Sunday, February 24, 2013

Quote of the Week...


...is from Warren Mosler’s Soft Currency Economics II (Modern Monetary Theory):
the Fed must provide enough reserves to meet the known requirements, either through open market operations or through the discount window. If banks were left on their own to obtain more reserves no amount of interbank lending would be able to create the necessary reserves. Interbank lending changes the location of the reserves but the amount of reserves in the entire banking system remains the same. For example, suppose the total reserve requirement for the banking system was $ 60 billion at the close of business today but only $ 55 billion of reserves were held by the entire banking system. Unless the Fed provides the additional $ 5 billion in reserves, at least one bank will fail to meet its reserve requirement. The Federal Reserve is, and can only be, the follower, not the leader when it adjusts reserve balances in the banking system.

Bibliography
Mosler, Warren (2012-10-25). Soft Currency Economics II (Modern Monetary Theory) (Kindle Locations 367-373).  . Kindle Edition.

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