The Protocols of the Elders of Zion, Anti-Semitism and the Aristocracy

Last night I put up a piece debunking the Protocols of the Elders of Zion, based on the chapter about this vile book in Jon E. Lewis’ The Mammoth Book of Cover-Ups (London: Constable & Robinson 2007), pp. 433-50. The Protocols are a notorious anti-Semitic forgery, probably concocted by Matvei Golovinski of the Tsarist secret police, the Okhrana, to make his master, Nicholas II, even more anti-Semitic and to intensify the persecution of the Jews.

The Protocols purport to be the minutes of a secret meeting of a group of elite Jews, intent on destroying all non-Jewish religions and conquering and enslaving Christians and gentiles. They claimed that the Jews were at the centre of a massive conspiracy controlling the banks and were encouraging the downfall of Christian civilization by promoting liberalism, democracy, socialism and anarchism. At the same time they were distracting gentiles from uncovering this plot through using alcohol, gambling, games and other amusements.

There is absolutely no truth in any of this whatsoever. But the book became an immense success and was read and influenced many Fascists and anti-Semites. These included Adolf Hitler, who made the book a compulsory part of the German school syllabus.

Like much of Fascism, it’s a rejection of modernity – the mass society of modern politics that emerged in the late 18th and 19th centuries. Modern politics and secular ideologies were attacked. At one point, the Protocols claim that Darwinism, Marxism and Nietzscheanism have been successful because they have been promoted by the conspiracy. (Lewis, Mammoth Book of Covers-Ups, p. 444). The forger’s own view of what constitutes the best society is revealed very clearly in another passage, in which the conspirators celebrate their destruction of the aristocracy.

The people, under our guidance, have annihilated the aristocracy, who were their one and only defence and foster-mother for the sake of their own advantage, which is inseparably bound up with the well-being of the people. Nowadays, with the destruction of the aristocracy, the people have fallen into the grips of merciless money-grinding scoundrels who have laid a pitiless and cruel yoke upon the necks of the workers. (p.446).

Historically, some of the persecution of the Jews in the later Middle Ages was due to the fact that a large number of the aristocracy had become seriously in debt to Jewish bankers, and tried to get out of their obligation to pay it back by urging for their persecution and expulsion.

A significant number of aristocrats and the upper middle class were supporters of Nazism before the Second World War. The leader of the British Union of Fascists, Oswald Mosley, was a baronet. Aristocrats and landlords joined pro-Nazi and appeasement organisations like the Anglo-German Fellowship. Martin Pugh on his book on British Fascism between the Wars describes how the aristos welcomed members of the Nazi elite at dinner parties on their estates, when the swastika was discreetly flown from the flagpoles.

And there still seems to be a fascination and dangerous sympathy with Nazism even today. Way back in the 1990s and early part of this century, Private Eye published a number of stories about one Cotswold aristocrat, who had very strong anti-Semitic, racist and anti-immigrant opinions.

And then there’s the Traditional Britain Group on the far right of the Tory party. These also have the same, genuinely Fascist attitudes, and one of their leaders is fascinated with the Nazis and the Third Reich. It was the Traditional Britain Group, who invited Jacob Rees-Mogg to their annual dinner, which Mogg accepted. When the Observer published the story, Mogg claimed that at the time he hadn’t known anything about them. If he had, he wouldn’t have gone. Which doesn’t really sound convincing, as people don’t normally accept dinner invitations from organisations and people they know nothing about. But perhaps Mogg, as well as being viciously right-wing, is also very naïve.

As for the Tories being good friends of the Jews, as the current head of the Board of Deputies, Marie van der Zyle claimed in a speech, David Rosenberg posted up in response a series of incidents across the decades which put the lie to it. These showed very clearly how anti-Semitic the Tories had been, and which parts of it may very well still be.

And one of the attractions of anti-Semitism, apart from sheer racism, is that, in the form of conspiracy theories like the Protocols, they blame the Jews for all the forces of modernity that threaten the aristocracy and the upper middle class, and celebrate the aristocracy itself as the people’s saviours, and so appealing very strongly to certain types of Tories.

Jimmy Dore and Secular Talk Tear Apart anti-Corbyn Smears about Bankers

Mike on Pollard’s Smears

On Monday, Mike put up a piece attacking the latest anti-Semitism smear against Jeremy Corbyn by the hard-right editor of the Jewish Chronicle, Stephen Pollard. Corbyn had made a video describing how the banks were propping up the Tory government, because they protected and supported them at the expense of ordinary working people. Ten years ago the banks caused the massive crash, which led to the Tories pushing their austerity programme, which is cutting services and pushing ordinary folks into poverty. But while millions of people, including nurses and other vital workers and employees are finding it difficult to make ends meet, the chief of Morgan Stanley last year gave himself a 21.5 million pound bonus, and the banks together have given themselves 15 billion pounds in bonuses. Corbyn concluded his piece by saying that when these people called Labour a danger and a threat, they were right: Labour is a threat to a rigged system. The party now has well over half a million members, and will work for the many, not the few, and Socialist Voice. They pointed out that it was Pollard, rather than Corbyn, who was the anti-Semite. Corbyn said nothing about bankers being Jewish. Pollard did. Therefore, it’s Pollard who believes the anti-Semitic lie that all bankers are Jewish.

Pollard and a number of other gullible bigots immediately blew their tops and decided that when Corbyn talked about ‘bankers’, he was really using dogwhistles to express his hatred of the Jews.

Pollard’s comment was immediately ripped apart on Twitter by David Rosenberg, Another Angry Voice, Kerry-Ann Mendoza, Chelley Ryan, Curious Chak, Martin Frowd, Revolution Breeze, and The MANY versus the Few.

After being torn to shreds, Pollard issued a non-apology. He sort-of admitted that his comments may have been way off beam, but that was what happened when anti-Semitism was allowed to flourish: you saw everything through its prism.

Mike pointed out that this changed nothing, that Pollard still held anti-Semitic views in that he considered bankers to be synonymous with Jews, and that he had claimed that Corbyn was an anti-Semite, even though he stated that he had no evidence to support it.

So the left-wing twitterati returned to the job of tearing bloody chunks out of him, metaphorically speaking. Vote Labour to save the NHS, Audrey, Kerry-Ann Mendoza, and Hajo Meyer’s Violin. They pointed out that Pollard hadn’t apologized and was still showing his own anti-Semitic prejudices. Another Angry Voice tweeted a speech by Marie van de Zyle at a ‘Say No to Anti-Semitism’ event in Manchester, which was a pack of lies from one end to the other. Kerry-Ann Mendoza also tweeted about how she had been accused of anti-Semitism at an event. She described how IDF soldiers kidnap and torture Palestinian children. So she was accused of using the anti-Semitic trope that Jews eat babies. Sara tweeted that she wished to send a message of solidarity to Corbyn, and Tom London said that the schism between the two sides of the Jewish community could be mended if they were prepared to meet in good faith.

