$150 billion stimulus plan announced

[Rajiv]

Tax Rebates Deal Announced

The market has had a positive response to the $150 billion stimulus plan as the major indices climb near session highs

Upto $5T just injected into the economy -- now -- if only we could get people to just borrow more!

[Jim Nickerson]

Re: $150 billion stimulus plan announced

Tax Rebates Deal Announced

The market has had a positive response to the $150 billion stimulus plan as the major indices climb near session highs

Upto $5T just injected into the economy -- now -- if only we could get people to just borrow more!

Rajiv, where does the 5 trillion come from?

[Rajiv]

Re: $150 billion stimulus plan announced

Rajiv, where does the 5 trillion come from?

The US government puts out a $150B bond - that gets monetized by the banks. Current reserve requirement for the banks is 3%. 150/0.03 = 5000 -- hence the $5T figure

[Jim Nickerson]

Re: $150 billion stimulus plan announced

The US government puts out a $150B bond - that gets monetized by the banks. Current reserve requirement for the banks is 3%. 150/0.03 = 5000 -- hence the $5T figure

Thank you, Rajiv.

[FRED]

Re: $150 billion stimulus plan announced

Thank you, Rajiv.

The "hot money" multiplier is even more extreme. We interviewed Dr. John Atlee at Harvard last week. He said on this topic in one of his earlier papers:

The Key Importance of Reserve Requirements

The amount of additional GDP financed by each additional dollar of New Money is called the Money-GDP Multiplier. Its empirical value is equal to the reciprocal of the MDR. For instance, in the 4th quarter of 2000, M1 was about $1.1 trillion, GDP almost $10 trillion, for an MDR of 11%. Thus, each dollar of New Money could theoretically finance about $9 of additional GDP. This 9 to 1 leverage could probably be effectively managed by the Fed. But the Fed's actual effective leverage via present bank reserves is now an incredible 1400 to 1 -- far beyond effective control. This inappropriate condition is due to several factors:

1. The Fed has been gradually reducing the legal reserve requirement -- from the pre-1958 20% (for the biggest banks) to 10% in 1992.

2. Since 1994 the Fed has permitted banks to "sweep" (reclassify) checking accounts into savings accounts overnight to reduce required reserves.

3. Over 80% of the banks' present $40 billion total reserves is actually part of their normal working inventory of vault cash, which they would maintain regardless of the reserve requirement, so that most banks are effectively "unbound" by the Fed's reserve control.

4. As a result, bank reserve balances at the Fed -- the only reserves the Fed actually controls by its open market operations -- are now only about $7 billion. That's a miniscule 1.3% of checking accounts (not the official 10%), resulting in the following extreme leverages:

* Reserve-Checking Account Multiplier -- nearly 80 (550 / 7)
* Reserve-M1 Multiplier -- 157 (1100 / 7)
* Reserve-GDP Multiplier -- over 1400 (10 trillion / 7).

That kind of leverage is like trying to use a 20-foot spoon to put peas in a bottle.

No wonder Greenspan now largely ignores the key relationship between bank reserve deposits and M1, and tries to manage economic growth indirectly, through interest rates. But the relationship between interest rates and economic growth is neither precise nor immediate, either conceptually or empirically.

Therefore, Greenspan is forced to rely mainly on his own judgment ("flying blind, by the seat of his pants," as the old pilots used to say), based on a vast array of economic data that is often difficult to integrate and interpret. But however good his judgment, reliance on one man's personal judgmental management isn't scientific, democratic or safe, and his successor may well lack his skill.

For the Fed to regain adequate control of the money supply -- and the economy -- it needs to:

1. Restore the pre-1980 clear distinction between money and other financial assets, by again prohibiting interest payments on checkable accounts (and third-party checks drawn on money-market accounts). (That deregulation was inspired largely by the OPEC-induced inflation of the 1970s and '80s.)
2. Sharply increase the reserve requirement on checkable accounts.

In fact, it would be quite simple now to go all the way to the ideal 100% reserves long recommended by leading economists like Irving Fisher. Total checkable deposits are now about $550 billion. Banks already have over $50 billion of reserves and excess vault cash. And ending interest payments on the $240 billion of NOW and ATS accounts that are now part of M1 would undoubtedly induce the transfer of part of these into money market accounts. So the needed additional reserves might be only about $400 billion. And since banks now hold about $800 billion in T-bonds, they could easily sell half of them to the Fed. To sweeten this reform for the banks, the Fed should pay interest on their reserves -- as the Fed and the banks have long advocated.

