The Federal Reserve has added $2.6 trillion to the US economy since the start of 2020. These actions, along with recent fiscal spending programs, have caused many economists to worry about the risks of price level inflation and overheating of the economy, potentially sowing the seeds of future economic collapse.
Article by Thomas L. Hogan from AIER.
The Fed conducted a similar expansion after the 2008 financial crisis. From 2008 through 2015, the Fed increased the supply of base money by $3 trillion through its repeated quantitative easing (QE) programs. Yet despite this massive expansion, the rates of inflation and GDP growth consistently undershot the Fed’s target for more than a decade.
One potential reason for the lack of economic activity is that the Fed is preventing economic growth by paying banks not to lend. Since late 2008, the Fed has paid interest on the excess reserves that banks hold at the Fed. If the Fed pays a high enough rate of interest on excess reserves (IOER), then banks may choose to hold the newly-created money as excess reserves rather than lending it out into the economy.
Economists remain highly divided about the economic effects of IOER. I examined the evidence in a recent paper published in the Journal of Macroeconomics (available for free download until July 14th). I found that the Fed’s IOER policy accounts for the majority of the decline in bank lending in the decade following the financial crisis.
The Fed’s new operating system
At the peak of the financial crisis in late 2008, the Fed witnessed collapses in both the banking system and the broader economy. Despite access to emergency liquidity from the Fed, many banks stood on the brink of failure. Emergency lending had vastly increased the supply of money in the economy, as would the Fed’s upcoming large scale asset purchases. The Fed wanted a way to sterilize these monetary injections to minimize future inflation.
To address these problems, in October of 2008 the Fed started paying interest to banks on their excess reserves.
With this policy, the Fed saw a way to prevent bank failures and limit inflation, effectively killing two birds with one stone. First, the Fed was fortifying bank balance sheets by buying their risky mortgage-backed securities and replacing them with safe, liquid reserves. Second, paying IOER effectively sterilized the monetary injections from Fed’s emergency lending and QE programs. By paying banks to hold more reserves, the Fed could prevent the newly-created money from spreading to the rest of the economy and inflating the price level.
IOER and bank reserves
In some ways, the IOER policy worked as expected. Banks massively increased their reserve holdings. Figure 1 shows the total excess reserves held at the Fed, which increased from close to zero in early 2008 to more than $2.5 trillion by 2014. With each round of QE, the majority of funds were absorbed as excess reserves, effectively sterilizing these injections from affecting spending or inflation.
Some effects of IOER, however, were not as expected. The rate of IOER was expected to act as a floor or lower bound for the federal funds rate and other short-term, risk-free interest rates. But, as soon as IOER was introduced, the fed funds rate and other short-term rates fell through this supposed floor. Rather than cutting the IOER rate to match market interest rates, the Fed made this policy official by adopting a new target range for the fed funds rate with the rate of IOER being the upper bound of the range. In other words, the Fed began paying a rate of IOER that was higher, rather than equal to, short-term market interest rates.
Another effect that remains controversial is the relationship between excess reserves and bank loans. In theory, if the Fed pays a rate of IOER that is equal to short-term market interest rates, then banks should be indifferent between these assets. In this case, IOER would have no effect on bank balance sheet allocations. However, since the Fed was paying IOER that was higher than comparable market rates, banks used the new reserves as substitutes for other assets.
Some economists predicted that the banks would accumulate excess reserves in place of other short-term, liquid assets like fed funds or US Treasuries. But the high rate of IOER made excess reserves more attractive, even relative to other assets like bank loans. Figure 2 shows that the decline in loans as percentages of bank assets was almost fully offset by an increase in excess reserves.
IOER and bank lending
It seems clear from Figure 2 that bank loans and reserves were inversely related. As banks’ reserve holdings increased after 2008, their loan holdings went down. But how much of this shift was caused by the rate of IOER compared to other factors, like banks’ need for safe assets or the lack of loan demand?
My recent paper, “Bank lending and interest on excess reserves: An empirical investigation” seeks to address this question. I used data on US banks from 2000 through 2018 to test how lending responded to changes in the rate of IOER. Accounting for other factors, such as changes in regulation, loan demand, and economic activity, I found the higher rates of IOER have strong negative effects on banks’ loan allocations.
Using these results, I was able to estimate how much banks would have allocated to loans if the Fed had not paid high rates of IOER. If the rate of IOER had been left at zero, I estimate that lending would have declined slightly in 2009, but it would have recovered more quickly thereafter. In total, the results indicate that the Fed’s IOER policy accounts for 63.9 percent or more of the decline in bank lending after the financial crisis.
The evidence shows that banks treated excess reserves as a profitable alternative to loans. High rates of IOER caused them to increase reserve holdings and decrease their loan allocations. The Fed was indeed paying banks not to lend.
‘The Purge’ by Big Tech targets conservatives, including us
Just when we thought the Covid-19 lockdowns were ending and our ability to stay afloat was improving, censorship reared its ugly head.
For the last few months, NOQ Report, Conservative Playbook, and the American Conservative Movement have appealed to our readers for assistance in staying afloat through Covid-19 lockdowns. The downturn in the economy has limited our ability to generate proper ad revenue just as our traffic was skyrocketing. We had our first sustained stretch of three months with over a million visitors in November, December, and January, but February saw a dip.
It wasn’t just the shortened month. We expected that. We also expected the continuation of dropping traffic from “woke” Big Tech companies like Google, Facebook, and Twitter, but it has actually been much worse than anticipated. Our Twitter account was banned. Both of our YouTube accounts were banned. Facebook “fact-checks” everything we post. Spotify canceled us. Medium canceled us. Apple canceled us. Why? Because we believe in the truth prevailing, and that means we will continue to discuss “taboo” topics.
The 2020 presidential election was stolen. You can’t say that on Big Tech platforms without risking cancellation, but we’d rather get cancelled for telling the truth rather than staying around to repeat mainstream media’s lies. They have been covering it up since before the election and they’ve convinced the vast majority of conservative news outlets that they will be harmed if they continue to discuss voter fraud. We refuse to back down. The truth is the truth.
The lies associated with Covid-19 are only slightly more prevalent than the suppression of valid scientific information that runs counter to the prescribed narrative. We should be allowed to ask questions about the vaccines, for example, as there is ample evidence for concern. One does not have to be an “anti-vaxxer” in order to want answers about vaccines that are still considered experimental and that have a track record in a short period of time of having side-effects, including death. One of our stories about the Johnson & Johnson “vaccine” causing blood clots was “fact-checked” and removed one day before the government hit the brakes on it. These questions and news items are not allowed on Big Tech which is just another reason we are getting canceled.
There are more topics that they refuse to allow. In turn, we refuse to stop discussing them. This is why we desperately need your help. The best way NOQ, CP, and ACM readers can help is to donate. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal as well. We are pacing to be short by about $3700 per month in order to maintain operations.
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During that four-month stretch, Twitter and Facebook accounted for about 20% of our traffic. We are actively working on operating as if that traffic is zero, replacing it with platforms that operate more freely such as Gab, Parler, and others. While we were never as dependent on Big Tech as most conservative sites, we’d like to be completely free from them. That doesn’t mean we will block them, but we refuse to be beholden to companies that absolutely despise us simply because of our political ideology.
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