Monday, September 19, 2011

Negative Interest on Reserves

Former Fed Vice-Chair Alan Blinder speaks out on negative interest rates on reserves:

The rate could then be pushed into negative territory. The notion is strongly opposed by banks, who view it as a tax. Blinder doesn’t disagree with that characterization. “The whole notion is you should tax things you don’t like people to do, and subsidize things that are essential,” he said. “One thing we don’t like is banks just piling up idle reserve,” he said. “We would like to push that money out of the banks and have them do something with it.” Although some money will undoubtedly go into super-safe money funds, “the hope is that some fraction goes into increased lending,” he said.

This has been one of the proposals of market monetarists (as Lars Christensen proposes we be called.)

I don't really agree that it should be called a tax. It is more like a service fee. The Fed is providing a safe and short financial asset for banks to hold. If supply and demand conditions result in people being paid to hold such assets, then that is great. But if market conditions result in an equilibrium where people pay to be willing to store wealth in such a way, then that must be accepted as well.

It is true, of course, that banks are required to hold some reserves, and charging them to hold required reserves is more a tax. The simplest solution would be to reduce the interest rate to zero on required reserves and only charge banks for holding excess reserves.

The ideal solution is to not have required reserves at all.

HT to Tim Duys.

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