The reference to "flying by the seat of his pants" comes from Atlee's own experience. He was a B17 bomber navigator in WWII. At 90 he's still sharp as a tack. He's part of our Old Timers Interview Tour. We think you'll find his perspectives interesting.

[Sapiens]

Re: $150 billion stimulus plan announced

Here are some graphs of those Gov. Bonds:

Can you spot the stimulus packages?

Cheers!

[vinoveri]

Re: $150 billion stimulus plan announced

Could this re-ignite the U.S. housing bubble?

Also, I had thought FHA served lower income folks - but according to this it's directed at those with poor credit -
does anyone else see anything strange here ???


Seattle Real Estate NewsSeattle Real Estate News
"The new economic stimulus package would raise the limit on loans mortgage giants Fannie Mae and Freddie Mac could by from the current cap of $417,000 to as much as $730,000, according to the Associated Press.
The higher cap would be effective until the end of December and would vary based on the median home price in a particular metropolitan area.
The higher limits would also apply permanently to Federal Housing Administration-backed loans, which go to borrowers with poor credit and had been capped at $367,000"

[Rajiv]

Re: $150 billion stimulus plan announced

From the Fed

Reserve requirements

Note that for small liabilities, the reserve requirement is 0 (zero)

I am sure that the bonds newly issued by the US Government that are to be monetized by the banks will somehow fall into the exempt category -- now of course all you need is people willing to borrow money!

Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (see table of reserve requirements). Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero.

The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This "exemption amount" is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Monetary Control Act of 1980 at $25 million. This "low-reserve tranche" is also adjusted each year (see table of low-reserve tranche amounts and exemption amounts since 1982). Net transaction accounts in excess of the low-reserve tranche are currently reservable at 10 percent.

For more history on the changes in reserve requirement ratios and the indexation of the exemption and low-reserve tranche, see the annual review in the H.3 statistical release. Additional details on reserve requirements can be found in the Reserve Maintenance Manual (682 KB PDF) and in the article (119 KB PDF) in the Federal Reserve Bulletin, the appendix of which has tables of historical reserve ratios.

Reserve Requirements
Type of liability	Requirement
	Percentage of liabilities	Effective date
Net transaction accounts 1
$0 to $9.3 million2	0	12-20-07
More than $9.3 million to $43.9 million3	3	12-20-07
More than $43.9 million	10	12-20-07
Nonpersonal time deposits	0	12-27-90
Eurocurrency liabilities	0	12-27-90

Return to text

Note. Required reserves must be held in the form of vault cash and, if vault cash is insufficient, also in the form of a deposit maintained with a Federal Reserve Bank. An institution that is a member of the Federal Reserve System must hold that deposit directly with a Reserve Bank; an institution that is not a member of the System can maintain that deposit directly with a Reserve Bank or with another institution in a pass-through relationship. Reserve requirements are imposed on commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge corporations, and agreement corporations.

1. Total transaction accounts consists of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection. For a more detailed description of these deposit types, see Form FR 2900 at http://www.federalreserve.gov/boarddocs/reportforms/

Return to table

2. The amount of net transaction accounts subject to a reserve requirement ratio of zero percent (the "exemption amount") is adjusted each year by statute. The exemption amount is adjusted upward by 80 percent of the previous year's (June 30 to June 30) rate of increase in total reservable liabilities at all depository institutions. No adjustment is made in the event of a decrease in such liabilities.

Return to table

3. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent is the "low-reserve tranche." By statute, the upper limit of the low-reserve tranche is adjusted each year by 80 percent of the previous year's (June 30 to June 30) rate of increase or decrease in net transaction accounts held by all depository institutions.

