4 ms·

Good point you raised about FOMC directly injecting money. That's another case how the Fed benefits the banks and the Have's directly. Fed buys and sells trea

by ww520 11y ago

Good point you raised about FOMC directly injecting money. That's another case how the Fed benefits the banks and the Have's directly. Fed buys and sells treasury to create and destroy money but with more money created over time to encourage inflation. The extra money created are given to the treasury sellers with better pricing over time. The people without treasury are left out of the new money created. Of course the banks benefited from the extra money; FOMC only deals with the 22 big banks and the primary bond traders. Besides FOMC, loan is a bigger money creation mechanism. With 10% fractional reserve, the banks can lend out 10X of what they have. In that case interest rate dictates how much loan actually lent out and how much money actually created. By raising or lowering interest rate, the Fed increases or decreases the overall loan amount. Lowered interest rate encourages bigger loan amount, vastly increases the money supply for assets, leading to the current asset bubble. Basic income can become another mechanism for the Fed to inject money. The Fed can buy less treasury, raise rate, and give out more in basic income. People spending the extra money and companies earning them are good. Companies earning money via products and services are good. This encourages more products and services, and more employment. Instead the new money created now are given to the asset holders and locked up in assets. Edit: QE was another money creation mechanism and it hugely benefited the banks. The Fed bought assets at inflated price from the banks with created money.

ChrisLomont 11y ago
>The people without treasury are left out of the new money created Everybody in the US has treasuries. SS is the biggest holder of them, so when their value goes up, everyone with a SS account benefits. Next, most pension/retirement plans give another large class of adults benefits (50%+ of adults hold such plans). Remember, Fed buys from the Open Market (the "OM" in "FOMC"), which has an effect on pricing for all. > With 10% fractional reserve, the banks can lend out 10X of what they have And they also have an offsetting 10X in liabilities. It's not some free money giveaway any more than lending money to my friend does not create new money - it gives him more cash and an exact same amount of debt. Plus, if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum. >Basic income can become another mechanism for the Fed to inject money. All other Fed injection mechanisms swap assets. And the amount needed for even a tiny UBI is massive compared to any other amounts added. This is not even remotely plausible.
- ww520 11y ago
  For fractional reserve, the 10X money is what's circulated in the system. The liability on the book is just accounting. The bank doesn't have 10X money to start with. It has 1X but it's allowed to lend out upto 10X. The extra 9X is created out of thin air. Of course the 10X is the theoretical max; ultimately what controls the nX (where 1 <= n < 10) is interest rate. Lending out loan creates money circulated in the system. Paying off debt destroys money from the system. By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply. That's why the Fed went into the QE programs. The increasing bad loans at the banks was choking off the money circulating. By buying non-performing loans from the banks, the Fed removed the liability off the banks' books so they had more room in their fractional requirement and be able to lend again, thus restoring the money supply.
  - ChrisLomont 11y ago
    >It has 1X but it's allowed to lend out upto 10X No, a bank cannot lend out 10X of it's deposits. That's simply wrong. Say a person deposits $1. The bank owes the person $1. If the bank thinks this $1 is unlikely to be withdrawn soon, it can lend out $0.90 (assuming a 10% reserve rate). End of story. This bank having received $1 cannot turn around and lend $10. Note that this point the bank has $0.10 of the original persons assets, owes that person $1, and is owed $0.90 by the borrower. The net position of all this is zero for the bank. Now, the borrower can deposit the borrowed 0.90 (assuming it's not spent somewhere else) into that bank, or some other bank. The process repeats. The net value to society is zero. Liquidity is added, debts are added, they balance to zero. If a bank lending money is creation of money, so is all lending. I lend Bob $10, he lends $10 to Fred, he lends $10 to Joe, and since we don't have fractional reserves, this is an infinite multiplier. However the chain of debts and assets still is zero sum. There is no difference between this and banks, except banks are required to hold some cash on hand to handle normal business transactions. >By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply. Not quite - a bank will loan any money it has at the highest rate it thinks is profitable (as would any actor in the economy). No bank loans are at the target rate the Fed sets. The Fed does not control the interest rate, they set the Federal Funds Target Rate, which is a target. They do not lend money at this rate [1]. Nor do banks, except to each other, and only overnight. Banks lend money to each other overnight to meet reserves, and each pair of banks sets a rate it thinks is worthwhile, like any open market transaction. The weighted average of these loans is the "federal funds effective rate". The Fed wants this number to be the Federal Funds Target Rate, and they use FOMC to buy/sell assets to try and get banks to lend to each other at the target rate. This has almost no effect on the multiplier, since it does not change the reserve requirements, and the usual fluctuations are tiny. Nowhere does the Fed set a rate and lend at that rate, or even force others to lend at that rate. It's a target. And no where does this force banks to lend or not lend to others. Banks decide to do this at whatever rate borrowers will pay. [1] https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate

