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Politics : Ask Michael Burke

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To: HB who wrote (36138)	11/13/1998 12:18:00 PM
From: Tommaso	Read Replies (1) of 132070

stls.frb.org This requires the Acrobat reader, but the address gets one to the area of Monetary Trends. How can an increase in stock prices cause an increase in the money supply? It's true that the multiplier effect of Banks' creating deposits against the reserves that they hold vastly expands anything that the Fed does and is in some respects loosely controlled by Fed operations. But the Fed certainly does have the ultimate power to control the availability of those reserves by open-market operations (buying and selling treasury bonds). Generally I find myself arguing with those who imagine that the Fed is intervening directly and secretly in the stock market. They don't do that, but their whole reason for existing is to control money and credit. They don't literally authorize the mint to print more bills, but they do make it possible for banks to extend more credit by creating deposits, and this in turn encourages speculation with borrowed money in the stock market.

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