowers interest rates using a channel/corridoor approach, i.e. interest on excess reserves, reverse repo, and the discount rate.



The Fed can maintain a large balance sheet for as long as it needs without impacting interest rate targets. Again, your entire post is based on a severe knowledge deficiency, and therefore is simply dishonest and misleading.

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You do realize QE wasn't just about bottoming out interest rates, right ??
The FEDs large scale bond purchases added to liquidity to capital markets and their MBS purchases removed toxic agency debt off the books of the banks

And the Fed is unwinding it's balance sheet and increasing it's Fed Funds rate so they'll have options or the monetary tools available if and when the next recession hits.
The Fed refers to it as " monetary policy normalization ".

Fenton said:

You do realize QE wasn't just about bottoming out interest rates, right ??
The FEDs large scale bond purchases added to liquidity to capital markets and their MBS purchases removed toxic agency debt off the books of the banks

And the Fed is unwinding it's balance sheet and increasing it's Fed Funds rate so they'll have options or the monetary tools available if and when the next recession hits.
The Fed refers to it as " monetary policy normalization ".

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At the rate they are unwinding, it will take them 14 years to wind down every $1 trillion of excess reserves. "Normalization" ain't happening.

Monetary policy isn't that effective anyway. Some people are waking up to that fact.

...Hence I believe we will have to go to Monetary Policy 3, which is fiscal and monetary policy coordination that is of a form that we haven’t seen before in our lifetimes but has existed in various forms in others’ lifetimes or faraway places. It is inevitable that this shift will happen because it is inevitable that central bankers will want to ease when interest rates are pinned at 0% and when quantitative easing will be ineffective in achieving the goal...

Modern Monetary Theory is one of those infinite number of configurations that is in my opinion inevitable and shouldn’t be looked at in a precise way.

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It’s Time to Look More Carefully at “Monetary Policy 3 (MP3)”
and “Modern Monetary Theory (MMT)”

JohnfrmClevelan said:

At the rate they are unwinding, it will take them 14 years to wind down every $1 trillion of excess reserves. "Normalization" ain't happening.

Monetary policy isn't that effective anyway. Some people are waking up to that fact.


It’s Time to Look More Carefully at “Monetary Policy 3 (MP3)”
and “Modern Monetary Theory (MMT)”

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I agree, monetary policy has it's limitations, and QE is a great example.

Since the Feds conventional approach ( changing reserve requirements, changing the discount rate, and conducting open market operations ) are dependent on Banks being at or near their reserve requirements, QE has also changed how the Fed adjust their target rate.

Thanks to the massive amounts of excess Reserves created by QE, the Fed was forced to create a corridor system to maintain better control the Fed funds rate

Now the Fed makes adjustments to the overnight reverse repurchase rate and the rate payed on excess reserves to help control the Fed funds rate.

The large amounts of excess reserves creates a challenge for the Fed because Banks can do whatever they like with those reserves. Like moving them into higher yield instruments or lending them out in response to a drop in the ( IOER )

Either one could inject a massive amount of liquidity into the markets which would lead to sudden inflation. Banks should never be given the power or ability to undermine the Feds authority, which is exactly what this would do

Our fractional reserve banking system would allow Banks to convert those excess reserves into loans at a 10-1 ratio, and winding down the Feds balance sheet would help gaurd against this as would Congress raising the reserve requirements

Fenton said:

The large amounts of excess reserves creates a challenge for the Fed because Banks can do whatever they like with those reserves. Like moving them into higher yield instruments or lending them out in response to a drop in the ( IOER )

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Banks cannot do whatever they like with reserves. Reserves serve a very limited purpose.

Fenton said:

Either one could inject a massive amount of liquidity into the markets which would lead to sudden inflation. Banks should never be given the power or ability to undermine the Feds authority, which is exactly what this would do

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This is not true. Banks can't "inject liquidity" (whatever you think that means). Banks can only create money when they have creditworthy borrowers. And they were never constrained by reserves, even before QE. Excess reserves did not change how banks work, and they did not lead to more loans, and they certainly didn't lead to any inflation.

No private sector transaction can change the amount of total reserves in the system. Only transactions between the government and the private sector can do that.

Fenton said:

Our fractional reserve banking system would allow Banks to convert those excess reserves into loans at a 10-1 ratio, and winding down the Feds balance sheet would help gaurd against this as would Congress raising the reserve requirements

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Again, banks can only do this when there are creditworthy borrowers. And also again, they could have done the exact same thing before QE, if there were creditworthy borrowers. Winding down the Fed's balance sheet has no bearing on bank loans, just like expanding the Fed's balance sheet had no bearing on bank loans.

