>   
>   (email exchange)
>   
>   On Wed, Feb 24, 2010 at 10:37 AM, wrote:
>   
>   It’s not worthy of any comment, other than to show that even the Fed doesn’t
>   understand its own operations:
>   

“These constraints will discourage institutions from lending their reserve balances as they continue to work to stabilize their operations.”

>   
>   Banks don’t lend from their reserve balances. That’s a fact. How can you take someone
>   seriously when they get an elementary fact like that wrong? Banks DO NOT use reserve
>   balances to create loans. They create loans and deposits simultaneously out of thin
>   air. They use reserve balances to settle payments or meet reserve requirements ONLY.
>   If a bank is short reserve balances for either of these purposes, the Fed provides an
>   overdraft AUTOMATICALLY at a stated penalty rate, which the bank then clears via the
>   money markets or the cheapest alternative. Whether banks in the aggregate hold $1 or
>   $1 trillion in reserve balances, there operational ability to create loans is the
>   same . . . infinite! (Though the creation of even 1 loan requires a willing,
>   credit-worthy borrow in the first place, of course.)
>