Mike concluded his article by stating it was worth a try.

Secular Talk and The Jimmy Dore Show

The accusations have crossed the Atlantic. They were repeated in the American Jewish newspapers, the Forward. And the American progressive news shows Secular Talk and the Jimmy Dore Show weighed in to rip Pollard and the other fanatics claiming Corbyn was an anti-Semite apart.

Both Secular Talk, fronted by Kyle Kulinski, and Jimmy Dore and his guests, Ron Placone and Steffi Zamorano, play Corbyn’s speech. Kulinski hows some of the twitter comments from ordinary Jews smearing Corbyn as an anti-Semite. He states that this is what happens to Progressives. Like they tried smearing Bernie Sanders as a sexist and racist, but they couldn’t smear him as an anti-Semite, because he was Jewish. But this didn’t apply in Corbyn’s case. He points out that they’re doing it to the BDS movement. And they’re only using the anti-Semitism smear because they have no real arguments against what he says.

Jimmy Dore and his friends say the same thing, though they take square aim at Stephen Pollard. One of the tweets they show asks how it is that the Jewish Chronicle in London and the Forward in New York say exactly the same thing, on the same day. It’s a good question. The answer is probably that both newspapers are running the same stories because they’re collaborating with the Israeli Ministry of Strategic Affairs, which has been exposed as organizing the campaign of anti-Semitic smearing against pro-Palestinian and anti-Zionist activists. Dore makes the same point as Kulinski, that these tweets don’t show that Corbyn is an anti-Semite because he never mentioned the Jews. All he mentioned was Morgan Stanley. Which doesn’t have a Jewish name. But it does show how Pollard and the other tweeters do believe the anti-Semitic lie that all bankers are Jewish.

Dore also makes the point that this attempts to stop any criticism of the banks, or income inequality or indeed any left-wing issues, because if you do so, you’re an anti-Semite. It’s crying wolf.

And worse, it reduces the value of real accusations of anti-Semitism. Because if you accuse Jeremy Corbyn of anti-Semitism, who stands up for working people, then obviously anti-Semitism can’t be a bad thing. Just like the attacks on Bernie Sanders undermine real accusations of sexism, because if he’s sexist and works for ordinary people, then similarly sexism can’t be all bad.

Here are the videos.

The Jimmy Dore Show.

Secular Talk

I am not at all surprised that they tried attacking Corbyn on the grounds that talking about bankers must be left-wing code for Jews. I’ve seen it done before on Kathy Shaidle’s extreme right-wing blog, Five Feet of Fury. Shaidle’s from the other side of the Atlantic, but her blog is aimed at Conservatives in America, Canada and Britain. She used the accusation to attack American and Canadian critics of the banksters, who cause the crash. I suppose it was only a matter of time before Conservatives and the Israel lobby over here used the same smear.

Private Eye: Campaign Against Anti-Semitism Accuses Telegraph of Anti-Semitism

Published by Anonymous (not verified) on Wed, 19/09/2018 - 6:15pm in

Here’s another story from an old issue of Private Eye, but rather more contemporary than those I last posted. It’s from the issue for the 4-17 May 2018. As well as smearing Mike and other members of the Labour party for supporting Corbyn and not sufficiently supporting Israel and its ethnic cleansing of the Palestinians, the Campaign Against Anti-Semitism also decided to attack the Telegraph. Just as the Israel lobby attacks anyone, who criticizes Israel and its covert interference in their domestic politics as an anti-Semite by claiming that they are using anti-Semitic tropes, so the Zionist bully-boys and girls claimed that the Torygraph was also doing so. In this case, the Torygraph was using them in a story about George Soros, and in a piece of false information about the Rothschilds nearly owning all the banks in the world except in three countries.

Private Eye’s article was entitled ‘Give Them Enough Trope’ and it ran

To Publish one anti-Semitic trope may be considered a mistake. To publish two in six months reveals, in the most charitable interpretation, an epic level of carelessness – but such is the slapdash clickbait operation that is today’s Telegraph.

In February the paper caused worldwide outrage with a front-page story about George Soros and his supposed “secret plot to thwart Brexit”, which not only drew on a classic anti-Semitic trope but compounded the offence with an accompanying online sidebar stating that the financier “stands accused by many governments around the world of meddling in their affairs”. In fact the accusation is mostly made by far-right figures in eastern Europe, which any half-decent editor would have spotted. But the Telegraph no longer employs half-decent editors, so the sidebar, written by a graduate trainee, went straight on to the site.

Now, a correction quietly posted on the Telegraph website last week reveals that last September it published what even it admitted was “an inaccurate and offensive … anti-Semitic trope” as part of a cheap ‘n’ cheerful listicle entitled “What’s missing? The countries with no airports, railways, trees and World Heritage Sites”.

The fun fact in question was that “Only three countries on the planet don’t have a central bank owned or controlled by the Rothschild family” – a nonsensical claim culled from way out on the wilder fringes of conspiracy theory. When press regulator IPSO investigated , following a complaint from the Campaign Against Anti-Semitism, the Telegraph said it was “a regrettable error arising from momentary carelessness”. It was “unable to say from which website or websites the claim had been taken”, but it did try to assure the watchdog its editorial training meant that “if it had been from an obviously and egregiously anti-Semitic website, the journalist would have been alerted to the risk of adopting information published on it.”

Ipso ruled against the paper, pointing out that “the claim was, on its face, highly implausible” and “to take no further steps to verify the claim represented a failure to take care not to publish inaccurate information”.

By a pleasing coincidence, the morning after the Ipso-mandated apology was published on the Telegraph website, the paper devoted an editorial tot eh subject of… anti-Semitism!

“As we report today, the Left does not take the allegations of anti-Semitism seriously at all,” it sturmed (surely “stormed”? Ed).

“Mr Corbyn has made the required noises against anti-Semitism without doing anything about it. Before Mr Corbyn points to the mote in the Tory eye, he should consider the beam in his own.” (p. 8).

This shows just how hypocritical the Tories are in their accusations of anti-Semitism against Corbyn and the Labour party. But David Rosenberg on his blog put up a few weeks ago a long list of anti-Semitic comments uttered by Tory politicians since the 1930s, when many of them were head-over-heels about Adolf Hitler and the Nazis. It was his response to Marie van der Zyle of the Board of Deputies of British Jews claiming that the Tories had always been friends of the Jews, which is thoroughly disproved by history.

It’s also a rare instance of the Campaign Against Anti-Semitism attacking it in the right-wing, mainstream press. People looking at articles its posted on its website have found that most of them by far are directed at the Labour party, with very few criticizing the Tories or the Far Right, despite the fact that the vast majority of anti-Semitic abuse and assaults come from the Fascist fringe.

