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Hamilton's comment about paying interest on reserves was about two-thirds of the way through his post. Quoting it in full: "The second measure that the Fed employed to allow this ballooning of its assets was to start paying banks an interest rate on reserves that is exactly equal to its target for the fed funds rate itself, essentially eliminating any incentive for the banks to lend fed funds and encouraging banks instead to simply let excess reserves accumulate. Last week, banks were sitting on about $800 billion in excess reserves with the Fed, doing absolutely nothing with them. The Fed was in effect lending those funds in place of the banks. I have been quite apprehensive about this scheme, particularly now that we have reached a point where, in my opinion, the Fed in fact does want the money supply to increase so as to cause a little inflation. But the present arrangement makes it quite awkward for the Fed to do so."
Hamilton's post was good. I must have missed where he explained that paying interest on reserves is dangerous.
Waldman has some good points, especially, his canoe metaphor, explaining how the Fed is trying to offset what the private sector is doing in credit markets.
But his notion that interest on reserves is a subsidy to the banks is a bit crazy. It seems that he just doesn't get the picture that holding base money is lending money to the central bank, just like leaving money in a zero-interest checking account is making a loan to your commercial bank. Is there some gold-buggism in the confusion.
If I owned a bank, I would organize a clearinghouse that allowed settlement with something that pays interest. Sounds like a no brainer to me.
Zero interest reserve balances looks like an artifact of the Fed's monopoly power, with the aim of transfering money to the Treasury.