In a recent podcast, David Beckworth asked Bill Nelson about the difficulties involved in shrinking the Fed’s balance sheet. In recent years, bank examiners have begun pressuring banks to hold high levels of reserves. Nelson suggested that the Fed needs to educate bank examiners on the fact that bloated reserves are not necessary in order to insure adequate liquidity:
Beckworth: Maybe just off the bat, how are examiners getting in the way of monetary policy?
Nelson: Even before doing that, I do want to make it clear that everyone here is operating with good intent. I don’t want to cast bank examiners as somehow, deliberately, as obstructionist. It’s just a matter of entrenched practices and experience that ends up having that effect. . . .
Nelson: I think there’s a few things that need to be done that could really help a lot. One is just public communication by the leadership of the Federal Reserve that borrowing is normal. Borrowing is a business decision on the part of banks. That’s especially true for the standing repo facility that they’ve just created, that they intend to look differently than the discount window and be perceived as a normal business decision. Leadership of the Fed needs to explain that to the public and they need to explain it to Congress, and they need to explain it to their supervisors.
This problem has been going on for years. So why hasn’t the Fed already told bank supervisors to clean up their act? There is no good reason to require banks to hold large quantities of reserves—they serve no useful purpose and make monetary policy more difficult.
It seems to me that this is just one example of a much broader problem, one part of a bureaucracy sabotaging another. For instance, in China the government just announced an initiative to encourage more births. At the same time, the Chinese bureaucracy does not allow Chinese couples to have more than three children. One part of the Chinese bureaucracy is sabotaging another.
In New York City, the government banned the construction of new single room occupancy apartment buildings, even as their housing bureaucracy desperately tried to create housing for the homeless.
Bureaucrats at the EPA try to encourage the switch to cleaner forms of energy, even as the requirement for environmental impact statements makes it difficult to build new clean energy infrastructure. Indeed the regulations on drilling for clean energy such as geothermal are actually stricter than for dirtier types of energy such as petroleum.
Progressives often focus on what the government should be doing to advance their goals. They focus far too little on what government is already doing to stymie their objectives.
READER COMMENTS
TMC
Nov 9 2022 at 11:56am
Regulations should have end dates. New information is consistently generated so that regulations can be re-evaluated, but ‘lock in’ is too powerful of a force to overturn.
Capt. J Parker
Nov 9 2022 at 1:47pm
From the podcast:
I can’t believe there is zero room for the Fed to taper IOR some amount during QT. Slightly lower IOR relative to interest paid on other high liquidity interest bearing assets would certainly incentivize banks to economize on reserves.
As for bank examiners working at cross purposes to the Fed, I’m sure they are. But, I would have titled the podcast: Central planners at the Fed invent new liquidity facility and fail to anticipate how the banks and bank regulatory complex would respond to it.
Scott Sumner
Nov 9 2022 at 5:03pm
This is a good point:
“But, I would have titled the podcast: Central planners at the Fed invent new liquidity facility and fail to anticipate how the banks and bank regulatory complex would respond to it.”
vince
Nov 9 2022 at 3:42pm
What do you expect from a bunch of bureaucrats? What do bureaucrats do when the fiscal year is closing in? Spend their excess money, then complain they weren’t given enough, then ask for more for the next fiscal year. All with no accountability, no transparency, and no incentive for efficiency. Parasites.
It would be fascinating if they had to complete time sheets showing exactly how they filled their days, all open to public inspection. An industrial engineering audit would be great too.
Alex
Nov 9 2022 at 4:13pm
Progressives often focus on what the government should be doing to advance their goals. They focus far too little on what government is already doing to stymie their objectives.
Beautifully put.
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