As for Private Eye, the satirical magazine has followed absolutely the establishment line that Corbyn is a Trotskyite and an anti-Semite, and so are his supporters. Which makes you query just how independent and critical the magazine really is.

Conspiracy Book’s Debunking of Holocaust Denial

The Mammoth Book of Cover-Ups: The 100 Most Disturbing Conspiracies of All Time, Jon E. Lewis (London: Constable & Robinson 2007).

As the book’s cover tells you, this is a popular treatment of 100 assorted conspiracies, ranging from the assassination of JFK, 9/11, the Da Vinci Code, the death of Princess Diana, the Men In Black of UFO lore, the belief that Roosevelt knew about the coming Japanese attack on Pearl Harbour?, the Illuminati, the Protocols of the Elders of Zion and so on. It’s a selection of conspiracies and conspiracy theories that were current at the end of the 1990s and early part of the 21st centuries.

As you might expect of a popular work of this size, the individual chapters tend to be brief. Many are only about two or three pages long, and so this isn’t an in depth examination of them by any means. Most of these theories are absolutely spurious, and so get properly debunked. Most, but not all. Some conspiracies, like the Iran-Contral scandal and the Masonic lodge P2, which was deeply involved in Italian Fascism, the Mafia and had connections to the CIA.

Lewis writes in his introduction that his aim has been to understand and treat the conspiracy theories objectively, to find which are true, and which aren’t.

Hostility to conspiracy theory is as useless in understanding the world as an indiscriminate acceptance of it. The task, surely, is to disentangle the mad and bad conspiracies from those that illuminate the darkened, secret corners of power. To this end The Mammoth Book of Cover-Ups takes a considered, objective scalpel to one hundred of the most compelling conspiracy theories of modern times. The theories are arranged alphabetically, assessed and interrogated. Where appropriate, the relevant documents are reproduced, and details of where to look to find out more are listed. Each conspiracy theory is assigned an “Alert Level” rating indicating its likely veracity. (p. 3).

One conspiracy theory that the book thoroughly debunks is Holocaust denial, discussed on pages 180-2. The first two paragraphs briefly state what it was, and how its existence is supported by a mountain of very trustworthy evidence.

The Holocaust is the name given to the extermination of some six million Jews and other “undesirables” by the Third Reich of Germany between 1933 and 1945. To industrialise the genocide process, the Nazis purpose-built a number of death camps such as Auschwitz, which gassed the Jews in batches; most victims, however, simply died of malnourishment in concentration camps. In occupied Eastern Europe, from where more than five million Jews were taken, special SS killing squads, Einsatzgruppen, sometimes shot Jews in situ.

A wide spread of sources confirms the nature and extent of the Holocaust: the thousandfold testimonies of camp survivors; film and photographs taken by Allied reporters as the camps were liberated in 1945; the confession by Auschwitz SS camp commandant Rudolf Hoss; the prosecution of Adolf Eichmann in 1960-2 and his sentencing to death for “crimes against humanity”. But all of this is dispute by a number of historians and politicians, who speculate that the Holocaust, if it happened at all, was on at most a minor scale. (p. 180).

It then goes on to discuss David Hoggan and his The Myth of the Six Million, one of the earliest and most influential books pushing the lie that the Holocaust never happened. Hoggan claimed in it that the Jews had falsely accused the Germans of genocide in order to gain reparations. This set the pattern for later works, claiming that the Jews had made it up either to gain money or international sympathy. It was the latter which led the United Nations to look kindly on the creation of Israel as a Jewish homeland. The book notes that from 1970s, the most prominent mouthpiece for Holocaust denial in the US has been the Institute for Holocaust Review, led by the neo-Nazi Willis Carto. Publications from the Institute and similar organisations in the US speculate that the gas chambers at Auschwitz weren’t there to kill Jews, but to kill the lice they carried. There are many versions of Holocaust denial. One of these is that there was indeed an extermination of the Jews during the Nazi occupation, but that this was small and not official Nazi policy. This was the view of the notorious David Irving, who claimed that the Nazis were too busy fighting the war to organize the mass extermination of the Jews, and that Hitler was unaware of it.

The chapter goes on to describe how Irving’s version of the Holocaust and Hitler’s involvement was challenged by Deborah Lipstadt in her 1993, Denying the Holocaust. This accused Irving of anti-Semitism and distorting evidence. Irving sued her and her British publisher, Penguin, for libel. Lipstadt and Penguin defended themselves by hiring the Cambridge historian Richard J. Evans, who then went through Irving’s works. He found that Irving had deliberately used unreliable documentation. One such was the report made by Fred Leuchter, who designed gas chambers for the American prison service. Leuchter stated that he found no significant deposits of cynanide at Auschwitz. However, this was in 1988, nearly 40 years after the camp was used and Leuchter himself was not trained in forensics. Evans also found that Irving also expressed very anti-Semitic sentiments in his books, such as calling Jews ‘the scum of humanity’. The court found in Lipstadt’s favour, with the judge declaring Irving to be ‘an active Holocaust denier; that he is anti-Semite and racist, and that he associates with right-wing extremists who promote neo-Nazism’.

The chapter also makes it clear that Hitler knew very well what was going on. He knew its scope even if he didn’t know all the details about every train of victims going to Sobibor. He set the agenda for the Holocaust, as shown in his speeches. In 1939, for example, he declared

If international Jewish financiers inside and outside Europe again succeed in plunging the nations into a world war, the result will be … the annihilation of the Jewish race in Europe. (p. 181.)

Fifteen other leading Nazis attended the Wannsee conference in 1942, which was held outside Berlin on how the extermination of the Jews could best be arranged. The meeting was minuted, and its protocols used to incriminate those present.

The chapter concludes

The Holocaust happened. Most reputable historians put the lower limit of Jews, gypsies, Romanies, homosexuals, Jehovah’s Witnesses, the disabled and the mentally ill exterminated by the Nazis at five million. The upper limit is as high as 11 million.

In 1979 the Institute for Historical Review offered a $50,000 reward to anybody who “could prove that the Nazis operated gas chambers to terminate Jews”. Mel Marmelstein, an Auschwitz survivor, forwarded to the IHR affidavits concerning the fate of his family in Auschwitz plus other documentation, and duly claimed his money. When the IHR failed to give him the $50,000 he sued. The court awarded him the $50,000 plus an extra $40,000 for distress. In other words, the leading outfit for Holocaust denial, giving it its best shot, could not convince a neutral jury of its case. (p. 182).

The book properly gives Holocaust denial an alert level of zero, as it is a completely false conspiracy theory.

It also has a short bibliography, which includes the following two books debunking Holocaust denial:

Deborah Lipstadt, Denying the Holocaust: The Growing Assault on Truth and Memory, 1993; and

Michael Shermer, Alex Grobman and Arthur Hertzberg, Denying History: Who Says the Holocaust Never Happened and Why Do They Say It?, 2002.

