Your comments would have been spot on 20 years ago. Things have changed. Read up on Basel II.
Let us start with reserve requirments. The banks need to keep this reserve at the Fed (where there is a required minium) or in other safe assets like US Treasury Bills. T-Bills always offer a higher rate – unless intrest rates are zero. Then you use the Fed becasue it is more convient. What you are showing is the banks preference in where to park their reserves, not overall excess reserves.
Second, high poewr money is no longer high power.
Which results in this:
(M1 is the bit that the Fed has indirect control over. The rest less so.)
Why is this? The Fed issues currency – a.k.a. high power money. But anybody with high quality liquid assets can create money. 20 years ago that was primarily banks and the Fed had a 1 size fits all when it came to reserve ratios. To maximize profits, banks need to be as highly geared as they could be. Any new cash from the Fed would be turned into loans fast.
Then Basel II came along and said that reserve ratios had to be risk adjusted. Was your lending safe, then you have have a high ratio and a low reserve. High risk loans meant a low ratio and a high reserve. Banks would create a computer model.
Or you could lend off books. Issuing loans via MBSs dod not require any reserves. The shadow banking system does not require any reserves. Both of these methods could indirectly create money. The Feds have very little control over these markets.
Then the banking crisis hit. The computer models toe calculate the reserve ratio blew up and the shadow banking system shut down.
Which takes us to your point on the reserves – exchanging productive assets for Fed reserves. To be a little glib, managing reserves is one of the primary functions of the banks – a necessary part in converting 30 year home loans into 0 years savings products. Banks want to gear as high as possible to maximize profits while central banks want to keep the gearing low to reduce risk. The current environment is not that bad. In the past 100 years I can point to 20 to 30 years where it was worse.
And I am not sure what you mean by the comment that MBS and Treasuries will soon be worth far less. I can't think of any way the one could make Treasuries worth less without making the Fed's reserve dollars taking a even bigger hit. Nor do I know what you mean by big fish. Banks and the wealthy hold much of the government debt and MBS so they would suffer the most. My personal vote is for financial repression, but for that to happen we would need to have some inflation over the next 10 years, and the market does not think that will be happening – we know that because the price of TIPS.