By George Selgin, includes “In short, slice and dice it however you like, there is no way to make sense of Liberty Street Economics' claim that the Fed's interest payments on excess reserves serve to achieve an optimal quantity of bank reserves, or to otherwise make our payments system more efficient. … Who, then, foots the bill for the subsidy? Taxpayers do. … the Fed has taken the latter course by using bank reserves, which are short-term liabilities, to fund longer-term Treasuries and MBS. "There is," she adds, "no free lunch from that transaction." Instead, the Fed's extra earnings reflect increased risk …”