JohnfrmClevelan said:

Banks cannot do whatever they like with reserves. Reserves serve a very limited purpose.



This is not true. Banks can't "inject liquidity" (whatever you think that means). Banks can only create money when they have creditworthy borrowers. And they were never constrained by reserves, even before QE. Excess reserves did not change how banks work, and they did not lead to more loans, and they certainly didn't lead to any inflation.

No private sector transaction can change the amount of total reserves in the system. Only transactions between the government and the private sector can do that.



Again, banks can only do this when there are creditworthy borrowers. And also again, they could have done the exact same thing before QE, if there were creditworthy borrowers. Winding down the Fed's balance sheet has no bearing on bank loans, just like expanding the Fed's balance sheet had no bearing on bank loans.

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Cleveland Fed: Excess Reserves, Oceans of Cash
Excess Reserves - Oceans of Cash

" The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in their loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change or which conditions are likely to bring about a massive change in their use of excess reserves. Recent history is not much help in determining the answer to this question because no balances this big have been seen in recent times. "

"Does this mean that the Federal Reserve should consider a major policy change that would remove some of the excess reserves as a safety measure? Such a measure might include raising the reserve requirement, charging interest on excess reserves, and removing liquidity from the system. "

Let me add, if the Fed is thinking about raising the reserve requirement ( I'm pretty sure this is Congress's job but I may be wrong ) to stop Banks from accessing or investing their excess reserves, then clearly there is a distinction between reserves and excess reserves

I know, Banks to not lend their reserves, but apparently they can do what they like with the excess capital that's parked at the Fed marked as excess reserves.

Fenton said:

Cleveland Fed: Excess Reserves, Oceans of Cash
Excess Reserves - Oceans of Cash

" The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in their loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change or which conditions are likely to bring about a massive change in their use of excess reserves. Recent history is not much help in determining the answer to this question because no balances this big have been seen in recent times. "

"Does this mean that the Federal Reserve should consider a major policy change that would remove some of the excess reserves as a safety measure? Such a measure might include raising the reserve requirement, charging interest on excess reserves, and removing liquidity from the system. "

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You might find this hard to believe, but not everybody that the Fed publishes actually understands how this stuff works. There are still different schools of thought that can't agree on what happened, and what will happen in the future. There was disagreement about QE, and differing predictions about the outcome. And there are still disagreements about excess reserves, even though we have had ten years of evidence telling us that the "explosion of liquidity" school of thought was completely wrong. These guys are still clinging to the idea that this past decade has been an aberration, and that their long-held economic beliefs aren't completely wrong.

Fenton said:

Let me add, if the Fed is thinking about raising the reserve requirement ( I'm pretty sure this is Congress's job but I may be wrong ) to stop Banks from accessing or investing their excess reserves, then clearly there is a distinction between reserves and excess reserves

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It's a distinction without a difference, because the Fed never capped the amount of total reserves in reserve accounts. If the demand for bank loans called for more reserves, then the Fed provided those reserves (by buying bonds, which added net reserves to reserve accounts). Once the banks (as a whole) had sufficient reserves to cover 10% of total M1 liabilities, they would find their way to the banks that needed them via the interbank market.

So even if the Fed raised the reserve requirement to 20%, it wouldn't prevent banks from creating all the loans that demand called for, it would just make it a bit more expensive, as they would now have to keep a larger reserve balance. And since the Fed pays interest on all reserves, not just excess reserves, it doesn't really cost banks anything to hold excess reserves.

Fenton said:

I know, Banks to not lend their reserves, but apparently they can do what they like with the excess capital that's parked at the Fed marked as excess reserves.

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Reserves are settlement funds. They move when there are interbank transactions, but the total stays the same. If a bank wants to hold a bond, somebody else must be willing to hold cash, and their bank will hold the reserves. In total, assets only move around; with the transactions you are thinking of, total reserves and total assets remain unchanged.

Fenton said:

You do realize QE wasn't just about bottoming out interest rates, right ??

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WTF do you think you quoted me in saying? Because you clearly didn't read the statement you quoted:

Kushinator said:

QE is a policy where asset purchases are well in excess of the level necessary to bring interest rates to the zero-bound.

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You can't walk it back. Hence, your statement adds little value to the discussion.

JohnfrmClevelan said:

So even if the Fed raised the reserve requirement to 20%, it wouldn't prevent banks from creating all the loans that demand called for, it would just make it a bit more expensive, as they would now have to keep a larger reserve balance. And since the Fed pays interest on all reserves, not just excess reserves, it doesn't really cost banks anything to hold excess reserves.

