Another Ahha post, commenting on a Steve Forbes comment;
From: ahhaha 8/28/2007 3:51:13 PM
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I heard Steve Forbes say that the only way to solve the apparent problems in finance is to fix the dollar to gold, also called gold standard. A gold standard is superfluous since it disciplines the supply of money, not its price.
The idea here is to limit the amount of fiat or extra money FED can create. Mortgage lending and associated problems didn't arise from excess money creation. They arose because FED fixes one price for all kinds of money in all kinds of markets.
Mortgage lending money has a very different loan term profile in comparison to C&I loans, but the basis of this money has one fixed cost. When base money is factored through lenders price covariance between money kinds is high which would be appropriate only when term factors were commensurate. At times they aren't commensurate. At those times the supply of money under the loans can be tapped for either kind of loan. Money can't be earmarked for exclusive use in any particular market, although currently FED is trying to do so by designating reserves to go more to MBSs than to treasuries.
However, in contrast to supply of money, the cost of money, say, MBS money, remains the same as money that goes to C&I loans. Even though a bank can't use MBS reserves to extend C&I loans the effect of increased MBS reserves allows a bank to free future deposits from going to support what has been displaced by the MBS reserves, and therefore can go to support other kinds of loans. Effectively, the earmark has failed. Supply and price don't retain an effective proportionality, nor a constant elasticity. Thus, money supply isn't the problem.
If money supply isn't the problem, the fixing the dollar to gold would have no consequence to the above kinds of lending. Gold can limit the supply of money permanently created under certain constraints, but that doesn't realize the optimal price of money available in disparate markets. Gold based money creation could go to MBSs or to C&Is without price discrimination just as is the case now.
Discrimination or specialization has to come from basis money that reflects all factors without recognition of the form of basis. Each form of lending has to reflect different conditions, but since the basis is interchangeable, the price of the basis has to be freely determined. When price is fixed divergence between terms makes supply abundance in one form of loans and dearth in another. |