At the New York Fed: Thirteenth Annual Joint Conference with NYU-Stern on Financial Intermediation

Published by Anonymous (not verified) on Fri, 03/08/2018 - 9:00pm in



Nicola Cetorelli, Sarah Gertler, and Anna Kovner

Better understanding of financial intermediation is critical to the efforts of the New York Fed to promote financial stability and economic growth. In pursuit of this mission, the New York Fed recently hosted the thirteenth annual Federal Reserve Bank of New York–New York University Stern School of Business Conference on Financial Intermediation. At this conference, a range of authors were invited to discuss their research in this area. In this post, we present some of the discussion and findings from the conference.

Intermediary Structure and Economic Activity

The first two papers at the conference explored the question of how financial intermediaries are organized, and how this organization affects their activity. First, Jennifer Dlugosz discussed her work on bank decision-making with Yong Kyu Gam, Radhakrishnan Gopalan, and Janis Skrastins. The authors find that banks that set deposit rates locally increase rates more in the face of natural disaster shocks and experience relatively higher deposit volumes after the shock. These local rate-setting banks also expand mortgage lending in affected counties more than their counterparts. Finally, after shocks, house prices in areas with more bank branches locally setting deposit rates recover faster.

The next paper on this topic focused on how bank structure affects risk. Presenter Anastasia Kartasheva and her coauthors Andrew Ellul, Chotibhak Jotikasthira, Christian Lundblad, and Wolf Wagner explore the relationship between certain business models and systemic risk. They propose and test a model in which an insurer hedges its credit guarantee exposure by investing in illiquid assets. They investigate the effect on markets and insurers if, in the event of a negative asset shock, insurers engage in fire sales to maintain their capital ratios.


The 2008-09 financial crisis revealed that financial intermediary risk-taking can pose severe problems for financial stability. Indeed, since the crisis, there has been a global effort to enhance regulation of financial intermediaries, and researchers have been engaged in exploring the effects of regulatory changes. At the conference, Anton Korinek discussed his theoretical work with coauthor Olivier Jeanne on post-crisis macroprudential regulation. They highlight two key factors for policy design: first, ex-post policy measures mitigate financial crises and reduce the need for macroprudential policy, and next, macroprudential policy should consider moral hazard effects if and only if regulation includes price-based regulatory measures.

How do loan markets react to increased regulation? Ralf Meisenzahl described his paper with coauthors Rajkamal Iyer, Rustom Irani, and José-Luis Peydró that explores the link between capital regulation and shadow banking in the U.S. corporate loan market. Their main result is that tightening bank capital regulation increases nonbank presence, and that, in the face of this regulation, less-capitalized banks reduce loan retention while nonbanks take their place. Banks with less capital are most likely to sell distressed loans, with higher risk-weights and capital requirements. Finally, loans funded by nonbanks experienced greater turnover and secondary market price volatility during the crisis.

Loan Markets

The final session included papers that explore loan market dynamics. Gabriel Chodorow-Reich and Antonio Falato, using information from the Shared National Credit database, document that more than one-third of loans in their data set breached a covenant during the 2008-09 period, which allowed lenders to renegotiate loan terms or accelerate repayment of what otherwise appeared to be long-term credit. Worse-off lenders were less likely to grant a waiver and were also more likely to reduce loan amounts after a violation at this time. Thus, they argue that this loan covenant channel is the primary transmission of bank health to nonfinancial firms.

Shifting focus to the newest innovations in lending markets, Boris Vallee presented his paper with Yao Zeng on marketplace lending, a relatively new kind of online lending where investors directly screen borrowers. They find that more sophisticated investors screen loans differently, and that they systematically outperform less sophisticated investors. Additionally, these lenders outperform less when they are provided less information.

Do FinTech lenders discriminate differently from traditional banks? Adair Morse discussed her work on consumer lending discrimination in the FinTech era with Robert Bartlett, Richard Stanton, and Nancy Wallace. They find that lenders reject African-American and Hispanic applicants 5 percent more often than other applicants. However, such discrimination is especially pronounced among traditional lenders, consistent with loan officers facial biases, and less pronounced for FinTech lenders that instead may never see their borrowers in person. They conclude that since default risk remains with the government-sponsored enterprises, Fintech lenders are effectively leaving money on the table by maintaining too-high rejection rates.

Keynote Speech: Blockchain Economics and Money

Markus Brunnermeier gave the keynote speech on the economics of blockchains, drawing implications for financial intermediation activities. He explained that traditional centralized ledgers are managed by a single intermediary and thereby extract monopoly rents. However, decentralized ledgers (such as blockchain) have the potential to be more competitive by allowing inefficient blockchains to be abandoned by users in favor of new, more popular protocols. When that happens, a new ledger is established while preserving all information from the existing blockchain. This move reduces the monopolist rents of the primary ledger. However, too many competing blockchains may coexist, splitting the community across too many different ledgers and rendering them unable to fully exploit positive network externalities. Brunnermeier observed that enforcement of property rights must be improved in order to ensure the effective application of blockchain technology.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Cetorelli_nicolaNicola Cetorelli is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gertler_sarahSarah Gertler is a senior research analyst in the Bank’s Research and Statistics Group.

Kovner_annaAnna Kovner is a vice president in the Bank’s Research and Statistics Group.

How to cite this blog post:

Nicola Cetorelli, Sarah Gertler, and Anna Kovner, “At the New York Fed: Thirteenth Annual Joint Conference with NYU-Stern on Financial Intermediation,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 3, 2018,

The “Next” Financial Crisis and Public Banking as the Response

Published by Anonymous (not verified) on Thu, 02/08/2018 - 10:12am in


Interviews, banks

Introduction and Transcript:

In this episode of The Hudson Report, we speak with Michael Hudson about the implications of the flattening yield curve, the possibility of another global financial crisis, and public banking as an alternative to the current system.

Paul Sliker: Michael Hudson welcome back to another episode of The Hudson Report.

Michael Hudson: It’s good to be here again.

Paul Sliker: So, Michael, over the past few months the IMF has been sending warning signals about the state of the global economy. There are a bunch of different macroeconomic developments that signal we could be entering into another crisis or recession in the near future. One of those elements is the yield curve, which shows the difference between short-term and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about this, because since 1950 every time the yield curve has flattened, the economy has tanked shortly thereafter.

Can you explain what the yield curve signifies, and if all these signals I just mentioned are forecasting another economic crisis?

Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest term loans are for mortgages, which have the highest rate. Even for large corporations, the longer you borrow – that is, the later you repay – the pretense is that the risk is much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.

Right now what’s happened is that the short-term rates you can get by putting your money in Treasury bills or other short-term instruments are even higher than the long-term rates. That’s historically unnatural. But it’s not really unnatural at all when you look at what the economy is doing.

You said that we’re entering into a recession. That’s just the flat wrong statement. The economy’s been in a recession ever since 2008, as a result of what President Obama did by bailing out the banks and not the economy at large.

