Hall on Interest on Reserves

I was reading Robert Hall's 2013 paper, "The Routes into and out of the Zero Lower Bound."   I found it quite interesting.  I have already commented on his criticism of nominal GDP level targeting here.

Today at lunch, I was struck by the following passage:

With respect to the interest paid on reserves, there seems to be a general failure to appreciate that paying an above-market rate on reserves changes the sign of the effect of a portfolio expansion. Under the traditional policy of paying well below market rates on reserves, banks treated excess reserves as hot potatoes. Every economic principles book describes how, when banks collectively hold excess reserves, the banks expand the economy by lending them out. The process stops only when the demand for deposits rises to the point
that the excess reserves become required reserves and banks are in equilibrium. That process remains at the heart of our explanation of the primary channel of expansionary monetary policy. 

So far so good.

With an interest rate on reserves above the market rate, the process operates in the opposite direction: Banks prefer to hold reserves over other assets, risk adjusted. They protect their reserve holdings rather than trying to foist them on other banks. An expansion of reserves contracts the economy.

I don't really understand this.   An expansion of reserves will contract the economy?    I think the higher interest rate on reserves contracts the economy by raising the demand for base money.   Expanding the quantity of reserves helps satisfy the additional demand.

What could Hall have in mind?

Is this only true when the Fed purchases T-bills?    If T-bills provide more monetary services than reserves for some purposes, then having the Fed buy them could contract the quantity of money services.   And if T-bills have yields below those of reserves, maybe they do provide more monetary services than reserves.   That is at least one reason why they might have such low yields.

But suppose the Fed purchases securities with yields greater than those on reserves?   For example, long term government bonds or mortgage backed securities.   How could that be contractionary?

Anyway, if it is really true that an expansion of reserves contracts the economy when interest rates on reserves are above market rates, then quantitative easing is counter-productive.

Regardless of whether expanding reserves is contractionary, I am all for Hall's solution:

The Fed could halt this drag on the economy by cutting the rate paid on reserves to zero or perhaps -25 basis points.

And I agree with this response to the supposed reason the Fed pays interest on reserves at this time:

The only excuse for not cutting the reserve rate is the belief that short rates would fall and money-market funds would go out of business. This amounts to an accusation that the funds are not smart enough to figure out how to charge their customers for their services. Traditionally, funds imposed charges ranging from 4 to 50 basis points, in the form of deductions from interest paid. A money-market fund using a  floating net asset value can simply impose a modest fee, as do conventional stock and bond funds. The SEC may accelerate this move by requiring all money funds to use floating NAVs.