So how does the US government or Fed control the Banks then?
So what is the difference between the multiplier effect and banks ability to raise loans using the same money that is deposited with them? I trust we are not debating jargon use of words here...
I must go as time is debt. Mustn't create more debt. :cheesy:
Nice sarcasm. You get a point.
As to that last, as you know, the only monetary assets that aren't someone else's liability are the PMs: gold and silver.
I quoted the part about the multiplier because that's the crux of the problem.
What you're not getting is this: reserve requirements exist to be broken. Which means the answer to your first question is, they don't. They really don't.
Have you ever heard the one about how at the beginning of creation all the different parts of the body wanted to be boss, and finally the asshole won out by closing tight and staying closed until all the rest of the parts of the body gave in and let him be boss?
It's funny because we all think the brain is boss. But - and here's one you probably never thought about - which part of the body is thinking the brain is boss? The brain itself, of course.
In the same way, the Fed is recognized by everyone else as boss of the banking system, and of course the Fed thinks so too. But they would, wouldn't they?
All it does is allow reserve expansion to happen in flush times because banks - here's the important part; it's in that Keen link which you really have to read - make loans first
and find the reserves later.
As Keen points out, if loans exceed the reserve limit, the Fed really has no choice but to relax policy. They're in the business of keeping credit flowing smoothly, not suddenly applying the air brakes when things start going too fast.
This exactly accords with my experience supporting the Fed Funds desk at a super-huge bank. Reserves were seen merely as a bureaucratic rubber stamp that had to be fig-leafed somehow. You had to report once every two weeks, on what was and is still known as Fed Wednesday. If your reserves were too low, you went out and got them somehow in the interbank market. If they were too high - that is, greater than your reserve requirement - you lent them out to some other bank who needed them. Since reserves are just a percentage of deposits, and since if you loan someone money at bank a, it becomes a deposit at bank b, the reserve requirement means exactly nothing. Games got played by the Fed Funds traders on Fed Wednesday, games that everyone enjoyed but that everyone knew meant zip to the actual everyday functioning of the bank. Once Fed Wednesday was over, no one gave a hoot what the reserves were. As it came close, the traders would see what the position of the bank was, and start to either buy or sell money so that the proper number got reported.
I did this for a long long time, and I can tell you categorically that the bank never turned down a loan just because making it would screw up the reserve position.
The Fed is powerless. The reserve requirement is their strongest tool for restraining or expanding credit, and to the big banks, it means zilch. They're way too sophisticated to allow a little thing like a Fed reserve requirement get in the way of making money. Quite literally making money.
Which, finally, means that multiplier you learned about in school, and that the Chicago Fed makes such a big deal about in that pdf, is a fairy tale. Doesn't exist. Or rather, it does, but only now, in bad times, because as loan demand dries up and other loans are defaulted on, debt goes up in smoke and money disappears. The multiplier exists, but it exists only in bad times. In good times, it's a joke.
I understood instantly what Keen was talking about because it fit so perfectly what I saw in the Fed Funds department. But even if you've never worked there, he presents some strong evidence that the reserve requirement means nothing, because he shows that credit expansion comes before money supply goes up. First loans are made, and then money supply goes up, not vice versa, as would be the case if the Fed's open market operations, for instance, meant anything to the money market.
So, that's the long and complicated answer. The short answer is in those 10 points.
BTW, saying no to Lehman was done because, you have to remember, Lehman wasn't part of the Federal Reserve System. Legally there was quite literally nothing the Fed could do, other than facilitate its sale to a third party, as they did with Bear. When no buyer was willing to take it, the game was over.
If anything, that was a further illustration of their powerlessness: not only can't they restrain the banks within their system, they can't do anything at all about credit providers like Lehman who exist entirely outside the Federal Reserve system. And in the recently demised boom, that amounted to a lot more than just the pawn shop down the block: there was Lehman, Merrill, Goldman, Morgan Stanley, and a numberless host of small-time mortgage originators all over the US, all of them providing credit
entirely without reference to the Fed's reserve requirement.
Which makes that multiplier even more irrelevant, once again, except in bad times, and in bad times it exists
despite the Fed, not
because of it, as we are now seeing.