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We can think of interest on excess reserves as partial compensation for not lending available funds. Banks, as a general rule, want to hold as little of reserves as possible, because the opportunity cost of not earning interest through lending FAR outweighs the lower bound of the Fed's target rate.

Fenton said:

The large amounts of excess reserves creates a challenge for the Fed because Banks can do whatever they like with those reserves. Like moving them into higher yield instruments or lending them out in response to a drop in the ( IOER )

Either one could inject a massive amount of liquidity into the markets which would lead to sudden inflation. Banks should never be given the power or ability to undermine the Feds authority, which is exactly what this would do.

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More bull****.

Only the Fed can increase or decrease the level of reserves in the banking system. Even if additional loans are created to the point where excess reserves = 0, no additional reserves will be created through the lending process. Instead, banking deposits will be created.

Our fractional reserve banking system would allow Banks to convert those excess reserves into loans at a 10-1 ratio, and winding down the Feds balance sheet would help gaurd against this as would Congress raising the reserve requirements

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That's not how it works...........................:roll:

Kushinator said:

We can think of interest on excess reserves as partial compensation for not lending available funds. Banks, as a general rule, want to hold as little of reserves as possible, because the opportunity cost of not earning interest through lending FAR outweighs the lower bound of the Fed's target rate.

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Unless something has changed, the Fed pays IOR on all reserves, not just excess reserves. So there is no "cost" to holding excess reserves.

Banks have little choice on whether or not to create loans. Either there is a creditworthy borrower, or there isn't.

JohnfrmClevelan said:

Unless something has changed, the Fed pays IOR on all reserves, not just excess reserves.

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Only reserves of domestic institutions. Reserves held by Mitsubishi for example do not earn interest. As a result, they tend to lend out excess reserves at a rate less than the IOER/IORR. The rate on required reserves has no impact on the Federal Funds Rate.

So there is no "cost" to holding excess reserves.

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There is both opportunity cost and inflation cost.

Banks have little choice on whether or not to create loans. Either there is a creditworthy borrower, or there isn't.

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Even credit worthy borrowers were constrained during the financial crisis. Banks change their underwriting standards. Banks choose who they lend to, just like they did leading up to the housing bubble.

JohnfrmClevelan said:

You might find this hard to believe, but not everybody that the Fed publishes actually understands how this stuff works. There are still different schools of thought that can't agree on what happened, and what will happen in the future. There was disagreement about QE, and differing predictions about the outcome. And there are still disagreements about excess reserves, even though we have had ten years of evidence telling us that the "explosion of liquidity" school of thought was completely wrong. These guys are still clinging to the idea that this past decade has been an aberration, and that their long-held economic beliefs aren't completely wrong.



It's a distinction without a difference, because the Fed never capped the amount of total reserves in reserve accounts. If the demand for bank loans called for more reserves, then the Fed provided those reserves (by buying bonds, which added net reserves to reserve accounts). Once the banks (as a whole) had sufficient reserves to cover 10% of total M1 liabilities, they would find their way to the banks that needed them via the interbank market.

So even if the Fed raised the reserve requirement to 20%, it wouldn't prevent banks from creating all the loans that demand called for, it would just make it a bit more expensive, as they would now have to keep a larger reserve balance. And since the Fed pays interest on all reserves, not just excess reserves, it doesn't really cost banks anything to hold excess reserves.



Reserves are settlement funds. They move when there are interbank transactions, but the total stays the same. If a bank wants to hold a bond, somebody else must be willing to hold cash, and their bank will hold the reserves. In total, assets only move around; with the transactions you are thinking of, total reserves and total assets remain unchanged.

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Excess reserves are not required reserves. Prior to 2008, Banks were allowed to lend out excess reserves instead of holding onto non-interest bearing cash and they're still
allowed to lend out excess reserves.

The Fed IOER rate is an incentive for Banks to leave their excess reserves at the Fed.
If the Fed discount rate ever exceeds the IOER rate, then Banks will just draw from their excess reserves instead of paying higher interest on a overnight loan

St Louis Fed: Paying Interest on Excess Reserves
Paying interest on excess reserves | FRED Blog

Kushinator said:

More bull****.

Only the Fed can increase or decrease the level of reserves in the banking system. Even if additional loans are created to the point where excess reserves = 0, no additional reserves will be created through the lending process. Instead, banking deposits will be created.



