The Business News Network in Canada interviewed me last week about the gigantic amount of excess reserves being held by U.S. banks.
Here’s a link to the video of the interview. (We had a small technical glitch at the start, but then got rolling.)
Going into the interview, I was focused on the following talking points:
- Total bank reserves have skyrocketed over the past year, from roughly $50 billion to roughly $850 billion.
- When we studied economics in school, we were usually taught that a big increase in reserves would eventually translate into big inflation.
- However, that’s not true today, for two reasons: (1) short-term interest rates are effectively zero, and (2) the Fed can now pay interest on reserves. Those facts weaken / break the traditional link between reserves and inflationary pressures.
- Some have wondered whether the excess reserves mean that banks are hoarding, rather than lending.
- That’s not true either. Instead, the high level of reserves simply reflects the fact that the Fed has been a busy beaver, expanding its balance sheet by making loans and buying securities (i.e., credit easing). Banks might be hoarding or they might not; excess reserves don’t shed any light on the question.
- Viewers who are interested in these issues should check out a recent paper from the New York Federal Reserve, which does a great job of explaining each of these issues.
I didn’t manage to get all of that into the interview, of course, but I tried to hit some of the high points.