Stop the Presses! or, How the Fed Can Avoid Reserve Shortages without Bulking-Up, Part 2

George SelginYou ’ve always had the power to go back to Kansas.–the Good Witch of the East, to Dorothy, inThe Wizard of Oz(This is the conclusion of a two-part essay. For Part 1 clickhere.)Equipped with some historical background, we can now consider ways in which the Fed might get the Treasury and Foreign Official Institutions (FOIs) to revive their pre-crisis practice of parking surplus dollars somewhere other than at the Fed. In fact, most of the necessary means are already at hand. Fed officials only need to recognize and take advantage of them. They need, as it were, to click the heels of their ruby slippers together, and repeat three times that, so far as foreign dollar pools and big Treasury balances are concerned, "There's no place likesomewhere else."Just how can the Fed get the Treasury and FOIs to take their business elsewhere? Broadly speaking, their options are: capping their Fed deposits, or making those deposits less remunerative, or taking steps to restore the attractiveness of alternative investments that don't gobble-up bank reserves.Draining the Foreign Repo PoolIn principle, limiting FOIs' use of the Foreign Repo Pool (FRP) is very easy, because the Fed is free to set any rules it likes for that facility. Specifically, as Matthew Klein observes inhis Barron's piece, "The New York Fed has the right to 'manage the overall size of the foreign repo pool' to 'maintain orderly market or reserve management conditions'." The Fed could, therefore, restore the l...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs