/biz/ - Business & Finance

>>28205826
I think you're getting it but here are some adjustments:
>government (US Treasury) issues bonds at auction
>primary dealer banks buy those bonds with their own money
>the Fed buys those bonds from the primary dealer banks by crediting a reserve balance to their accounts
>dealer banks now have $USD reserves in place of bonds.

The Fed wants to do this mostly to affect interest rates. Taking bonds out of circulation makes them more expensive, making the yield less attractive, so investors in the private market will be more inclined to put their money to work elsewhere. Banks DO need the liquidity as can be seen by the M2 graph. Imagine a "bank run" situation where everyone demanded their USD from bank accounts. Banks need reserve balances to meet that demand or they go bust.
>Wouldnt it make more sense to do this when everything opens up and people are more willing to spend?
Yes interesting how you came to this conclusion too. Lots of big brains have been studying the Japan example, which is like 20 years ahead of ours, and seeing that people DID tighten up their wallets and QE actually made things worse economically.

>>27213860
>>27208900
We might as well get into some deep dive pills.
QE trades a bank's bonds for a reserve balance. A popular unchecked claim was that Reserve Balances can't be used on anything: "they just sit there and DON'T make it into the real economy so NO INFLATION". Bullshit on several levels:
>Reserve balances at Federal Reserve accounts are convertible at par with cash.
Banks can and do convert a portion of reserve balances into bank-investable securities. Basically all types of debt securities:

>Investments permissible for commercial banks to invest in Types 1-5, all debt-based
https://www.govinfo.gov/content/pkg/CFR-2014-title12-vol1/pdf/CFR-2014-title12-vol1-part1.pdf
https://www.law.cornell.edu/cfr/text/12/part-1

>OCC at one point permitted commercial banks to underwrite equities (stonks)
https://www.law.upenn.edu/journals/jil/articles/volume2/issue3/SametzKeenanBlochGoldberg2J.Comp.Corp.L.&Sec.Reg.155%281979%29.pdf

>National commercial banks can invest in cash-settled DERIVATIVES!! for their own accounts
https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-activities-permissible-for-nat-banks-fed-saving.pdf

>Full list of nonbanking investment activities for commercial banks: includes GOLD and equities under certain conditions.
https://www.law.cornell.edu/cfr/text/12/225.28

>Cash goes out, reserves go down, and a good explanation of reserve balance functions.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/senior.fellows/2019-20%20fellows/BanksCannotLendOutReservesAug2013_%20(002).pdf

>Cash and reserve balances are the same thing.
https://www.federalreserve.gov/aboutthefed/section19.htm

>>23360640
The TLDR of this should be that commercial banks use reserve balances from QE to invest in all classes of assets. The rules get even fuzzier when including permissible investments of subsidiaries of com banks... So the money DOES get into the real economy.

>>25228018
A lot of unanswered issues from this bondking post. I've done some real deep dives in this so I'll source as I go.
First:
>Reserve balances at Federal Reserve accounts are convertible at par with cash.
Its quite literally the definition of a reserve. Banks keep reserves in order to meet demand for deposits so as to stay solvent. If everyone makes a bank run and withdraws paper cash, the bank's reserve balance at the Fed goes down. Cash and reserve balances are both Fed liabilities. Bank reserves can very easily make it OUT of the banking system. Also, banks can and do convert a portion of reserve balances into bank-investable securities. Basically all types of debt securities:
>Investments permissible for commercial banks to invest in Types 1-5, all debt-based
https://www.govinfo.gov/content/pkg/CFR-2014-title12-vol1/pdf/CFR-2014-title12-vol1-part1.pdf
https://www.law.cornell.edu/cfr/text/12/part-1
>OCC at one point permitted commercial banks to underwrite equities (stonks) for their own accounts
https://www.law.upenn.edu/journals/jil/articles/volume2/issue3/SametzKeenanBlochGoldberg2J.Comp.Corp.L.&Sec.Reg.155%281979%29.pdf
>National commercial banks can invest in cash-settled DERIVATIVES!! for their own accounts
https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-activities-permissible-for-nat-banks-fed-saving.pdf
>Full list of nonbanking investment activities for commercial banks: includes buying GOLD and equities under certain conditions.
https://www.law.cornell.edu/cfr/text/12/225.28
>Cash goes out, reserves go down, and a good explanation of reserve balance functions.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/senior.fellows/2019-20%20fellows/BanksCannotLendOutReservesAug2013_%20(002).pdf
>Cash and reserve balances are the same thing.
https://www.federalreserve.gov/aboutthefed/section19.htm

It is because of QE, mainly the "Portfolio Rebalancing" effect from pic related. Basically QE makes bond prices too high and yields too low. Institutional funds have to shift huge piles of money out of bonds and into risk equities in order to get the fixed income returns they need.

>>23204637
>stocks went up because of corporate bond purchases.
Fed only put $3.6 billion into corporate bonds and has since offloaded most of them. Compare that to $7 TRILLION in US Treasuries and MBS.
>banks buying stocks
I thought so too but then I read the National Bank Act, which gave me autism, but section 24 paragraph 7 says banks can't buy stocks, only debt securities.
>stocks still went up
Its because of Portfolio Re-balancing effect.

I get the whole deflation jiggy, but I am not convinced that fiscal spending will NOT cause increased inflation. Clear relationship on the charts as the march stimulus was distributed.

>>23180324
QE is an easy write,
but Interest on Reserves will take you down a nice thick rabbit hole of black pills

>>22758660
I don't think you understand how QE works. Asset prices increase indirectly only through the Portfolio Rebalance, and some extent the Signaling effect.