That's not how it works...........................:roll:

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You could save yourself some embarrassment Kush if you would just calm down before you post, and not go off half cocked everytime you respond to me,

Banks were allowed to lend out excess reserves before 2008 rather than hold onto non-interest bearing excess cash and their allowed to lend out excess reserves now

Excess reserves are not required reserves, and the Fed has never forced financial institutions to hold onto non-interest bearing excess cash

St Louis Fed: Paying interest on reserves
Paying interest on excess reserves | FRED Blog

If you can't control yourself, then don't respond to my post.

Fenton said:

The Fed IOER rate is an incentive for Banks to leave their excess reserves at the Fed.

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Incorrect. It's simply how the Fed establishes its interest rate target. It's amusing watching you flail.

Fenton said:

You could save yourself some embarrassment Kush if you would just calm down before you post, and not go off half cocked everytime you respond to me

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You're talking complete nonsense. At least you're learning something.

Banks were allowed to lend out excess reserves before 2008 rather than hold onto non-interest bearing excess cash and their allowed to lend out excess reserves now

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The Fed doesn't control the level of excess reserves. Banks have always been able to lend out excess reserves... even after 2008.

Excess reserves are not required reserves, and the Fed has never forced financial institutions to hold onto non-interest bearing excess cash

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Nobody claimed the Fed forced financial institutions to hold onto reserves. More flailing.

If you can't control yourself, then don't respond to my post.

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Stop pretending to be anything sort of an expert. You're learning (through repeated error) in these exchanges... not the other way around.

Kushinator said:

Only reserves of domestic institutions. Reserves held by Mitsubishi for example do not earn interest. As a result, they tend to lend out excess reserves at a rate less than the IOER/IORR. The rate on required reserves has no impact on the Federal Funds Rate.

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I can't find any authority that says the Fed doesn't pay IOR to foreign banks. Do you have a link to something? Because I find that to be completely illogical, since the Fed needs to defend that interest rate.

Fenton said:

Excess reserves are not required reserves. Prior to 2008, Banks were allowed to lend out excess reserves instead of holding onto non-interest bearing cash and they're still
allowed to lend out excess reserves.

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That's completely wrong. Banks don't lend out reserves, excess or not, and they never have. Reserves only exist as balances on the Fed's ledger; it's not even possible to lend out reserves. Which makes the rest of what you said wrong as well.

JohnfrmClevelan said:

I can't find any authority that says the Fed doesn't pay IOR to foreign banks. Do you have a link to something? Because I find that to be completely illogical, since the Fed needs to defend that interest rate.

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My apologies, i lumped foreign owned banks in with U.S. money market funds and GSE's. However, my initial point is still valid as the IOER operates more as a magnet pulling rates up as opposed to a floor for rates. Given that most foreign owned banks formed after 1991 are exempt from FDIC fees, they are prime candidates (along with IOER exempt institutions) to conduct arbitrage by borrowing (as counterparties to GSE's and money markets) and lending (unwinding to maintain their monthly liquidity requirements) below the rate paid on both excess and total reserves. I mistakenly took this activity as a form of exemption.

As we can see, the IOER acts as the upper limit of the Fed's target range:



I believe the Fed is currently using the reverse repo facility to mop up any future interest rate arbitrage.

Sorry for any confusion i might have caused.

Kushinator said:

You're talking complete nonsense. At least you're learning something.



The Fed doesn't control the level of excess reserves. Banks have always been able to lend out excess reserves... even after 2008.



Nobody claimed the Fed forced financial institutions to hold onto reserves. More flailing.



Stop pretending to be anything sort of an expert. You're learning (through repeated error) in these exchanges... not the other way around.

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Have you read through this exchange ?
I'm not the one who's been confusing excess reserves with required reserves.

Your last post for example.

Yea, NO ****. Only the Fed can increase and decrease reserves. Show me where I've claimed otherwise. Go ahead, quote me. You will not because you can not.

And OF-COURSE Banks don't lend reserves, which I've said more than once in these exchanges.
And I've never claimed to be an expert, but I CAN READ.

You guys keep coming back with non sequiturs and personal attacks (actually John's been pretty civil ), you on the other hand apparently have problems controlling your emotions.

We're discussing monetary policy for ****s sake. There is no reason to get emotional.

Kushinator said:

Incorrect. It's simply how the Fed establishes its interest rate target. It's amusing watching you flail.

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The IOER acts as an effective ceiling for the policy rate.

The Fed sets the IOER just below the upper limit to create a buffer and to discourage banks from borrowing reserves at the lower fed funds rate.

If the EFFR ( effective federal funds rate ) ever exceeds the IOER, Banks will just access their excess reserves instead of paying a higher rate for a loan in the overnight market

Honestly this isn't that complicated, or difficult to comprehend.