Return to table

Low-Reserve Tranche Amounts and Exemption Amounts since 1982
Effective date (beginning of maintenance period)	Low-reserve tranche amount (millions of U.S. dollars)	Exemption amount (millions of U.S. dollars)
January 14, 1982	26.0	n.a.
December 23, 1982	n.a.	2.1
January 13, 1983	26.3	***
January 12, 1984	28.9	2.2
January 3, 1985	29.8	2.4
January 2, 1986	31.7	2.6
January 1, 1987	36.7	2.9
December 31, 1987	40.5	3.2
December 29, 1988	41.5	3.4
December 28, 1989	40.4	3.4
December 27, 1990	41.1	3.4
December 26, 1991	42.2	3.6
December 24, 1992	46.8	3.8
December 23, 1993	51.9	4.0
December 22, 1994	54.0	4.2
December 21, 1995	52.0	4.3
December 31, 1996	49.3	4.4
January 1, 1998	47.8	4.7
December 31, 1998	46.5	4.9
December 30, 1999	44.3	5.0
December 28, 2000	42.8	5.5
December 27, 2001	41.3	5.7
December 26, 2002	42.1	6.0
December 25, 2003	45.4	6.6
December 23, 2004	47.6	7.0
December 22, 2005	48.3	7.8
December 21, 2006	45.8	8.5
December 20, 2007	43.9	9.3

n.a. Not applicable.
*** No change.

---

Last update: September 26, 2007

[GRG55]

Re: $150 billion stimulus plan announced

The "hot money" multiplier is even more extreme. We interviewed Dr. John Atlee at Harvard last week. He said on this topic in one of his earlier papers:

The Key Importance of Reserve Requirements

The amount of additional GDP financed by each additional dollar of New Money is called the Money-GDP Multiplier. Its empirical value is equal to the reciprocal of the MDR. For instance, in the 4th quarter of 2000, M1 was about $1.1 trillion, GDP almost $10 trillion, for an MDR of 11%. Thus, each dollar of New Money could theoretically finance about $9 of additional GDP. This 9 to 1 leverage could probably be effectively managed by the Fed. But the Fed's actual effective leverage via present bank reserves is now an incredible 1400 to 1 -- far beyond effective control. This inappropriate condition is due to several factors:

1. The Fed has been gradually reducing the legal reserve requirement -- from the pre-1958 20% (for the biggest banks) to 10% in 1992.

2. Since 1994 the Fed has permitted banks to "sweep" (reclassify) checking accounts into savings accounts overnight to reduce required reserves.

3. Over 80% of the banks' present $40 billion total reserves is actually part of their normal working inventory of vault cash, which they would maintain regardless of the reserve requirement, so that most banks are effectively "unbound" by the Fed's reserve control.

4. As a result, bank reserve balances at the Fed -- the only reserves the Fed actually controls by its open market operations -- are now only about $7 billion. That's a miniscule 1.3% of checking accounts (not the official 10%), resulting in the following extreme leverages:

* Reserve-Checking Account Multiplier -- nearly 80 (550 / 7)

* Reserve-M1 Multiplier -- 157 (1100 / 7)

* Reserve-GDP Multiplier -- over 1400 (10 trillion / 7).

That kind of leverage is like trying to use a 20-foot spoon to put peas in a bottle.

No wonder Greenspan now largely ignores the key relationship between bank reserve deposits and M1, and tries to manage economic growth indirectly, through interest rates. But the relationship between interest rates and economic growth is neither precise nor immediate, either conceptually or empirically.

Therefore, Greenspan is forced to rely mainly on his own judgment ("flying blind, by the seat of his pants," as the old pilots used to say), based on a vast array of economic data that is often difficult to integrate and interpret. But however good his judgment, reliance on one man's personal judgmental management isn't scientific, democratic or safe, and his successor may well lack his skill.

For the Fed to regain adequate control of the money supply -- and the economy -- it needs to:

1. Restore the pre-1980 clear distinction between money and other financial assets, by again prohibiting interest payments on checkable accounts (and third-party checks drawn on money-market accounts). (That deregulation was inspired largely by the OPEC-induced inflation of the 1970s and '80s.)

2. Sharply increase the reserve requirement on checkable accounts.

In fact, it would be quite simple now to go all the way to the ideal 100% reserves long recommended by leading economists like Irving Fisher. Total checkable deposits are now about $550 billion. Banks already have over $50 billion of reserves and excess vault cash. And ending interest payments on the $240 billion of NOW and ATS accounts that are now part of M1 would undoubtedly induce the transfer of part of these into money market accounts. So the needed additional reserves might be only about $400 billion. And since banks now hold about $800 billion in T-bonds, they could easily sell half of them to the Fed. To sweeten this reform for the banks, the Fed should pay interest on their reserves -- as the Fed and the banks have long advocated.

