Via Economic Policy Journal

Neel Kashkari

This is simply astounding.

Minneapolis Fed President Neel Kashkari put out the below tweet:

Be sure to read the tweet carefully. It clearly shows that Kashkari has no idea why the Fed is doing repo operations and why banks would want to swap T-bills for Fed reserves.

Here is the New York Fed explaining why they do repo transactions (my bold):

In a repo transaction, the [New York Fed’s Open Market Trading] Desk purchases Treasury, agency debt, or agency mortgage-backed securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date. It is economically similar to a loan collateralized by securities having a value higher than the loan to protect the Desk against market and credit risk. Repo transactions temporarily increase the quantity of reserve balances in the banking system.

So why would the Fed want to increase the reserve balances in the banking system?

Because it increases the money supply and generally puts short-term downward pressure on interest rates.

This is pretty basic stuff that Kashkari appears to be clueless about.

Even Paul Krugman, with Robin Wells, in their college text,  Microeconomics, explain the process:

The monetary base is the sum of currency in circulation and bank reserves…Each dollar of bank reserves backs several dollars of bank deposits, making the money supply larger than the monetary base. 

That is the monetary base acts as a multiplier of the money supply.

Treasury bills don’t have the multiplier effect that bank reserves do. That’s why a bank may need additional Fed reserves to support its loan portfolio.

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The full discussion about Fed reserves could go on for hours. There are, for example, excess reserves that are not in the system acting as a direct money supply multiplier. Only required reserves do but the key is that banks seek these reserves because T-bills and other assets don’t act as multipliers. This is very important to understand. Because of the way the fractional reserve system is structured, Federal reserve balances support the entire bank credit system

This is the primary function of the Federal Reserve, through various methods to manipulate the money supply generally via different types of reserve operations.

Since the financial crisis of September 2008, the Federal Reserve has been pumping massive amounts of reserves into the system, some ended up for technical reasons as excess reserves that don’t have an impact on the money supply, but nearly 100 billion dollars has ended up as required reserves—thus supporting the spectacular growth in the money supply. This expanded money supply is what is causing the climb in equity prices.

The tweet from Kashkari indicates he doesn’t understand any of this.

He was torched on Twitter:

 and this tweet said it all:

And get this, Federal Reserve regional bank presidents rotate as voting members of the Federal Open Market Committee, the monetary policy setting committee of the Federal Reserve, which includes setting reserve policy, and clueless Kashkari is actually a voting member this year.

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