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It's remarkable how even a minor government intervention can sometimes take on a life of its own, feeding on itself in a way that sometimes seems to end only with it swallowing everything in sight!
Consider interest on reserves.
Consider interest on reserves.
It began, innocently enough, as a proposal for unburdening banks and their customers of the implicit tax mandatory reserve requirements imposed on them, by having the Fed pay interest on required reserves.
Such was the aim of the 2006 "Financial Services Regulatory Relief Act" that first gave the Fed permission to pay interest on reserves (IOR). Banks then held any excess reserves, so it would have involved modest payments on a small fraction of bank assets. https://www.congress.gov/bill/109th-congress/senate-bill/2856
When the 2008 crisis hit, the Fed decided to take advantage of the 2006 law to pay banks to accumulate reserves. To do that it had to cheat a bit, paying an above market rate despite the letter of the 2006 law. https://www.alt-m.org/2016/09/06/has-fed-been-breaking-law/ But hey, what are lawyers for?
At first the new arrangement was temporary. But in January 2019 it was officially made permanent. https://www.alt-m.org/2019/01/31/the-fed-marches-on/ Back in 2008, interest-bearing reserve balances made up <4% of demand deposits. Now the figure is closer to 100%.
And yet, the spiral may not have culminated. For now some see the Fed's IOR payments to banks as supplying a rationale for extending the same privilege to ordinary citizens. Consider part III of the @NiskanenCenter's recent policy agenda series.
"Banks," the authors argue, "currently hold [Fed] accounts, which pay higher interest than commercial banks... . Considerations of horizontal equity thus favor extending this advantageous privilege, now exclusively enjoyed by banks, to the rest of us."
And so a modest plan, originally intended to give commercial banks a measure of "regulatory relief," has come to be regarded as instead granting them an unfair "advantage," over the rest of us, the proposed cure for which consists of having the Fed compete directly w/ them.
I don't pretend that my story is an argument against the proposal in question. I simply offer it as an interesting example of what Mises called the "interventionism dynamic."