Since 2008, people talk about “look at how that GDP is growing.” Especially in the last few quarters, you have the media saying look, “we’ve recovered. GDP is up.” But if you look at what they count as GDP, you find a primer on how to lie with statistics.

The largest element of fakery is a category that is imputed – that is, made up – for rising rents that homeowners would have to pay if they had to rent their houses from themselves. That’s about 6 percent of GDP right there. Right now, as a result of the 10 million foreclosures that Obama imposed on the economy by not writing down the junk mortgage debts to realistic values, companies like Blackstone have come in and bought up many of the properties that were forfeited. So now there are fewer homes that are available to buy. Rents are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and that means more people have to rent. When more people have to rent, the rents go up. And when rents go up, people lucky enough to have kept their homes report these rising rental values to the GDP statisticians.

If I had to pay rent for the house that I have, could charge as much money as renters down the street have to pay – for instance, for houses that were bought out by Blackstone. Rents are going up and up. This actually is a rise in overhead, but it’s counted as rising GDP. That confuses income and output with overhead costs.

The other great jump in GDP has been people paying more money to the banks as penalties and fees for arrears on student loans and mortgage loans, credit card loans and automobile loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card companies make more money on arrears than they do on interest charges. This is counted as providing a “financial service,” defined as the amount of revenue banks make over and above their borrowing charges.

The statistical pretense is that they’re taking the risk on making loans to debtors that are going bad. They’re cleaning up on profits on these bad loans, because the government has guaranteed the student loans including the higher penalty charges. They’ve guaranteed the mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks are getting penalty charges on. So what’s reported is that GDP growth is actually more and more people in trouble, along with rising housing costs. What’s good for the GDP here is awful for the economy at large! This is bad news, not good news.

As a result of this economic squeeze, investors see that the economy is not growing. So they’re bailing out. They’re taking their money and running.

If you’re taking your money out of bonds and out of the stock market because you worry about shrinking markets, lower profits and defaults, where are you going to put it? There’s only one safe place to put your money: short-term treasuries. You don’t want to buy a long-term Treasury bond, because if the interest rates go up then the bond price falls. So you want buy short-term Treasury bonds. The demand for this is so great that Bogle’s Vanguard fund management company will only let small investors buy ten thousand dollars worth at a time for their 401K funds.

The reason small to large investors are buying short term treasuries is to park their money safely. There’s nowhere else to put it in the real economy, because the real economy isn’t growing.
What has grown is debt. It’s grown larger and larger. Investors are taking their money out of state and local bonds because state and local budgets are broke as a result of pension commitments. Politicians have cut taxes in order to get elected, so they don’t have enough money to keep up with the pension fund contributions that they’re supposed to make.

This means that the likelihood of a break in the chain of payments is rising. In the United States, commercial property rents are in trouble. We’ve discussed that before on this show. As the economy shrinks, stores are closing down. That means that the owners who own commercial mortgages are falling behind, and arrears are rising.

Also threatening is what Trump is doing. If his protectionist policies interrupt trade, you’re going to see companies being squeezed. They’re not going to make the export sales they expected, and will pay more for imports.

Finally, banks are having problems of they hold Italian government bonds. Germany is unwilling to use European funds to bail them out. Most investors expect Italy to do exit the euro in the next three years or so. It looks like we’re entering a period of anarchy, so of course people are parking their money in the short term. That means that they’re not putting it into the economy. No wonder the economy isn’t growing.

Dante Dallavalle: So to be clear: a rise in demand for these short-term treasuries is an indication that investors and businesses find too much risk in the economy as it stands now to be investing in anything more long-term.

Michael Hudson: That’s exactly right.

Dante Dallavelle: OK. So we have prominent economists and policymakers, like Geithner, Bernanke Paulson, etc., making the point that we need not worry about a future crisis in the near term, because our regulatory infrastructure is more sound now than it was in the past, for instance before 2008. I know you’ve talked a lot about the weak nature of financial regulation both here at home in the United States and internationally. What are the shortcomings of Dodd Frank? Haven’t recent policies gutting certain sections of the law made us more vulnerable, not less, to crises in the future?

Michael Hudson: Well, you asked two questions. First of all, when you talk about Geithner and Bernanke – the people who wrecked the economy – what they mean by “more sound” is that the government is going to bail out the banks again at public expense.

It cost $4.3 trillion last time. They’re willing to bail out the banks all over again. In fact, the five largest banks have grown much larger since 2008, because they were bailed out. Depositors and companies think that if a bank is so crooked that it grows so fast that it’s become too big to fail, they had better take their money out of the local bank and put it in the crooked big bank, because that’s going to be bailed out – because the government can’t afford to let it go under.

The pretense was that Dodd Frank was going to regulate them, by increasing the capital reserves that banks had to have. Well, first of all, the banks have captured the regulatory agencies. They’re in charge of basically approving Federal Reserve members, and also members of the local and smaller bank regulatory agencies. So you have deregulators put in charge of these agencies. Second, bank lobbyists have convinced Congress to de-tooth the Dodd Frank Act.

For instance, banks are very heavily into derivatives. That’s what brought down AIG in 2008. These are bets on which way currencies or interest rates will go. There are trillions of dollars nominally of bets that have been placed. They’re not regulated if a bank does this through a special-purpose entity, especially if it does it through those that are in Britain. That’s where AIG’s problems were in 2008. So the banks basically have avoided having to back up capital against making a bad bet.

If you have bets over where trillions of dollars of securities, interest rates, bonds and currencies are going to go, somebody is going to be on the losing side. And someone on the losing side of these bets is going to go under, like Lehman Brothers did. They’re not going to be able to pay their customers. You’re going to have rolling defaults.

You’ve also had Trump de-tooth to the Consumer Financial Protection Agency. So the banks say, well, let’s do what Wells Fargo did. Their business model is fraud, but their earnings are soaring. They’re growing a lot, and they’re paid a tiny penalty for cheating their customers and making billions of dollars off it. So more banks are jumping on the high-risk consumer exploitation bandwagon. That’s certainly not helping matters.

Michael Palmieri: So, Michael we’ve talked a little bit about the different indicators that point towards a financial crisis. It’s also clear from what you just stated from a regulatory standpoint that the U.S. is extremely vulnerable. Back in 2008 many argue that there was a huge opportunity lost in terms of transforming our private banking system to a publicly owned banking system. Recently the Democracy Collaborative published a report titled, The Crisis Next Time: Planning for Public ownership as Alternative to Corporate Bailouts. That was put out by Thomas Hanna. He was calling for a transition from private to public banking. He also made the point, which you’ve made in earlier episodes, that it’s not a question of if another financial crisis is going to occur, but when. Can you speak a little bit about how public banking as an alternative would differ from the current corporate private banking system we have today?

