Tuesday, October 27, 2009

Fed: Ten Minus Seven Equals Negative Four

A former research economist at the Federal Reserve, William A. Barnett, is calling for an audit of the Fed and points to these, ahem, oddities, In NYT, he writes (ViaRM):

Consider the data the Fed presented last year on nonborrowed reserves. Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves. Clearly, the money borrowed cannot exceed the total reserves, so nonborrowed reserves should not be negative. Yet for a few months last year, the Fed reported banks’ nonborrowed reserves at billions of dollars below zero. In its calculations of nonborrowed reserves, the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves. Such incompetent accounting would not survive an unconstrained, fully informed audit.

Here's the chart:

Then Barnett brings up the old problem of sweep accounts distorting money supply data:
The information the Fed releases on bank deposits is similarly biased and contaminates data on the money supply and thereby on the liquidity of the economy produced by Federal Reserve policy. In order to evade reserve requirements, which mandate that a certain fraction of deposits be held in reserve and not lent out, many banks sweep much of their checking account deposits into shadow money-market-deposit savings accounts before reporting those deposits to the Fed. Since such accounts have no reserve requirements, this allows the banks to decrease the amount of total reserves they’re required to have. But the liquidity provided to the economy from checking accounts is the pre-sweeps amount, not the reported post-sweeps amount.

Why does the Fed not require banks to go public with their real checking account deposit data? If the Fed doesn’t see it as a problem that banks evade reserve requirements on checking accounts, why doesn’t it just remove those requirements? Such evasion would be less likely to continue in the face of a comprehensive audit by the Government Accountability Office.
As Bob Murphy notes, during normal times, this second issue wouldn't be a major problem since what is important is growth rates and not absolute numbers. But, given the current financial crisis period, you need all the data to spot any quirky stuff that might be going.

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