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October 07, 2008

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flow5

Re: paying interest on reserves. The bankers have always had their hands in the cookie jar. If the New York Fed through its open market power adds a dollar of legal reserves to the system, cummulatively, somewhere in the banking system, bankers acquire c. $200 of earning assets. The return on $200 dwarfs the interest foregone on idle reserves [sic].

The conclusion is obvious. Legal reserves are not a tax, they are like manna from Heaven.

And it doesn’t stop there. The Fed turns over nearly all of the earnings to the Treasury (from SOMA). These profits are obscene. And payment to the banks would come from tax payer dollars. What a racket.

If the banks want to increase their profitability and competitiveness, then they should be prohibited from paying interest rates on their deposits(Reg Q in reverse for CBs, but unrestricted for the non-banks).

The net result would be higher CB profits, an increase in the supply of loan-funds, decrease in long-term interest rates, higher production & employment, etc.

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