Michael Hudson: Sure. I’m actually part of the Democracy Collaborative. The best way to think about this is that suppose that back in 2008, Obama and Wall Street bagman Tim Geithner had not blocked Sheila Bair from taking over Citigroup and other insolvent banks. She wrote that Citigroup had gambled with money and were incompetent, and outright crooked. She wanted to take them over.

Now suppose that Citibank would had been taken over by the government and operated as a public bank. How would a public bank have operated differently from Citibank?

For one thing, a public entity wouldn’t make corporate takeover loans and raids. They wouldn’t lend to payday loan sharks. Instead they’d make local branches so that people didn’t have to go to payday loan sharks, but could borrow from a local bank branch or a post office bank in the local communities that are redlined by the big banks.

A public entity wouldn’t make gambling loans for derivatives. What a public bank would do is what’s called the vanilla bread-and-butter operation of serving small depositors, savers and consumers. You let them have checking accounts, you clear their checks, pay their bills automatically, but you don’t make gambling and financial loans.

Banks have sort of turned away from small customers. They’ve certainly turned away from the low-income neighborhoods, and they’re not even lending to businesses anymore. More and more American companies are issuing their own commercial paper to avoid the banks. In other words, a company will issue an IOU itself, and pay interest more than pension funds or mutual funds can get from the banks. So the money funds such as Vanguard are buying commercial paper from these companies, because the banks are not making these loans.

So a public bank would do what banks are supposed to do productively, which is to help finance basic production and basic consumption, but not financial gambling at the top where all the risk is. That’s the business model of the big banks, and some will lose money and crash like in 2008. A public bank wouldn’t make junk mortgage loans. It wouldn’t engage in consumer fraud. It wouldn’t be like Wells Fargo. It wouldn’t be like Citibank. This is so obvious that what is needed is a bank whose business plan is not exploitation of consumers, not fraud, and isn’t gambling. That basically is the case for public ownership.

Paul Sliker: Michael as we’re closing this one out, I know you’re going to hate me for asking this question. But you were one of the few economists to predict the last crisis. What do you think is going to happen here? Are we looking at another global financial crisis and when do you think, if so, that might be coming?

Michael Hudson: We’re emphatically not looking for “another” global crisis, because we’re in the same crisis! We’re still in the 2008 crisis! This is the middle stage of that crisis. The crisis was caused by not writing down the bad debts, which means the bad loans, especially the fraudulent loans. Obama kept these junk mortgage loans and outright fraud on the books – and richly rewarded the banks in proportion to how badly and recklessly they had lent.

The economy’s been limping along ever since. They say there’s been a recovery, but even with the fake lying with statistics – with a GDP rise – the so-called “recovery” is the slowest that there’s been at any time since World War II. If you break down the statistics and look at what is growing, it’s mainly the financial and real estate sector, and monopolies like health care that raise the costs of living and crowd out spending in the real economy.

So this is the same crisis that we were in then. It’s never been fixed, and it can’t be fixed until you get rid of the bad-debt problem. The bad debts require restructuring the way in which pensions are paid – to pay them out of current income, not financializing them. The economy has to be de-financialized, but I don’t see that on the horizon for a while. That’s s why I think that rather than a new crisis, there will be a slow shrinkage until there’s a break in the chain of payments. Then they’re going to call that the crisis.

Hillary will say it’s the Russians who did it, but it really is Obama who did it. The Democratic Party leadership is in the hands of Wall Street, and has not done anything to prevent the same dynamics that caused the crisis in 2008 and are still causing the economy to shrink.

Paul Sliker: That’s exactly why I wanted to reframe that question, because I think a lot of people look at economic and financial crises through just the simple paradigm of a bubble and the bubble bursting. But I think you did a fine job of clarifying that.

Well Michael, as always, we could go on but we have to end here. Thank you so much for joining us on The Hudson Report.

Michael Hudson: Well you’ve asked all the right questions.

The Crisis Next Time: Planning For Public Ownership As An Alternative To Corporate Bank Bailouts

Published by Anonymous (not verified) on Wed, 25/07/2018 - 11:00pm in


bailout, banks

The next financial crisis is all but inevitable. While its exact timing and severity cannot be predicted, both the accelerating frequency of crises in recent decades and the continued consolidation of the banking sector in an increasingly financialized economy suggest that we should be prepared for a crisis sooner rather than later. In the Great Financial Crisis of 2007-2008, the US federal government intervened at an unprecedented scale to bailout our largest commercial banks after they became entangled in the mess of risky financial products built on top of an unsustainable housing bubble. The effect of these massive bailouts was, in the end, to preserve the status quo: the modest attempts made to regulate the financial sector to protect consumers and avert further devastating financial crises have largely been rolled back, and the banks that were then “too big to fail” are today even bigger.

Tax Reform’s Impact on Bank and Corporate Cyclicality

Published by Anonymous (not verified) on Mon, 16/07/2018 - 9:00pm in



Diego Aragon, Anna Kovner, Vanesa Sanchez, and Peter Van Tassel

Tax Reform’s Impact on Bank and Corporate Cyclicality

The Tax Cuts and Jobs Act (TCJA) is expected to increase after-tax profits for most companies, primarily by lowering the top corporate statutory tax rate from 35 percent to 21 percent. At the same time, the TCJA provides less favorable treatment of net operating losses and limits the deductibility of net interest expense. We explain how the latter set of changes may heighten bank and corporate borrower cyclicality by making bank capital and default risk for highly levered corporations more sensitive to economic downturns.

Treatment of Net Operating Losses

Prior to the TCJA, companies were able to carry back net operating losses (NOLs) and receive refunds for taxes paid in the two years before the loss. Those “NOL carrybacks” contributed directly to net income and to regulatory capital for banks. NOLs could also be carried forward to offset 100 percent of taxable income for up to 20 years. The TCJA eliminates NOL carrybacks entirely and reduces carryforward utilization to only 80 percent of taxable income, although the latter will no longer expire after 20 years.

The chart below illustrates the cyclical effects of the new rules on a hypothetical firm with both positive and negative pre-tax income over time. Before, losses would be offset by refunds of taxes paid in the previous years (carrybacks). Now, pre-tax losses immediately result in lower cash flows for firms and lower capital for banks, as deferred tax assets are primarily excluded from common equity Tier 1 capital (see this supervisory guidance for details on the initial accounting effect of the tax law change). The chart illustrates this effect from the larger magnitude of the changes in bank capital under the new code (red line) relative to the old code (blue line). For nonbanks, companies with current losses that were previously profitable may be more likely to default without access to cash from tax refunds. Recoveries may also be slower following a recession, since only 80 percent of taxable income can be shielded with NOLs. However, if pre-tax income is not negative or if a recession is moderate, the impact of the new rules may be muted as the lower tax rate increases after-tax profits.

