About Those Excess Reserves At the Fed

If reserves do not matter, if they are a meaningless accounting entity, then it would not matter what the Fed pays on them, except for the purposes of a risk free handout to their banking buddies. And there may be a valuable insight in that after all.

Regardless, I would just like the Fed to make up its collective mind what their position on this really is, and not trot out whatever argument they feel suits the moment, although that does seem to be à la modeamongst economists these days. They have become as bad as attorneys and accountants. The truth is whatever we say it is, whatever the guy with the most money wants it to be.

The next time some economist says that paying interest on Excess Reserves does not matter, show them this newswire copied below, and let them argue it with Alan Blinder. San Francisco Fed President John C. Williams made a similar argument about four weeks ago. And Bernanke concurs that this is a powerful weapon in his mad scientist's toolkit. ....some economists argue that Fed interest payments on reserve do not matter because they do not want to deal with the political issue of paying what is essentially a subsidy to the banks for the reserves that the Fed creates for them...

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