My pick for economic chart of the year (2012): Excess Reserves Held by the Federal Reserve

As 2012 came to a close, the Atlantic asked 34 different economists with notable web presences to provide one chart that best explains the economic situation. Effectively a database, you can find the 34 charts and explanations here. Also, the Economist documents the year in nine charts here.

My pick for chart of the year is the following, “Excess Reserve Balances of Depository Institutions [at a Federal Reserve Bank]” (link).

Description: “Amount of funds held by a depository institution in its account at a Federal Reserve Bank in excess of its required reserve balance and its contractual clearing balance. Excess reserves equals total reserves less required reserves.”

EXCRESNS_Max_630_378

I like this chart for the following reasons. The first is that the unprecedented explosion of excess bank reserves held at the Federal Reserve occurs in September 2008 — the month in which Lehman Brothers filed for chapter 11 bankruptcy, and seemingly all hell broke loose. In that month the relationship between the Federal Reserve (and the US Treasury) and large banks changed drastically. The leading narrative of this change is that the US government “bailed out” commercial and investment banks. I don’t mean to here argue with that narrative, only to suggest this chart shows the opposite was perhaps true, too. This chart shows a dramatic and unprecedented rise in excess reserves on September 1, 2008, two weeks before the Lehman implosion. On August 1, excess reserves was just over $1 billion. On September 1, excess reserves jumped to $59 billion. A month later, $267 billion. By the end of 2008, they stood at almost $800 billion.

Today, there are $1.4 trillion in excess bank reserves held at the Federal Reserve. I think these data are evidence that “who bailed out whom?” is a legitimate question. Though I would welcome being told why and how it is not, if that is the case.

The good news is that in 2012, the number of excess reserves actually dropped, from $1.6 trillion to $1.4 trillion. This means $200 billion turned from idle to …? What?

Assuming reserves held in excess return to something close to historical levels — which are, basically, almost zero — what does this idle “cash” turn into?

What we do know is this: We now face the potential movement from idle to something other than idle of up to $1.4 trillion dollars. This potential money would seem to hold important implications for the possibility of greater growth and inflation, a housing recovery, and an actually thriving jobs market. This shift also would seem to call for deliberative management, and provide the opportunity for intelligent economic design. That’s a lot of money that needs something to do, and incentives ought to be created toward making it useful.

In any case, insofar as this money is bound to turn from “nothing” into “something,” this data-point deserves attention.

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This entry was posted in 2007-2012, an actually thriving labor market, economic recovery, macro-economics, money and finance, money velocity, the great contraction, the great contraction 2007-2012, the price mechanism, Uncategorized. Bookmark the permalink.

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