helicopter drops and the floor system

A quick note on “helicopter drops” by Steve Randy Waldman

(via Steve Roth)

A new link meme? The great synthesis.

DeLong objects.

And here.

This relates to the Floor system.

interest on excess reserves

Alan Blinder: The Fed Plan to Revive High-Powered Money: "Don't only drop the interest paid rate paid on banks' excess reserves, charge them:** Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of 'excess reserves' buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: '[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.' As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that "most" members of its policy committee think a change 'could be worth considering', that's almost like saying they love the idea. That's news because they haven't loved it before..."

(via DeLong)

IOER and money markets

Fed Looks for Other Ways to Aid Economy by Binyamin Appelbaum

The account said that most officials were open to the idea of encouraging bank lending by reducing the interest rate on funds that banks keep on deposit with the central bank. Those reserves have ballooned with the Fed’s bond purchases, because the Fed buys bonds from the banks and then credits their reserve accounts.

The Fed currently pays annual interest of 0.25 percent on bank reserves, which sounds like a pittance but cost $199 million in 2012. Officials have described the payments as a way of keeping inflation under control, because the reserves stay at the Fed. But with inflation sagging, economists including Princeton University’s Alan Blinder have argued that the Fed should revisit its priorities.

The account the Fed released on Wednesday said the idea “could be worth considering at some stage,” though it noted the benefits were likely to be small.

Janet L. Yellen, President Obama’s nominee to lead the Fed for the next four years, said at her confirmation hearing last week that the idea “certainly is a possibility.” She added, however, that officials remain concerned that a rate cut would disrupt financial markets. Keeping the interest rate on reserves above zero, for example, has created an incentive for banks to borrow from money market funds and then deposit the money with the Fed. In the absence of those payments, the money funds might actually be forced to pay the banks to take that same money.

“We’ve worried that if we were to lower that rate to close to zero, we would begin to impair money-market function,” Ms. Yellen said at the hearing.

non-stable elasticities

Brad DeLong Says We Can't Do Anything to Raise Employment Because Billionaire Wall Street Bankers Are Still Too Dumb to Breathe by Dean Baker

DeLong doesn't mention the Fed's interest on excess reserves. The question is whether the banks will unload the trillions on reserve into the economy once the economy picks up. We'll get inflation. We'll get bubbles. But the Fed has said they will raise the IOER to prevent this. The IOER will also shore up the banks' balance sheets.

Made me think of what Bernstein was saying about non-stable elasticities. 

What the banks do with their reserves is one of those elasticities which could jump.

http://en.wikipedia.org/wiki/Excess_reserves

"On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances ("IOER") as well as required reserves. They began doing so three days later.^[3] Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009.^[4][5] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.^[6]

The day before the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."^[7] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,^[7][8] and again on November 5 for the same reason.^[9]

The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:

Estimated Budgetary Effects^[10]

Year	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Millions of dollars	0	-192	-192	-202	-212	-221	-242	-253	-266	-293	-308
(Negative numbers represent expenditures; losses in revenue not included.)

0.25% simple interest on $800 billion is $2 billion, not $202 million [LOLWUT???] as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-term commercial paper and associated credit markets."

The government depositing money in the primary dealers accounts is sort of like a Government Jobs Program. Just takes a while for jobs to be created from credit loaned out from the banks.

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 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.