Deficit Owls | MMT: The Fed And The Treasury Can't Be Independent @deficitowls5296 | Uploaded August 2016 | Updated October 2024, 5 hours ago.
Professor L. Randall Wray on how the Federal Reserve cannot operate independently of the US Treasury (and this is true for any other country's treasury and central bank). The biggest reason is because (in the absence of the government paying interest on reserves) it is necessary to minimize the amount of excess reserves in the banking system.
"Bank Reserves" are a special form of electronic money, held by banks and foreign governments on the Fed's books. These are used to clear payments between banks and foreign countries. Because banks like to earn interest, they attempt to minimize the amount of excess reserves they hold (reserves beyond what they need to clear payments, or beyond the legal minimum reserve requirement). So if there are excess reserves, banks will offer them to loan to other banks or sell them for interest-earning assets. However, this only shifts reserves between banks, and can't get rid of them. This means that successive bidding will drive the short-term interest rate down to zero (or to any interest rate the government pays on reserves). Therefore, if the Fed wants an interest rate target that is above zero, it must drain the reserves somehow, which it does by selling bonds: by swapping reserves for bonds, the banks get bonds and lose reserves.
However, government spending adds reserves to the system, and taxing removes reserves. Therefore, the Fed and the Treasury must coordinate closely to minimize the Treasury's impact on the reserve system and the interest rates. If the government simply deficit spent, this would add tons of excess reserves, and drive rates to zero. If the government taxed before the Fed bought bonds, then the level of reserves would drop below what banks need, driving interest rates up, potentially to infinity (or to whatever the Fed's penalty borrowing rate is).
See the entire video here: youtube.com/watch?v=-KRi9nF8BiA
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Professor L. Randall Wray on how the Federal Reserve cannot operate independently of the US Treasury (and this is true for any other country's treasury and central bank). The biggest reason is because (in the absence of the government paying interest on reserves) it is necessary to minimize the amount of excess reserves in the banking system.
"Bank Reserves" are a special form of electronic money, held by banks and foreign governments on the Fed's books. These are used to clear payments between banks and foreign countries. Because banks like to earn interest, they attempt to minimize the amount of excess reserves they hold (reserves beyond what they need to clear payments, or beyond the legal minimum reserve requirement). So if there are excess reserves, banks will offer them to loan to other banks or sell them for interest-earning assets. However, this only shifts reserves between banks, and can't get rid of them. This means that successive bidding will drive the short-term interest rate down to zero (or to any interest rate the government pays on reserves). Therefore, if the Fed wants an interest rate target that is above zero, it must drain the reserves somehow, which it does by selling bonds: by swapping reserves for bonds, the banks get bonds and lose reserves.
However, government spending adds reserves to the system, and taxing removes reserves. Therefore, the Fed and the Treasury must coordinate closely to minimize the Treasury's impact on the reserve system and the interest rates. If the government simply deficit spent, this would add tons of excess reserves, and drive rates to zero. If the government taxed before the Fed bought bonds, then the level of reserves would drop below what banks need, driving interest rates up, potentially to infinity (or to whatever the Fed's penalty borrowing rate is).
See the entire video here: youtube.com/watch?v=-KRi9nF8BiA
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
