You, too, can be a banker: http://wfhummel.cnchost.com/bankingbasics.html
Terry On Mon, Dec 1, 2008 at 3:54 PM, Stephen A. Lawrence <[EMAIL PROTECTED]> wrote: > > > 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 (But it's been flagged as out of date, so 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. >> > >
