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To: Claude Cormier who wrote (100753)	8/12/2009 9:48:45 PM
From: russet	Read Replies (2) \| Respond to of 116555

You realize that the complexity of this topic is a course if not a book in Economics. Also everything depends on what rules the regulators allow each bank to follow and which they turn their backs on. 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 if you follow the fractional reserve rules to the letter, just as the reverse has occurred over the last three decades as the banks have loaned out an increasing multiple of their ever inflating assets, and the resulting monetary inflation has been evident in all the monetary aggregates except those that have been invented to not show such things as governments will do from time to time. 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. The bank foreclosed on a loan and sold the house for $300,000 less than the original loan of $500,000. This loan doesn't exist anymore and the house is sold. The bank can no longer keep this asset on its books. In order to keep its loan ratios in line with regulations it has to come up with more assets which it can by temporarily borrowing from the Fed or getting more cash from stock and bond issues. All these things have happened recently. But as teevee has stated if we are to believe the news, many liens of credit and credit card maximums have been slashed or not renewed and loan requirements have been tightened so some monetary tightening is occurring by the banks actions but the government is attempting to reverse this by printing up lots of money and throwing it at everything that squawks. When you stir in political stuff anything is possible and the net effect of federal government spending tied in with state government reduction in spending can do whatever you want in the short term. In practice banks don't have to immediately reduce their lending as their assets decline, and the politicians have made sure that many declining assets of the banks do not have to be marked to market by wiping out FASB accounting rules so asset reporting has become the Wild West. The big hope is imminent inflation will boast everything up to pre crash levels before anyone has to do anything. Given the politicians make the rules, and few are willing to go to war over it, I doubt the money supply will shrink much as well. But you asked for the theory, so I gave it :-)