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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: russet who wrote (100769)8/12/2009 10:45:47 PM
From: Claude Cormier  Read Replies (2) of 116555
 
|| In theory, if you reduce banks assets, and loans are one of the biggest assets of the lending bank, you end up reducing the money supply

Well that is the one thing I disagree with. Maybe I am wrong.

It depends how loan are reduced.

If the loan is reimbursed by the borrower, yes the money supply is reduced.

If the loan is defaulted on, no the money supply is not reduced.

|| I'm not sure what you mean when you say the fractional reserve banking would certainly allow them to keep the loan on the books.

You remember you where talking about the bank being forced top recall $3M of loans following that singe default of $500K. I suggested that it may not be the case and that the bank had no reason to do so as long as fractional rerserve banking can tolerate the new ratio.

The fact is that total outstanding credit has not been reduced by much since the crisis started.
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