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I'm not a finance expert, but my intuition is that the market is already good at smoothing out this kind of instability. This is what market makers [1] do and t
by dpatru 8y ago
I'm not a finance expert, but my intuition is that the market is already good at smoothing out this kind of instability. This is what market makers [1] do and there is no requirement that a market maker needs the ability to make money.
Borrowing costs may be higher because this proposal removes some "free" money that banks can currently lend out. But maybe interest rates will stay the same and instead checking account fees will rise. This could induce some checking account holders to move some of their money to term loans to the bank which the bank could then lend out. It is not clear that interest rates have to rise.
> the money supply is delinked from borrower demand
The money supply available to meet borrower demand need not be created. It already is partially provided by people lending their money for a term to the bank. This proposal merely says that the bank may not use checking account money to meet borrower demand, i.e., it may not represent to a checking account holder that his money is available when in fact it has been lent out to someone else.
[1]: https://en.wikipedia.org/wiki/Market_maker https://en.wikipedia.org/wiki/Market_maker
- nickik 8y agoThe problem with the proposal is as you have just explained, if it would work well it would be the same as now without being clear why it is better. That is why I and everybody I know voted against it, nobody could explain why it would be better. The only explanation was that if it was implemented perfectly it would cause additional problems.
- notahacker 8y agoWe've tested the ability of the market to smooth out instability caused by attempting to artificially fix monetary aggregates. We got high and wildly fluctuating interest rates and record levels of unemployment. And that was a looser policy regime than the one being proposed. Market makers do not sit around with huge piles of uninvested cash waiting for the day that loan demand to exceed its supply on loanable funds, and consumers with interest-free deposit accounts are not exactly the ideal people to make markets. And of course when loan demand exceeds the amount of cash available to be loaned at that point in time interest rates rise. That's Econ 101.