T-Bills are purchased by Depository Institutions, who pay for them with Excess Reserves, or Vault Cash.
But deregulated outfits like Enron are less likely to store excess reserves in the ground.
First, neither excess reserves nor the monetary base (currency plus bank reserves) are money.
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During this economic recession, however, they have put the money back into excess reserves.
It is the existence of the excess reserves that creates the need for TAG accounts.
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For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility.
Fed Chairman Ben Bernanke acknowledged the challenges with mounting excess reserves during a recent speech in London.
But, to date, money growth has been constrained by large excess reserves, which the Fed pays interest on.
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Some have compared the current situation to 1936, when banks carried excess reserves equal to 50% of total reserves.
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Mr. Draghi said the persistent high level of excess reserves in the deposit facility is "inevitable" in the circumstances.
But deregulated outfits are less likely to store excess reserves in the ground.
The Fed could start charging the banks interest to stash their excess reserves.
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When banks finally start using their excess reserves aggressively, it may over-stimulate the economy and cause a significant inflation problem.
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The build-up in excess reserves reduced the money creation that would normally have accompanied net open market purchases of assets.
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Until now it has not paid interest on those deposits, which means banks lend their excess reserves to other banks.
Huge increases in the base have not led to large increases in money, because banks are holding on to excess reserves.
The proposed operation would also eliminate bank account balances at least equal in amount to the excess reserves that were extinguished.
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Raising the rate of interest paid on excess reserves can make new bank loans less attractive, thus tempering overall credit creation.
Banks now get a 25 basis point interest rate return on their reserve deposits with Federal Reserve Banks, including their excess reserves.
The Fed could stop paying interest on excess reserves to member banks.
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The Fed also now pays competitive rate for banks parking excess reserves.
Another point he touched on was the interest on excess reserves (IOER).
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In the process, it would provide the financial markets with needed Treasuries, while returning excess reserves to the nothingness from which they came.
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However, as the economy regains steam and loan demand increases, those excess reserves will enter the marketplace and increase nominal spending and prices.
Back then, excess reserves were considered uneconomical, since banks could make more profits off lending the money to fellow banks overnight or to clients.
If bankers are hoarding excess reserves because of fear and uncertainty, you give them more, not less, if you want them to lend more.
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Worried that all that pent-up credit would fuel reckless lending or inflation, the Fed simply doubled the reserve requirement, transforming excess reserves into mandatory ones.
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Guess what banks are doing right now with their excess reserves?
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While this is just armchair theorizing, I did recently meet an economist who constructed his own private measure of the monetary base that excluding excess reserves.
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Paying interest on excess reserves will initially sterilize the new high-powered money, without much impact on bank lending and nominal incomes, let alone real GDP growth.
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