by ww520 11y ago

ChrisLomont 11y ago

>The people without treasury are left out of the new money created Everybody in the US has treasuries. SS is the biggest holder of them, so when their value goes up, everyone with a SS account benefits. Next, most pension/retirement plans give another large class of adults benefits (50%+ of adults hold such plans). Remember, Fed buys from the Open Market (the "OM" in "FOMC"), which has an effect on pricing for all. > With 10% fractional reserve, the banks can lend out 10X of what they have And they also have an offsetting 10X in liabilities. It's not some free money giveaway any more than lending money to my friend does not create new money - it gives him more cash and an exact same amount of debt. Plus, if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum. >Basic income can become another mechanism for the Fed to inject money. All other Fed injection mechanisms swap assets. And the amount needed for even a tiny UBI is massive compared to any other amounts added. This is not even remotely plausible.

ww520 11y ago
For fractional reserve, the 10X money is what's circulated in the system. The liability on the book is just accounting. The bank doesn't have 10X money to start with. It has 1X but it's allowed to lend out upto 10X. The extra 9X is created out of thin air. Of course the 10X is the theoretical max; ultimately what controls the nX (where 1 <= n < 10) is interest rate. Lending out loan creates money circulated in the system. Paying off debt destroys money from the system. By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply. That's why the Fed went into the QE programs. The increasing bad loans at the banks was choking off the money circulating. By buying non-performing loans from the banks, the Fed removed the liability off the banks' books so they had more room in their fractional requirement and be able to lend again, thus restoring the money supply.
- ChrisLomont 11y ago
  >It has 1X but it's allowed to lend out upto 10X No, a bank cannot lend out 10X of it's deposits. That's simply wrong. Say a person deposits $1. The bank owes the person $1. If the bank thinks this $1 is unlikely to be withdrawn soon, it can lend out $0.90 (assuming a 10% reserve rate). End of story. This bank having received $1 cannot turn around and lend $10. Note that this point the bank has $0.10 of the original persons assets, owes that person $1, and is owed $0.90 by the borrower. The net position of all this is zero for the bank. Now, the borrower can deposit the borrowed 0.90 (assuming it's not spent somewhere else) into that bank, or some other bank. The process repeats. The net value to society is zero. Liquidity is added, debts are added, they balance to zero. If a bank lending money is creation of money, so is all lending. I lend Bob $10, he lends $10 to Fred, he lends $10 to Joe, and since we don't have fractional reserves, this is an infinite multiplier. However the chain of debts and assets still is zero sum. There is no difference between this and banks, except banks are required to hold some cash on hand to handle normal business transactions. >By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply. Not quite - a bank will loan any money it has at the highest rate it thinks is profitable (as would any actor in the economy). No bank loans are at the target rate the Fed sets. The Fed does not control the interest rate, they set the Federal Funds Target Rate, which is a target. They do not lend money at this rate [1]. Nor do banks, except to each other, and only overnight. Banks lend money to each other overnight to meet reserves, and each pair of banks sets a rate it thinks is worthwhile, like any open market transaction. The weighted average of these loans is the "federal funds effective rate". The Fed wants this number to be the Federal Funds Target Rate, and they use FOMC to buy/sell assets to try and get banks to lend to each other at the target rate. This has almost no effect on the multiplier, since it does not change the reserve requirements, and the usual fluctuations are tiny. Nowhere does the Fed set a rate and lend at that rate, or even force others to lend at that rate. It's a target. And no where does this force banks to lend or not lend to others. Banks decide to do this at whatever rate borrowers will pay. [1] https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate