I had a dream in which a law was enacted restricting the loan of a marked dollar to a correspondingly marked loan...a loan that could be made only once with that dollar until it is repaid.
jeepers. kind of like a gold standard.
from that prudent bear article:
Today, the money and capital markets have come to dominate the money and credit creation process, with non-bank financial intermediaries at the heart of the U.S. Credit Bubble. Bank lending to business, the mainstay of credit growth in years past, plays today a very backseat role to the hot game in town: financing the asset markets. In so many ways, this just changes the whole analysis. No longer does "multiplication" work only to create additional bank deposits but, importantly, the entire process is opened up for an explosion of money and credit generally. Specifically, an historic monetary expansion ("multiplication") has created money market fund deposits in excess of $2 trillion. Here, of course, the government-sponsored enterprises and Wall Street firms have come to play a momentous role. As such, it should be recognized that a massive money market fund complex has moved resolutely to the epicenter of this credit creation process, becoming what I refer to as "The Fountainhead." Importantly, this type of monetary inflation involving the expansion of (nonbank) financial sector liabilities is not subject to reserve requirements; thus "deposits" can be lent in full, repeatedly, and instantaneously (especially to asset markets), creating what I refer to as the "Infinite Multiplier Effect" that leaves the old process of bank lending "high powered money" in the dust. And with the unparalleled financial and political might of the GSEs, monetary processes have developed directing credit to an incredibly vast real estate market. This confluence of factors has created the equivalent of Nuclear Credit Fission.
So, in my analysis, during a period of general credit expansion, money market fund deposits basically operate as "Hot Money." They can be borrowed and immediately lent, where they can then be deposited and lent again and again. As such, it should be recognized that GSE balance sheet expansion financed by money market deposits (either directly by GSE short-term borrowings or indirectly through leveraged players borrowing in the money market to finance the purchase of GSE bonds) holds great potential for providing powerful monetary and financial market effects. The most conspicuous consequence is the uncontrolled expansion of money fund deposits and the closely related unlimited availability of credit. If fact, GSE purchases are not at all dissimilar to the Federal Reserve creating "Hot Money" through its balance sheet expansion. GSE balance sheet expansions, and mortgage refinancing booms in particular, are extremely powerful financial market liquidity operations that, in truth, make Fed open market operations over the past few years look like "small potatoes." Not only do they allow homeowners to capture additional liquidity (buying power to sustain the consumption boom or the acquisition of financial assets) through the monetization of real estate inflation, there is also the acutely potent systemic "reliquefication" effect. |
