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« Weighing the Week Ahead: Will Bernanke Change Course? | Main | After the FOMC: Three Things Investors Need to Know »

September 15, 2013

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Mark Pope

Larry,

Very insightful as usual.

Generally don't trust any of the commies from Berkley but Ms. Yellen does sound like the best choice as there are political and practical problems with the others.

Berkley... Isn't that where Janet Napoletano is going to be the president?

Geithner is a proven liar and thief who had it in his power as Governor of the New York Fed to challenge the risky operations of the banks like Chase, JP Morgan, Lieman Brothers, Bear-Stearns, etc. He is the type of person that the Plutocracy just love because he can lie with a straight and sincere face. This is why he is now "ready" for the private sector. His payoff as it were.

oldprof

Tonka and Pacioli -

Right now the Fed balance sheet (the monetary base) has expanded dramatically, but has created only a normal increase in M2. This seems to reflect bank preferences to hold excess reserves. It is a lower velocity of money.

If banks were to step up lending in a dramatic fashion, a positive for the economy, it could become necessary to limit M2 by reducing the balance sheet. This is what Bernanke has discussed in the past.

As to how quickly this could be done, I have a planned post on the agenda, and perhaps I'll move it higher. The basic idea, which I have frequently written about, is that the amounts represent a small fraction of secondary market volume.

More later...

Jeff

Pacioli

Tonka stumbled upon the exact same assertion that tripped me up when reading the post.

"If banks reduced their current preference for excess reserves, accelerating their lending, the Fed would need to reduce the balance sheet rather quickly."

This assertion verges on over-simplification of a complex, fluid set of possibilities.

Could you explain further how you are so confident in your conclusion that "the Fed would NEED to reduce that balance sheet"?

Tonka

"If banks reduced their current preference for excess reserves, accelerating their lending, the Fed would need to reduce the balance sheet rather quickly."

Why would they need to reduce their balance sheet? Are you talking about needing to do so in order to raise interest rates because of increased lending? They can do that by just increasing the interest paid on reserves. I thought that was the whole point of interest on reserves...to be able to change interest rates without altering their balance sheet.

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