100 Percent Reserves?

by Liberty and Power

Tyler Cowen, among others, has observed that M1 (the narrowest measure of the money stock that includes bank deposits) has had a money multiplier of around 1 since November. This means it is covered 100 percent by bank reserves. But this is just another manifestation of both (a) the Fed's mistake of paying interest on reserves and (b) the irrelevance of M1 as a monetary measure. As a result of Greenspan's deregulation, most individual checking accounts are now classified as savings accounts (under the regulatory category of"money market deposit accounts") in M2 and are not part of M1.

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Bill Woolsey - 3/10/2009

Anderson has a 2003 note where he claims that M1 only includes 1/2 of total transactions balances. That would imply a reserve ratio of 60%.

Of course the entire model of sweep accounts being used to avoid reserve accounts breaks down when banks demand more reserves than required. Why bother to fool with the sweep software to disguise transactions deposits when there is no need to economize on reserves.

Still, if the 2003 ratio applies today then about 16% of the $4 trillion in saving accoutns are really "checking accounts."

However, there are alternatives to money market deposit accounts. I have looked at bank promotions of sweep accounts before. Here is the first one I found on google--

"Choose one or more of the sweep account options you want:
A Comerica Bank Business Money Market Investment Account

A non-FDIC-insured investment account, offered through Comerica Securities1,2

A Comerica Bank Business Line of Credit"

How are the second 2 options measured?

It seems that it would be relatively easy for the Fed to obtain reports and so have an accurate measure of transactions deposits. Who is being fooled by this? Policians?

Jeffrey Rogers Hummel - 3/9/2009

In 1994 the Fed allowed banks to use advanced computer software that sweeps unused checking account balances into MMDAs. As you no doubt know, previous accounts that did this with savings deposits and without the computer software were known as Automatic Transfer Service (ATS) accounts, and counted entirely in M1. But with the MMDA sweep, the bulk of the checking account is counted in M2. As a result, there was a significant drop in M1 deposits over the next few years, as banks made the transition. You can find it all discussed in an article by Richard G. Anderson and Robert H. Rasche in the St. Louis Fed Review for January/February 2001. M1 is currently $1.5 trillion, and a little less than half of that is checking accounts. But compare that with the nearly 4.5 trillion in savings deposits and MMDAs.

Bill Woolsey - 3/9/2009

Why do you think that most individual checkable deposits are classified as "money market deposit accounts?" My understanding is that because of sweep accounts, some amount of checkable deposits are measured as funds in money market deposit accounts. However, I have had no idea how to get a measure of it.

I have a money market deposit account. It is pretty useless for transactions purposes.

When you look at promotions for sweet accounts, there are a list of possible investments that funds can be swept to.

Since it is hard to see this as anything but a way to avoid reserve requirements, I would assume that this would just be too blatant if some record keeping item of "funds that are in checkable deposits during the day but moved out before the time to report the amount of checking deposit balances for reserve requirement purposes." But, perhaps I am wrong.