Reviving this crusty old thread:
Stephen A. Lawrence wrote:
> 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.
You have to be very careful in using the term "asset" when it comes to banks.
When they say assets, they mean the total of their outstanding loans, not the
deposits in them. A good way to determine what a bank has lent out relative to
the deposits in it is to look at its annual report. Total assets/total capital
= that banks multiplier.
> 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.
Here, right from Jed's favorite source of information, Wikipedia:
"Reserve requirements affect the potential of the banking system to create
transaction deposits. If the reserve requirement is 10%, for example, a bank
that receives a $100 deposit may lend out $90 of that deposit. If the borrower
then writes a check to someone who deposits the $90, the bank receiving that
deposit can lend out $81. As the process continues, the banking system can
expand the change in excess reserves of $90 into a maximum of $1,000 of money
($100+$90+81+$72.90+...=$1,000), e.g.$100/0.10=$1,000. In contrast, with a 20%
reserve requirement, the banking system would be able to expand the initial
$100 deposit into a maximum of ($100+$80+$64+$51.20+...=$500),
e.g.$100/0.20=$500. Thus, higher reserve requirements should result in reduced
money creation and, in turn, in reduced economic activity."
So there you have it. By this mechanism, banks lend out ten times as much money
as is deposited in them. $100 is magically transformed into $1000. Nice
business, eh?
"Reserve requirements apply only to transaction accounts, which are components
of M1, a narrowly defined measure of money. Deposits that are components of M2
and M3 (but not M1), such as savings accounts and time deposits such as CDs,
have no reserve requirements and therefore CAN EXPAND WITH REGARD TO RESERVE
LEVELS (emphasis mine). Furthermore, the Federal Reserve operates in a way that
permits banks to acquire the reserves they need to meet their requirements from
the money market, so long as they are willing to pay the prevailing price (the
federal funds rate) for borrowed reserves. Consequently, reserve requirements
currently play a relatively limited role in money creation in the United
States."
What I find disturbing is that bankers and others who merely play numbers games
with money and produce nothing but the indebtedness of those do produce, are
allowed to continue with this. This current financial debacle illustrates how
far this system has led us astray. Hedge funds and derivatives have amplified
this rolling fraud to the point that the whole world economy has suffered and
no one seems even to want to know what's happening. Instead, we have the idiots
we have elected to the Congress and the idiot in the White House throwing
trillions at the idiots who caused this. In other words, their solution to a
debt crisis is a lot more debt. Brilliant!
Not just average people, but relatively financially sophisticated people seem
to reside in a fool's paradise of ignorance concerning this issue. The late
Wright Patman (D-Texas), who occupied the same chairmanship as Barney Frank for
forty years, introduced legislation every year for twenty of those years to
abolish the Federal Reserve. Fat chance of that ever happening. For a fun time,
google Wright Patman/Federal Reserve.
M.