Complicated is what I've been been doing in between these exchange. Which is using a 200 Mhz oscilloscope and a signal generator to isolate a fault in an old and defective Phase Linear 700 amplifier I purchased off of E-bay.

Understaning multi-stage analog circuits is a challenge, as is tracing a signal through the schematic I've attached below. Monetary policy is not


Buying, repairing and reselling older amplifiers and guitar pedals is a hobby. Maybe you need a hobby Kush. It may help with your moods.

JohnfrmClevelan said:

That's completely wrong. Banks don't lend out reserves, excess or not, and they never have. Reserves only exist as balances on the Fed's ledger; it's not even possible to lend out reserves. Which makes the rest of what you said wrong as well.

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Prior to 2008, Banks refused to hold excess reserves, or non-interest bearing cash on hand in excess of their reserve requirement.
Banks could and did find interest bearing uses for that cash including lending it out, because simply holding it wasn't profitable.

The Fed has never forced Banks to hold onto non-interest bearing cash in excess of their reserve requirement

The Fed purchased Bank assets when they purchased those MBSs, and Banks wouldn't have agreed to hand over more than a trillion dollars in assets, and their ownership rights that entitled them to interest and principal payments over the life of those MBS to the FED for a . 25% rate of return ( what the Fed was paying at the time )

I've posted a link that discuses IOER in relation to EFFR and the challenges this represents as EFFR creeps closer the the rate paid on excess reserves.
The Fed acknowledges the challenge of keeping the EFFR below the IOER, they know Banks won't pay a higher rate on the overnight market when they have access to excess reserves
.

Fenton said:

Prior to 2008, Banks refused to hold excess reserves, or non-interest bearing cash on hand in excess of their reserve requirement.
Banks could and did find interest bearing uses for that cash including lending it out, because simply holding it wasn't profitable.

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This was not the banks' choice. Prior to 2008, when bonds were used to control the overnight rate, it was necessary to keep only a thin layer of excess reserves in the system, or else the rate would fall below the target. And since only bond sales between the Fed and the private sector can alter the total number of reserves, it was the Fed who determined when to buy and sell bonds, and how much. That was the ONLY thing that banks could do with their excess reserves, besides interbank lending. And of course they bought the bonds when offered, because reserves offered no return at the time.

Fenton said:

The Fed has never forced Banks to hold onto non-interest bearing cash in excess of their reserve requirement

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You don't have to "force" banks to do anything. Banks will always choose the higher return, all else being equal.

I explained why excess reserves were previously held to a minimum (by the Fed) above. There are excess reserves today for a number of reasons; they now earn interest, bond yields are low, reserve balances strengthen the banks' positions, etc. But the amount of excess reserves in the system is ultimately the Fed's choice, because only Fed<->private sector transactions can alter the number of reserves in the system. Even if a bank were to buy a bond from some private sector entity, overall reserve levels would not change one bit.

Fenton said:

The Fed purchased Bank assets when they purchased those MBSs, and Banks wouldn't have agreed to hand over more than a trillion dollars in assets, and their ownership rights that entitled them to interest and principal payments over the life of those MBS to the FED for a . 25% rate of return ( what the Fed was paying at the time )

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They certainly would, if the Fed was paying 100 cents on the dollar for assets that they couldn't otherwise unload, even at steep discounts. The whole reason for QE2 was because the value of MBSs had dropped so much that banks (which held MBSs as capital) were suddenly undercapitalized. Normally, banks look to other banks to buy those assets when they are in trouble, but all banks were in the same boat at the time. The Fed was the only buyer, and they didn't insist on a discount.

Fenton said:

I've posted a link that discuses IOER in relation to EFFR and the challenges this represents as EFFR creeps closer the the rate paid on excess reserves.
The Fed acknowledges the challenge of keeping the EFFR below the IOER, they know Banks won't pay a higher rate on the overnight market when they have access to excess reserves
.

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It's not much of a challenge. The overnight rate will always be close to the IOR rate. And interbank lending isn't that important for monetary policy anymore, anyway, because most banks already hold excess reserves.

JP Hochbaum said:

Quite a few misunderstandings and strawmen here. There is no need to interfere with an independent Federal Reserve. There is also no one saying that there will always be demand for the USD. Spending will still be done carefully and with inflation and dollar valuation taken into very important and vital consideration.

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Actually that is the issue with MMT right there. it doesn't care what you spend or how much you spend.
to MMT it doesn't matter.

It pretty much goes against every monitary theory we have out there which is why NO ONE uses MMT
for the money policy.