These concerns in the context of stress-tests were highlighted in a letter from the Federal Reserve’s Board of Governors describing changes to stress test modeling: “the elimination of NOL carrybacks will result in a larger decline in post-stress capital ratios for firms with taxes paid in the two years leading up to the stress test that then experience losses in the stress test...”

Tax Reform’s Impact on Bank and Corporate Cyclicality

Deductibility of Net Interest Expense

The TCJA also limits the tax deductibility of net interest expense. Through 2021, net interest expense is only deductible up to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA). Starting in 2022, net interest expense is only deductible up to 30 percent of earnings before interest and taxes (EBIT). Mitigating these caps is the fact that interest expense above the cap can be carried forward indefinitely. In addition, the caps only apply to U.S. taxes. As a result, international firms may find ways to structure around the caps.

Relative to the old tax code, all else equal, the new limits increase effective tax rates and lower net income when either earnings fall or net interest expense increases. The table below illustrates this effect for a hypothetical firm. In the baseline scenario, net interest expense is below the limit and the effective tax rate under the new code is 21 percent. In the next column, titled “recession,” income falls by more than half and the cap binds, limiting the ability of net interest expense to shield income from taxes. Finally, in the column titled “higher rates,” higher net interest expense results in a higher tax rate. Note that this provision is unlikely to affect banks, as banks tend to earn net interest income rather than pay net interest expense.

Tax Reform’s Impact on Bank and Corporate Cyclicality

The aggregate, cyclical impact of these limits depends on a number of factors, including the prevalence of highly levered firms, the cyclicality of earnings, the percentage of debt that is fixed versus floating rate, as well as the response of firm leverage to the change in the tax code. At the end of 2017, the fraction of public, nonfinancial firms with interest expense above the EBITDA and EBIT caps and positive earnings was only 12 and 19 percent, respectively, on an equal-weighted basis and 4 and 12 percent, respectively, on a market value-weighted basis, suggesting the impact is relatively small. That said, the caps may become more binding over the business cycle if interest rates increase or if earnings decline in a recession, as shown below. The following chart plots the equal-weighted percentage of nonfinancial firms in the Compustat database affected by the cap on interest expense deductibility from September 1980 to December 2017 to highlight how the share of affected companies changes over the business cycle (the light blue and dark blue lines). However, companies that have negative pre-tax earnings (firms with negative EBITDA) are not affected by the cap because they have no income to shelter from taxes (the red line).

Tax Reform’s Impact on Bank and Corporate Cyclicality

This figure pertains only to public firms, but private companies also rely on leverage, particularly firms acquired in leveraged buyouts. For example, in the high yield bond universe, the EBITDA cap affects most issuers rated BB and below, and the vast majority of CCC-C rated issues.

Market Reaction to the TCJA

Equity markets appear to be pricing in some of these changes. In the chart below, we investigate the reaction of different portfolios of stocks to the TCJA. To the extent that tax reform has a positive (negative) impact on corporate earnings for firms with high tax rates (interest expense ratios), one might expect those firms to outperform (underperform) around the time of the announcement and passage of the bill.

The chart below explores this hypothesis. The red line plots the cumulative excess return of a portfolio that buys stocks with high interest expense ratios and sells stocks with low interest expense ratios. Consistent with the hypothesis, high interest expense firms underperform around the announcement and passage of the bill.

This reaction suggests either that investors expect lower cash flows due to lower deductions or that investors are requiring a higher discount rate as a result of heightened systematic risk for high interest expense firms relative to low interest expense firms. In comparison, the light blue line plots the performance of a portfolio that buys stocks with high tax rates and sells stocks with low tax rates. The outperformance of this portfolio relative to the market suggests that high tax rate firms will differentially benefit from the TCJA relative to low tax rate firms. Taken together, the results highlight how equity investors are responding to the different effects of tax reform on corporate earnings.

Tax Reform’s Impact on Bank and Corporate Cyclicality

Long- and Short-Run Effects

In the short run, if corporate leverage does not change, the new tax code will tend to make bank capital and nonbank defaults more cyclical, particularly in a severe downturn. In the long-run, the increased cyclicality could be mitigated by deleveraging if firms respond to the lower corporate tax rate, new limits on net interest expense deductibility, and heightened cyclicality of after-tax cash flows, which potentially increase the probability of distress. If firms trade off the marginal costs and benefits of debt as in corporate finance theory, optimal leverage for nonbanks should fall under the new tax law. Empirically, the importance of tax changes for aggregate leverage appears to be somewhat limited. Graham, Leary, and Roberts (2015), for example, find a slow response of leverage to tax changes (see Graham (2003) for survey evidence). As of the first quarter of 2018, there is limited evidence of deleveraging, with most corporate financial policies appearing to favor returning cash to shareholders in the form of stock buybacks and dividend payouts.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Diego Aragon

Diego Aragon is a capital policy manager in the Federal Reserve Bank of New York’s Supervision Group.

Anna Kovner

Anna Kovner is a vice president in the Bank’s Research and Statistics Group.

Vanesa Sanchez
Vanesa Sanchez is a capital policy associate in the Bank’s Supervision Group.

Peter Van Tassel

Peter Van Tassel is an economist in the Bank’s Research and Statistics Group.

How to cite this blog post:

Diego Aragon, Anna Kovner, Vanesa Sanchez, and Peter Van Tassel, “Tax Reform’s Impact on Bank and Corporate Cyclicality,” Federal Reserve Bank of New York Liberty Street Economics (blog), July 16, 2018, //

California Leads The Way In Resistance To The Rule Of Bankers

Published by Anonymous (not verified) on Sun, 15/07/2018 - 4:00am in


banks, California

When former British Prime Minister Margaret Thatcher set her nation on the path of wholesale privatization and austerity in the 1980s, she declared that “resistance is futile.” “There is no alternative,” she decreed, to the rule of “markets,” not just in Great Britain, but for all of humanity and for all time. Thatcher found a soul mate in President Ronald Reagan, whose assault on the public sector in the U.S. — packaged for a racist American electorate as a campaign to purge “welfare queens,” and accompanied by a fierce anti-drugs and crime crusade — was soon joined by the most shamelessly corporatist wing of the Democratic Party. President Bill Clinton completed Reagan’s welfare and crime agenda and, as a final gift to Wall Street, deregulated the banks.

Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

Published by Anonymous (not verified) on Wed, 11/07/2018 - 9:00pm in

Gara Afonso, Roc Armenter, and Benjamin Lester

 Distribution of Bank Reserves and Fed Funds Dynamics

As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks’ reserve balances if reserves remain heavily concentrated at just a few banks.

Note: This analysis provides insight into how the fed funds market might react to changes in the aggregate level of bank reserves. However, as it does not account for all relevant factors, it should not be construed as an analysis of any specific time period. In particular, our analysis does not incorporate the technical adjustment introduced by the FOMC on June 13 that lowered the interest paid on banks' reserves relative to the top of the target range.

