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Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits.

A side matter... If there is inadequate competition, that is a different subject. The Leijonhufvud article does not seem to be blaming a lack of competition.

Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Yet Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits.

A side matter... If there is inadequate competition, that is a different subject. The Leijonhufvud article does not seem to be blaming a lack of competition.

Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits. If you think there is inadequate competition, that is a different subject.

Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits.

A side matter... If there is inadequate competition, that is a different subject. The Leijonhufvud article does not seem to be blaming a lack of competition.

Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits. If you think there is inadequate competition, that is a different subject.

The bank reserves can also come from selling bonds to the Fed at a time when the Fed thinks the economy needs stimulus. In that case a bank would have been selling a 3%+ earner in January 2011 and receiving a deposit at the Fed that earns much less. This is a commercial bank deciding to earn a lower yield on a specific lump sum while reducing risk, which is the opposite action to take if there seems to be a subsidy.

Axel Leijonhufvud said...

The Fed is supplying the banks with reserves at a near-zero rate.

The bank reserves are in part funded by deposits in transaction accounts and savings accounts. The Wikipedia article on transaction accounts says...

The Dodd-Frank Wall Street Reform and Consumer Protection Act, however, passed by Congress and signed into law by President Obama on July 21, 2010, repealed the statutes that prohibit interest-bearing demand deposit accounts, effectively repealing Regulation Q (Pub. L. 111-203, Section 627). The repeal took effect on July 21, 2011. Since that date, financial institutions have been permitted, but not required, to offer interest-bearing demand deposit accounts.

So the repeal happened a few months after the Leijonhufvud article. Regardless, there were savings accounts which have long paid interest. Surely a retired person can diversify between a transaction account and a savings account so that person would have been earning some interest even before the repeal and for any investor with significant funds, typically only a minority of holdings would be transactional.

Leijonhufvud lamented...

"transfers from tax-payers as well as from the mostly aged savers who cannot find alternative safe placements for their funds in retirement"

I am assuming that in Leijonhufvud's view, even the savings account rate was low enough to be one reason for his concern that there existed a subsidy.

A low interest rate on a savings account deposit is not directly determined by the Fed. Banks would like to pay depositors less but competition between banks can force that rate higher. The reason competition does not force that rate higher is because in an economy that the Fed thinks requires stimulus, such as in 2011, households and businesses are more risk averse than usual so they allocate less to risky holdings and more to low risk holdings like deposits. If you think there is inadequate competition, that is a different subject.