Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Book Nook -- Ignore unavailable to you. Want to Upgrade?

To: JF Quinnelly who wrote (99)	3/28/2001 8:02:01 PM
From: Ilaine	Read Replies (1) \| Respond to of 443

>> don't think this is accurate. Otherwise a bank could make a loan of $10,000 against a single dollar of savings; no reserve needed. The fraud capable without reserves would make the S&L debacle look tame by comparison.<< It's true. I've ordered a lot of freebie publications from the Fed, and it's mentioned in many of them. Here is one I found quickly. I'll see if I can find something with more meat. >>In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States. << ny.frb.org

To: JF Quinnelly who wrote (99)	3/28/2001 8:14:22 PM
From: Ilaine	Read Replies (1) \| Respond to of 443

Here are a couple with a bit more meat: federalreserve.gov federalreserve.gov

To: JF Quinnelly who wrote (99)	3/28/2001 8:17:53 PM
From: Thomas M.	Read Replies (1) \| Respond to of 443

This is the "infinite multiplier" that Doug Noland talks about: prudentbear.com Let’s now look at a bank’s role as intermediary. When you place your money into a bank deposit, the bank will take your funds and make loans. The borrower, now with "money" in his account, will have access to your funds, hence acquiring purchasing power. At the same time, you, as holder of a bank deposit, maintain your purchasing power. In this example it should be clear that bank lending creates credit and additional money supply. This, of course, is the traditional mechanism for money creation, or the "money multiplier." The key difference between the intermediation performed by an insurance company and that of a bank is that a bank deposit is "money," functioning both as a medium of exchange and a perceived store of value. As opposed to insurance premiums, bank deposits afford its holder the means to buy goods, jump on a hot stock or use as a down payment on a new home. Banks, having the ability to create money out of thin air, have at times throughout history lent excessively and recklessly, creating too much additional purchasing power only to fuel manic booms that end with the inevitable devastating busts. To guard against such occurrences, governments have for some time closely regulated bank lending, using such measures such as reserve and capital requirements. Or at least they used to. Let’s now look at the nature of intermediation performed by money market funds. Let’s say someone places money into a money market fund account. The money market fund then performs its function as an intermediary, lending these funds into the financial markets. Does this lending create additional money - additional purchasing power? To help answer this question, let’s ponder the following: Is the intermediation function of a money market fund similar to that of our insurance company example, or is it more like a bank? Importantly, it is the nature of the financial liability created by the initial deposit into the intermediary that is a critical factor to be considered. So, with this in mind, does a deposit into a money market fund create a liability to the depositor similar to an insurance policy - an instrument that does not function as a medium of exchange? If this were the case, additional money and purchasing power would not be created through the intermediation process. On the other hand, does the deposit into the money market fund instead create a financial asset with "money" characteristics similar to a bank deposit? Or, said another way, does the depositor maintain a financial asset that functions as money, securing purchasing power? Well, it should be obvious that money market fund deposits have the economic functionality of bank deposits and, thus, should today be considered "money." Clearly, when a person makes a deposit into a money market fund, purchasing power is maintained in the form of fund deposit, while additional purchasing power is created for the borrower when these funds are subsequently lent by the money fund, just like bank lending. The Federal Reserve agrees that money market fund assets are money, as it includes retail money market fund assets in M2 money supply and institutional money funds in M3. And in an effort to develop the most meaningful measure of money supply after momentous changes within the financial system, William Poole, president of the St. Louis Federal Reserve Bank, developed MZM, "Money at Zero Maturity" that specifically includes money market fund assets. Undeniably, money market funds provide "intermediation" similar to banks, creating additional purchasing power and "money" through the act of taking deposits and lending these funds into the marketplace. At the same time, money market funds have some striking and powerful advantages in this process not traditionally available to banks. For one, they are not burdened by either reserve or capital requirements. This is precisely why we make the argument that the mechanism of money market funds taking deposits and lending into the capital markets provides an "infinite multiplier" for money and credit creation. Unlimited additional money market liabilities can be created as long as deposits are made into money market funds and these deposits are lent and re-circulated back into additional money market deposits.