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It sounds like you have a misunderstanding of how the Fed manipulates the rate that banks lend to each other at. For a summary, the Fed tries to influence it by

by foota 10y ago

It sounds like you have a misunderstanding of how the Fed manipulates the rate that banks lend to each other at. For a summary, the Fed tries to influence it by changing the rate that banks required reserves pay, but banks themselves negotiate the rate they lend to each other at. See: https://en.wikipedia.org/wiki/Federal_funds_rate#Mechanism https://en.wikipedia.org/wiki/Federal_funds_rate#Mechanism

pc86 10y ago
Someone who equates the Fed to Soviet-era economic planning misunderstands more than just how the Fed manipulates rates.
- lend000 10y ago
  Mechanism aside, do you actually believe it's different? A price control is a price control, and it distorts information in the market, which is normally represented by price. I'd highly recommend you read up on the influences of the last boom and bust: https://admin.fee.org/files/doclib/houseunclesambuiltbooklet.pdf https://admin.fee.org/files/doclib/houseunclesambuiltbooklet...
RobertoG 10y ago
You are right. Another common misconception is that banks are limited by they reserves in the quantity of money that they can "create". Banks search for reserves after finding customers to lend. If they are not able to find it in the interbank market, they always can go to the central bank. It's by manipulating that rate that the central bank have some control in how "hot" the economy is. If the central bank wants to cool the economy it will make money more expensive to the private banks. Selling bonds to the private banks have also this effect. It's the responsibility of private banks to grant that the new created credit is used in solid business. If there are not demand for credit or there are not solid business, never mind how much reserves there are in the system.
lend000 10y ago
Thanks for posting that; I definitely misunderstood the mechanism. The effect is the same though (price control on base interest rates), just with a more convoluted series of steps.

by foota 10y ago

pc86 10y ago

Someone who equates the Fed to Soviet-era economic planning misunderstands more than just how the Fed manipulates rates.

lend000 10y ago
Mechanism aside, do you actually believe it's different? A price control is a price control, and it distorts information in the market, which is normally represented by price. I'd highly recommend you read up on the influences of the last boom and bust: https://admin.fee.org/files/doclib/houseunclesambuiltbooklet.pdf https://admin.fee.org/files/doclib/houseunclesambuiltbooklet...

RobertoG 10y ago

You are right. Another common misconception is that banks are limited by they reserves in the quantity of money that they can "create". Banks search for reserves after finding customers to lend. If they are not able to find it in the interbank market, they always can go to the central bank. It's by manipulating that rate that the central bank have some control in how "hot" the economy is. If the central bank wants to cool the economy it will make money more expensive to the private banks. Selling bonds to the private banks have also this effect. It's the responsibility of private banks to grant that the new created credit is used in solid business. If there are not demand for credit or there are not solid business, never mind how much reserves there are in the system.

lend000 10y ago

Thanks for posting that; I definitely misunderstood the mechanism. The effect is the same though (price control on base interest rates), just with a more convoluted series of steps.