Stephen A. Lawrence wrote: > > Michael Foster wrote: >> Arbitrary raising of interest rates by the Fed, for example, reduces >> inflation immediately by reducing the demand for borrowing. Since >> commercial banks are able to lend about ten times the amount >> deposited in them, > > Please provide a reference for this.
I have continued looking and have found no indication that commercial banks either are allowed to lend more than their total deposit value, nor that they actually do. The money supply is currently several trillion dollars (exact amount depends on what's included in it): http://www.econlib.org/library/Enc/MoneySupply.html All time peak borrowing at the discount window totaled about $400 billion, which is substantially less than the size of the money supply: http://www.tradingmarkets.com/.site/news/Stock%20News/1967248/ Ergo, borrowings at the discount window certainly don't account for 90% of the circulating money, as your claim would lead one to conclude. Banks can't make unsecured loans from the discount window; they must pledge securities in exchange for the loans: http://www.newyorkfed.org/aboutthefed/fedpoint/fed18.html http://www.frbdiscountwindow.org/cfaq.cfm?hdrID=21&dtlID= Commercial banks are limited to lending an amount no larger than their primary deposits (NB -- a loan from the discount window is certainly not a "primary deposit"). None the less the overall effect of injecting high powered money is to increase the money supply by a substantial factor, termed the "multiplier", over and beyond the deposit of cash by the Fed: http://www.nationmaster.com/encyclopedia/Deposit-creation-multiplier http://answers.yahoo.com/question/index?qid=20071220225943AAAzhu2 http://e-articles.info/e/a/title/Monetary-Multiplier/ http://en.wikipedia.org/wiki/Fractional-reserve_banking Note that the Wiki article claims that the effective reserve rate on most deposits is currently 0%, which is startling, as that also leads to a multiplier of infinity. (But it's been flagged as out of date, so that may or may not currently be true.) In any case, that's still no evidence that banks are allowed to lend out more than the value of their deposits. Unfortunately my economics texts seem to be AWOL -- I thought I'd unpacked them after we moved but they're nowhere to be found, so I'm just looking at reference on the Web here. Again, if you have a reference supporting the claim that a commercial bank can lend out up to 10 times the value of its primary deposits, please post it. I would be extremely interested in seeing it. Thanks. > > I have as yet not come across any information indicating that commercial > banks can lend out more than about 90% of their net asset value -- > reserve requirements currently being around 10% -- and you are claiming > they can actually lend out about 900% of their net asset value. > > I will continue looking around but it would save time if you could > provide a link to the relevant information. Next step will be dig my > old macro book out of the basement and see what they say about the > detailed operation of the discount window, which is what this is all > about, of course. > > Note well that the "money multiplier effect", which is about 10x, is > quite different from the claim you are making. The "money multiplier" > results from the assumption that the 90% which the bank lends out is > redeposited in another bank, at which point 90% of the new deposit is > again lent out, and so forth. You are claiming, on the other hand, that > the original bank can lend out 900% of the original deposit amount, and > that once that's deposited in another bank, another 900% can be lent > out. The former converges to a multiplier of about 10x. The latter > diverges, with the multiplier going to infinity. The consequences to > the economy are likely to be very, very different. >