The reference to "flying by the seat of his pants" comes from Atlee's own experience. He was a B17 bomber navigator in WWII. At 90 he's still sharp as a tack. He's part of our Old Timers Interview Tour. We think you'll find his perspectives interesting.

Isn't this the flip side of the argument, from John Hussman and others, that the Fed's injections of liquidity are inconsequential in comparison with current total money supply and the size of the economy? Are we not hearing the same argument from some critics of the stimulus package (e.g. it's not big enough)?

[FRED]

Re: $150 billion stimulus plan announced

Isn't this the flip side of the argument, from John Hussman and others, that the Fed's injections of liquidity are inconsequential in comparison with current total money supply and the size of the economy? Are we not hearing the same argument from some critics of the stimulus package (e.g. it's not big enough)?

A $150B package does seem small for a $13 trillion dollar economy that is still needs to shed $11 trillion in fictitious housing value remaining.

There is stimulus and there is stimulus. As the Erin correctly pointed out on CNBC today, the housing bubble was HUGE. This $150B ain't going to cut it. The Fed will have to continue to virtually "go it alone" by reflating through the banking system.

[rabot10]

Re: $150 billion stimulus plan announced

Could this re-ignite the U.S. housing bubble?

Also, I had thought FHA served lower income folks - but according to this it's directed at those with poor credit -
does anyone else see anything strange here ???


Seattle Real Estate NewsSeattle Real Estate News
"The new economic stimulus package would raise the limit on loans mortgage giants Fannie Mae and Freddie Mac could by from the current cap of $417,000 to as much as $730,000, according to the Associated Press.
The higher cap would be effective until the end of December and would vary based on the median home price in a particular metropolitan area.
The higher limits would also apply permanently to Federal Housing Administration-backed loans, which go to borrowers with poor credit and had been capped at $367,000"

NO! Not in your or my worst nightmare

[Rajiv]

Re: $150 billion stimulus plan announced

Remember that $150B cash allows bank to produce more debt upto almost $5000B -- this should be sufficient to start the greenenergy bubble -- so it will definitely cut it -- new businesses will be financed and new jobs created -- the $150B cash to the public is just a sop -- that is not where the real cash is.

Of course this assumes an orderly unwinding of the credit crunch.

[zmas28]

Re: $150 billion stimulus plan announced

Rajiv,

How does the $5T work? I saw your earlier answer but didn't understand. Isn't the $150B going to consumers (actually $100B, rest to business) in the form of cash to spend? Do you see it going into bank deposits and then lent out again and expanding credit that way?

[Rajiv]

Re: $150 billion stimulus plan announced

How does it get into the hands of the consumers in the first place? Through tax credits - right? How are the tax credits financed? The government doesn't mint dollar coins to hand out - does it? It floats a bond. The bond is bought by the banks in various amounts -- that is what gets monetized into 5 trillion dollars -- through the issuance of credit based on the possession of this government backed "asset." With the average reserve ratio being close to 3% this will allow $5T dollars of credit to be issued -- enough to finance the new bubble.

A similar thing happens with military/war spending -- but there I believe that the multiplier is much smaller - not the 30x + multiplier when money goes directly into consumer hands. There I believe that the ratio is 10x or lower. See my post on reserve requirements. Note that small deposits (under $9.3 million) have a "0" reserve requirement - this should cover most individuals and "small business."

[Slimprofits]

Re: $150 billion stimulus plan announced

Tax Rebates Deal Announced

The market has had a positive response to the $150 billion stimulus plan as the major indices climb near session highs

Upto $5T just injected into the economy -- now -- if only we could get people to just borrow more!

Individuals who pay income taxes would get up to $600, working couples $1,200 and those with children an additional $300 per child under the agreement. Workers who make at least $3,000 but don't pay taxes would get $300 rebates. The rebates, expected to go out in June...

My informal survey of family and friends reveals that most if not all of the rebate money will be used to pay down debts.