Michael Foster wrote: > Sorry Stephen, I left something out, which makes the thing rather > confusing. The multiplier, that is the amount of money commercial > banks can lend out versus the deposits in them is in fact 10 just > now. It varies. However, that doesn't mean that they create the > money out of thin air. They borrow the money from the Federal Reserve > at the discount rate, and then lend the money at whatever the market > will bear. I hate to tell you this, but the money they borrow from > the Federal Reserve is created from thin air.
Certainly, money lent out at the discount window is "magic money" which comes from nowhere, just like money used by the Fed to purchase government securities. (Actually they didn't call it "magic", they called it "high powered money" back in my macro class, as distinct from ordinary money.) The Fed accounts for it, of course, but since their books don't need to balance the accounting is just record keeping, it doesn't necessarily imply any degree of control. However, I'll have to look into this farther -- I had *thought* banks were only allowed to borrow from the discount window to meet their reserve requirements, which would still imply that their total lending could not exceed their assets. Certainly that is how I thought it was supposed to work back when I studied macroeconomics. However, if they're allowed to borrow from the discount window essentially without limit then, if they have a reserve requirement of 10%, then can borrow 1.11*x dollars from the discount window and lend out x dollars and everything's hunky dory -- assuming, of course, that the discount rate is lower than the prime rate (but it *always* is lower than the prime rate, of course). And, of course, you did stipulate "commercial banks", which operate under a different set of rules from savings and loans. So what you have is banks buying loans on 10% margin, with the margin loans being made (at vanishingly low interest rates) by the Fed. In particular, though, I would think that that would detonate the money supply, as the reserve requirement would be effectively annulled, and the multiplier on high powered money would go to infinity (just plug in "1" for "a" in the formula sum_0^infinity (a^n) = a / (1 - a)). And that is obviously not happening -- an explosion in the money supply produces runaway inflation, and inflation right now is small-to-nonexistent, as it has been for a good many years. For that reason alone I am skeptical that the fed is allowing essentially unlimited borrowing from the discount window. Furthermore, that would, as I said, effectively annul the reserve requirement, and things I've read recently implied pretty clearly that the reserve requirement was still in place and mostly having some sort of effect (though it was not always being strictly honored in practice). But, again, I have to look into this farther -- and also look over the effect on the money supply of a pure "multiplier" limit rather than a reserve requirement. It sure looks deadly but maybe it's not as large an effect as I would have guessed. > Many assume that if you > assert this, you must be some sort of right-wing conspiracy nut, and > although I haven't seen the video you refer to, I'll bet there are > all sorts of nutty assertions in it. But the fact remains that what I > have said here is how the banking system operates in the U.S. and > most of the rest of the world. Virtually all the money in the world > is fiat money and mostly created as debt. Franklin Roosevelt ended > the gold standard in the U.S. and established the gold reserve > standard. Richard Nixon ended the gold reserve standard (closed the > gold window where foreign governments could redeem dollars for gold) Hmm... as I recall, and feel free to jump all over me if I'm wrong here.... Before he did so the U.S. was still selling gold at $35 per ounce, as I recall, because they had pegged the dollar to gold without flexibility -- that is, after all, what a "gold standard" does; a "flexible standard" OTOH is no standard at all. But things in the rest of the world had changed and the market price of gold was several times that high. Consequently, the so-called "gold standard" wasn't working terribly well even before it was abandoned. In fact the "gold standard" was effectively abandoned the day the government ended free exchange of dollars for gold, which was the day they stopped printing "goldbacks". Without free exchange the so-called "peg" is meaningless -- it's like the value of the ruble under the communists: It was valued at a few per dollar but you couldn't get the government to exchange rubles for dollars, so what did that mean? On the black market the ruble was worth several times less. Which was the "real" value of the ruble -- the standard value (which you couldn't get for it) or the black market value? So it was with the so-called "gold standard". > and made U.S. currency as unstable as the rest of the world's fiat > money. Nixon did a lot of things to destabilize the money supply, actually... It took a good many years to get it back on an even keel after he left office. > > You are right that the power to create money has been delegated to > the Federal Reserve, not by legislation, but by default. Members of > the Congress haven't the remotest idea how the banking system works, > and so just accept the system as it is. The chairman of the Federal > Reserve Board is appointed by the President, but usually the > President hasn't a clue whom to appoint, and so just takes the > board's recommendation. > > If you ever have the patience and forbearance to listen the the > chairman of the Federal Reserve testifying before Congress, you will > hear that he's dictating terms, not explaining what the Federal > Reserve has done. This might be a bit easier now that Alan Greenspan > is no longer chairman with his endless mind-numbing speeches. > Instructive to hear that he recently admitted to having no idea what > was going on with the sub-prime mortgages, hedge funds and debt > swaps, no? > > > --- On Fri, 11/28/08, Stephen A. Lawrence <[EMAIL PROTECTED]> wrote: > >> From: Stephen A. Lawrence <[EMAIL PROTECTED]> Subject: Re: [Vo]:[OT] >> Federal Reserve Notes To: [email protected] Date: Friday, >> November 28, 2008, 7:34 PM Michael Foster wrote: >> >>> The vast majority of the money supply is not currency, >> but bank >>> issued debt. The present multiplier allowed to >> commercial banks is >>> 10. That is, they can lend out ten dollars for every >> dollar deposited >>> in them. >> I believe that is incorrect. >> >> What you said, which I've also seen quoted on the Internet in >> various places, would make no sense -- the money lent out would be >> coming from noplace, and banks, unlike every other sort of company, >> would have the ability to lend out stuff they don't have to start >> with. They can't do that; only the federal government has the >> power to create money, and it's been delegated to the Federal >> Reserve Board. > > > > > >
