I.E., ALL OF THESE COUNTRIES OPERATE WITH ZERO RESERVE REQUIREMENTS & A “POLICY RULE”.

And New Zealand pioneered this monetary policy rule and zero reserve requirements & was cited as an example by Govenor Kohn of how well it was working: Guess What? “New Zealand Dollar Hits 25 Yr Highs After Insterest Rates are Raised to 8 Percent”

This is both insane and criminal. When member commercial banks make loans to, or buy securities from, the non-bank public, they create new money & credit.

The reverse operation is only true for a single bank – i.e., limited to the bank’s excess-legal reserve position.

In reality, the system is composed of thousands of banks, and the new deposits thus created, via a series of interbank transactions, increase the balance of payments among virtually all of the banks within the Federal Reserve System.

And how is this financial legerdemain accomplished? — through the Fed’s “open market power”, i.e., the New York Federal Reserve’s “trading desk” buys securities from the non-bank public (or increases the excess legal reserves of the banking system). The system as a whole is then able to create deposits by a multiple of its total excess reserves.

E.g., on the basis of $1 of excess legal reserves added to the system by the FED, or the increase in $1 of “total reserves”; the “banking system” acquires $200 of additional earning assets (owing to fractional reserve banking – or its expansion coefficient).

Thus, the bankers are able to create a vast superstructure of credit on a very small volume of legal reserves.

So, if as the bankers & their collaborators say (this is a tax), then why is it that when excess reserves are added, do the member commercial banks collectively make more money…more than they would even if the volume of legal reserves was smaller? (and more than the banks would even if they were already receiving interest on their clearing balances, et. al.)

The banks will still have to hold prudential or liquidity reserves anyway (their primary or “working” reserves).

This Financial Services Regulatory Relief Act of 2006 is bullshit. The tax is the one on the citizens of the United States, and also the one on these collaborator’s minds. If you want to subsidize someone, lower my taxes.

Moe Gamble

One circumstance of which there is a whiff in this discussion of Things to Do to Avoid Sucking Zirp, maybe, is that the truly negative consequences of further reductions in the FedFunds have finally hit home fully in Fedland. They may be moving, rather quickly for central bankers, to looking at ‘new and different options’ because they’re preferred options will get them a currency crisis they hopefully now intend to avoid.

http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19

What reserves?

What are the implications if banks are induced to park more reserves at Fed?

How can the Fed expand its balance sheet limitlessly (GS) and not impact money supply?

Implications for banking system, weak banks in particular?