Unraveling the truth behind excess reserves and M2 money supply

  • The size of the Fed’s assets and liabilities is determined by the Fed alone, not commercial banks
  • Commercial bank reserves are mainly used for settlement between banks
  • Commercial banks have not been adding to M2 money supply

In response to our op-ed, Em. Prof. Robert Stauffer raises two points that require clarification. Firstly, he suggests that the existence of excess reserves in the banking system, amounting to $3.4 trillion, could be lent and thereby increase the M2 money supply. However, it is important to note that the size of the Fed’s assets and liabilities is solely determined by the Fed itself, not the commercial banks. While commercial bank reserves are indeed used for settlement between banks, this process is a zero-sum game and does not contribute to the expansion of M2. In fact, over the past year, commercial-bank credit has actually contracted by 0.7%, indicating a decrease rather than an increase in the M2 money supply.

Factuality Level: 8
Factuality Justification: The article provides a clear and accurate response to the claims made by Em. Prof. Robert Stauffer. It explains the role of the Federal Reserve in determining the size of its assets and liabilities and clarifies that commercial banks cannot collectively reduce their reserves at the Fed. It also presents data showing that commercial-bank credit has actually contracted over the past year, contradicting Mr. Stauffer’s claim that excess reserves could be lent and added to the M2 money supply.
Noise Level: 8
Noise Justification: The article contains a lot of back-and-forth between the authors and Em. Prof. Robert Stauffer, which is not directly relevant to the main topic of the article. The article also includes technical details about the banking system that may not be easily understood by the general reader. Overall, the article lacks focus and clarity, making it noisy.
Financial Relevance: Yes
Financial Markets Impacted: No
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article pertains to financial topics as it discusses the banking system, excess reserves, and commercial bank credit.
Key People: Robert Stauffer (Em. Prof.)

Reported publicly: www.wsj.com