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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: basho who wrote (54053)	2/17/2006 12:32:04 PM
From: gpowell	Read Replies (2) \| Respond to of 110194

I wouldn’t say fractional reserve systems are inherently unstable if by that one means inherently prone to serious systemic breakdown. I do think, however, that the greater the duration mismatch between assets and liabilities, and of course the more extended the leverage, the greater the danger of periodic liquidity crises. A bank’s liabilities generally equal assets. It is only by explicitly excluding loans as assets that one can make the assertion that there is a mismatch assets and liabilities. And this, I think, comes from a decidedly non-Austrian assumption that value can be objectively determined. When one considers that embodied in an asset is an implied promise of future resources then one should see that a loan and an asset are equivalent constructs. The main difference between loaning resources to another party (i.e. creating debt) and exchanging those same resources for an asset is the moral hazard that the other party will default on their promise. While both exchanges carry risk, moral hazard is absent from the asset exchange. Managing moral hazard is the main function of a bank in a fractional reserve system, and as should be obvious, the better they are at managing it, the lower the required reserve ratio. As for distorting the interest rate structure, I’m inclined to think that fractional reserve banking will tend to do so if only because under such a system animal spirits and their associated volatility are more likely to be fully unleashed. Not sure I understand your last sentence. The issue is whether economic distortion through money stock fluctuations is a desirable feature of a fractional reserve system; because there is no doubt that all money stuff adjustments are distortionary. That fractional reserve banking can provide liquidity, i.e. create money, implies that loan origination can proceed without first liquidating a previous loan. How well this is accomplished is a bank’s source of profit, and further, this activity tends to throw off positive externalities, i.e. benefits to society in excess of those received by the bank and debtor. Consequently, I view the "bounded instability” of fractional reserve banking to be its raison d'être. The very worst thing a government can do is to impede this process by guaranteeing the public and a bank against loss, as it is my contention that through the management of moral hazard, a profit-seeking bank facilitates economic growth precisely because it can better manage risk, i.e. allow greater risk to be taken. Any implicit and explicit guarantees increase risk without an expectation of greater profit, i.e. creates "unbounded instability" with zero or negative expected growth. 1. Isn’t a large part of the reason why reserves have remained relatively stable in the last few decades because reserve requirements have been reduced, regularly adjusted and at times effectively abolished? Seems to me that to use the term “reserves” when we are talking about $42.5 billion stacked up against M1/M2/M3 of $1,380 billion, $6,740 billion and $10,250 billion respectively is to be in danger of rendering it meaningless. There is no doubt that financial deregulation has produced a money supply (money stuff really) that is nearly endonegenous. From my point of view that implies reserves, as I define it, need never be adjusted. I am reminded of the Scottish “Free Banking” experience of 1716 to 1844, in that era there were no reserve requirements and the reserve ratio, in aggregate, approached 1%. Over that period only 32,000 pounds were lost to bank failures. 2) No question that almost all of the growth in Fed liabilities has been in currency.in circulation. Nor, I’m sure, that much of it is offshore. Still, the issuance of these FRNs has monetised some $550 billion of government debt since 1986 so it is not without effect in a broader monetary sense. All monetary fluctuations have an effect. But those initiated by the public, as a modification of cash balances must surely be, are part of the process of intertemporal coordination. That some government debt is monetized is inconsequential. 3) Not sure I see why the Fed is disciplined because much of the currency demand is from abroad. In some ways, it seems to me this parallel circulation outside the US would tend to dampen any inflationary effect of the issuance. The demand for real cash balances can be modeled as a declining exponential function of the expected rate of inflation, subject to parameter fit. Foreign holdings adjust the parameter such that the demand for real cash balances is more elastic with respect to expected inflation. Anyway, apologies for going on at such length. It’s easy to become altogether too caught up in (as Frank Shostak puts it) the mystery of the money supply. Bit of a Russian doll game in many ways. Yes, but the most important aspect of these types of discussion is to drill down to implicit assumptions.

To: basho who wrote (54053)	2/17/2006 6:47:39 PM
From: shades	Respond to of 110194

in building their books and problems will generally be bank specific rather than systemic. The philster was talking about this systemic problem today on his show - how the bank books the 100K home loan and the 1K monthly loan payment every month. He said that a lawyer at today's Enron trial was arguing that if Enron had been a bank - no one would be prosecuted - because in essence the banks are doing what Enron did but they have special laws protecting them and special accounting that Enron does not - hehe. He said the banks realized all this credit card debt and such was about to be defaulted on so the bankers went to the gubbment and begged them to pass new laws to help the banks and thus the consumer credit protection act was birthed. He said this will keep the debt slaves in check and make it where the banks will not have to write off the debt and make thier numbers look good. This greatly angered the Philster because he said most credit card debt that was defaulted on was for medical payments - so in effect we have just sent a lot of citizens to thier grave. The technology is there to keep them alive - but they won't be able to afford it. Philster was also angry that after this BILL went into effect - he continued to receive numerous offers for credit cards and home loan type products from the banks!