Modelling the Fed Funds Market

We formalize our argument within the context of a simple model that captures several of the key features of the fed funds market before and after the expansion in aggregate reserves. The diagram below illustrates key features of the fed funds market, along with the policy rates that the Fed sets. We distinguish between banks and government-sponsored enterprises (or GSEs, such as the Federal Home Loan Banks). While we assume that all GSEs are the same, banks differ from one another across a number of dimensions—most importantly, with respect to their reserve holdings. The Fed has paid interest on reserves (IOR) to banks since 2008, but GSEs are not eligible to receive such payments. The Fed offers GSEs (and banks) the possibility of conducting overnight reverse repurchase agreements (ON RRP). Finally, the Fed offers loans to banks at the discount window rate (DW). Currently, the IOR rate is set at 20 basis points above the ON RRP rate and the discount window rate is set at 50 basis points above the top of the target range.

 Distribution of Bank Reserves and Fed Funds Dynamics

As shown in the diagram, rates in the fed funds market are effectively split into two segments by the IOR rate. GSEs lend to banks that then earn IOR on the additional funds. The agreed rates for these trades are typically between the ON RRP rate (the opportunity cost for the lender) and the IOR (the return for the borrower). In contrast, a trade between two banks has a different rationale. The bank seeking to borrow funds is usually concerned about its liquidity needs and would rather avoid a discount-window loan at a high rate; it is thus willing to pay more than IOR. At the same time, the opportunity cost of funds for the lending bank is the IOR—so the agreed rates will typically be above the IOR for bank-to-bank transactions.

In today’s world of super-abundant reserves, most banks hold far more reserves than required and are not concerned about discount window borrowing. Hence, very few banks are willing to borrow at rates above the IOR rate and there are very few bank-to-bank transactions. As a result, most of the market activity today is driven by banks borrowing from GSEs, the EFFR lies between the ONRRP rate and the IOR rate, and the overall volume is determined by the balances supplied by the GSEs.

What Happens as Aggregate Reserves Decline?

As the level of reserves drops in our model, banks with reserve shortfalls face liquidity needs and resort to borrowing in the fed funds market at rates above the IOR rate to avoid paying higher rates at the discount window. Eventually, lending at “premium” rates becomes attractive to banks with excess reserves. As bank-to-bank trading revives, it puts upward pressure on the EFFR as trade volume shifts away from GSE-bank trades—and thus toward rates above the IOR. At some point, the EFFR rate will drift above IOR. The exact timing of this drift above IOR depends on how the distribution of reserves across banks evolves as the Fed normalizes its balance sheet.

Why Reserve Distribution Matters

The discussion above highlights that within the model a shift from GSE-to-bank trading to bank-to-bank trading will likely be a key driver of higher fed funds rates. This shift only requires that some banks find themselves short of reserves and willing to borrow at rates above the IOR rate. Thus, the distribution of banks—and, in particular, the fraction of banks with low reserves—is as important as the average reserve balance that any bank has (though, of course, the evolution of both are intertwined).

A simple example can illustrate our point. Consider just two banks, A and B, holding $20 and $100 in excess reserves, and assume that banks only seek to borrow funds at a rate above the IOR rate when their excess reserves are zero. In one scenario, aggregate reserves decrease entirely through a reduction in bank B’s balances: Average bank reserves could be as low as $10 per bank before bank B runs out of reserves and starts demanding funds—a drop of more than 80 percent in total reserves. In a second scenario, bank A’s balances absorb the drop in aggregate reserves: Bank A would then start demanding funds above the IOR rate while average bank reserves would still be $50 per bank—a mere 15 percent decrease in total reserves.

This simple example illustrates why the distribution of reserves is one important factor for understanding the effects of normalizing the Fed’s balance sheet. However, a comprehensive analysis of the evolution of the fed funds market requires modeling several other relevant factors, from regulatory considerations to the relative importance of GSE-bank trades going forward. We incorporate these additional factors into our model. But ultimately, key questions on the normalization of the Fed’s balance sheet are quantitative and that’s what our model is for.

Quantitative Scenarios

In our baseline simulation, we find that the effective fed funds rate drifts above the IOR rate once aggregate reserves are between $800 billion and $1 trillion. This estimate is significantly larger than the level before the financial crisis. Intuitively, since the fed funds market is quite anemic, GSE-bank trades offer very thin margins for banks, and some trades already occur at rates above the IOR, our analysis suggests that it would not take much for the revival of bank-to-bank trades to outweigh GSE-bank trades.

The predicted path for the fed funds rate as a function of aggregate reserves is shown as a gold line in the figure below. It is worth noting that the model suggests that the EFFR would be near the IOR for a relatively wide range of aggregate reserves, between $600 billion and $900 billion. At this point, lending banks are still flush with reserves, and thus do not demand particularly high rates in return. This would open the possibility of operating the IOR rate as a point target for monetary policy without concerns that temporary movements in aggregate reserves would challenge interest-rate control.

To see how the distribution of reserves impacts rates and volumes in the fed funds market, we study two cases. We first think of a market where reserves are highly concentrated at the largest banks, which choose to hoard them to meet liquidity requirements. This hoarding drives up the demand for reserves by other banks that need to satisfy reserve requirements, which triggers the largest institutions to start lending funds earlier. Since banks would typically lend at rates above the IOR rate, a higher demand for funds and the availability of more lending balances result in higher trading volume and an increase in interest rates. In practice, this all means that if reserves are highly concentrated and the largest banks hoard balances, the EFFR drifts above the IOR rate earlier—at around $1.1 trillion in aggregate reserves, per our analysis (indicated in blue in the chart below).

In contrast, if reserves are more evenly distributed across banks, aggregate reserves would have to decline much more for the bank-to-bank segment of the market to return. Under this “low concentration” scenario, increased trading volume and upward pressure on the effective rate would be delayed as banks would have less incentive to borrow in the fed funds market. As the chart below shows, in the low concentration case (indicated in red) the EFFR reaches IOR at around $500 billion.

 Distribution of Bank Reserves and Fed Funds Dynamics

To summarize, our analysis reveals that the answer to the question on how changes in the level of aggregate reserves affect trading in the fed funds market is more subtle than it might seem, as one needs to know both the total reserves held by banks and the distribution of those reserves across banks. More generally, this exercise highlights the importance of studying these questions within the context of a model, where the behavior of market participants will respond to changes in the economic environment.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Gara AfonsoGara Afonso is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group.

Roc Armenter is a vice president and economist at the Federal Reserve Bank of Philadelphia.

Benjamin Lester is a senior economic advisor and economist at the Federal Reserve Bank of Philadelphia.

How to cite this blog post:

Gara Afonso, Roc Armenter, and Benjamin Lester, “Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics,” Federal Reserve Bank of New York Liberty Street Economics (blog), July 11, 2018,