Interest on Excess Reserves: The Hobie Cat Effect

Forty years ago, in the spring of 1978, I had no intention of becoming an economist. Instead, I was studying marine biology at Duke University ’s Marine Lab at Pivers Island, on the beautiful North Carolina Coast. There, when the wind was up, my classmate Alan Kahana and I enjoyed going out on his Hobie 16, with Alan manning the tiller and myself hiked-out on the trapeze. We weren’t, truth be told, especially prudent sailors. On the co ntrary: we were so inclined to push things to the limit that one day we took the Hobie out just as a gale was getting up, and ended up…well, that’s a long, sad story. Suffice to say that it doesn’t take much to capsize a Hobie, and that on that day we capsized Alan’s boat once and for all.What, you are no doubt wondering, has any of this to do with Interest on Excess Reserves? I ’m getting there. You see, although it doesn’t take much to capsize a Hobie — a little over-trimming of the sail will suffice — once one capsizes, it’s likely to start to turn turtle as its mast fills with water. And as that’s happening, it may be all that two reasonably trim lads can do — by pulling for dear life on a righting line attached to the boat’s mast, whilst leaning backwards on its uppermost hull — to lever the thing back upright. The more the mast fills, the harder it gets. And the same sort of thing goes for letting a central bank slip into, and then trying to wr est it out of, a floor system of monetary control: the more liqui...

Source: Cato-at-liberty - April 4, 2018 Category: American Health Authors: George Selgin Source Type: blogs