OK, so the title is somewhat of an unfair attention grabber, pardon me on that.
This is in relation to the video here http://www.youtube.com/watch?v=dZf3Qye0BtQ in which Robert Murphy talks about how the balance in the checking account the banks have at the FED has increased from $45 billion to $829 billion in one year thanks to uncle Ben. Now, he says that this could lead to an inflation of 1700%. But it is not happening because the govt is giving the banks interest for keeping it in the checking account at the FED.
I find that statement inconsistent. But I can't say what due to me needing clarification on the fractional reserve lending. So I will try check the statement for both the possibilities of how FRL works.
a) If I (or FED) deposit $100 into a bank, the bank uses $10 as reserve and lends out $90.
If this is true, then if the FED gave the banks $829 - $45 = $784 billion dollars (because banks have not been lending much), they can at best keep $79 billion in the FED check account] and lend out $705 billion. That is only an inflation of 705/(45*10) = 156% inflation. Not 1700%. Sure, the $90 can play again, but 1700% seems pretty high.
b) If I (or FED) deposit $100 into a bank, the bank uses the _whole_ $100 as reserve and lends out $1000 :-O.
If this is true (I hope not). Then how does it matter that the FED is providing interest rates on the banks for reserves? They are already reserves. The banks can start lending out $7.8 trillion like tomorrow AND keep getting $1.56 billion in interest every year causing in a year over year increase in lending power of $156 billion on top of the $7.8 trillion thanks to the FED.
So, which is right? a) or b). Or is any of my assumptions wrong?
TIA
Alright, so I may have figured this out. Maybe there is no inconsistency if FRB is of type b. I think maybe the FED pays .2% interest on the portion in excess of the reserve requirements. As the banks had 45 billion in requirement last year, assuming they have not increased their loans, or that FED did not increase reserve requirements, $45b is still the reserve requirement. Thus, $784 billion is in excess and that is what they are getting .2% on.
Now, if they starting new loans to the amount of $7.84 trillion, all of a sudden the whole $829 billion becomes reserve requirements and FED stops paying any interest.
It is shocking though that the banks are more comfortable earning .2% interest on $784 billion than they are risking $7.84 trillion in the real world. Wow.
I am just guessing here. I could use some clarification on all this. Because if part b is how it works, sooner or later, banks will become a little more confident and 1700%, here we come. Gold baby, gold. Well, gold and a good exporting company that has very little imports.
Gautham Anil: I am just guessing here. I could use some clarification on all this. Because if part b is how it works, sooner or later, banks will become a little more confident and 1700%, here we come. Gold baby, gold. Well, gold and a good exporting company that has very little imports.
b is basically how it works.
Gautham Anil: Totally sucks.So they take $100 of good money (good as it gets that is,) and lend out $900 of funny money? Are you also confirming that the FED pays .2% on excess reserves. Or does it give .2% on whole reserves?
Totally sucks.So they take $100 of good money (good as it gets that is,) and lend out $900 of funny money?
Are you also confirming that the FED pays .2% on excess reserves. Or does it give .2% on whole reserves?
It is on excess reserves. I don't know about the .2%. If that's what Murphy says, then I guess it's probably correct.
TY, it had me confused till you puzzled it out.
About the reason they wont risk 7.84 trillion is because who will they lend it to?
The homeless and unemployed, like they did till now? They learned the hard way not to do that.
Mr Average American? He's knee deep in debt already, how can he possibly repay more?
Business? What will they do with it? Make even more whatevers to try and sell to the unemployed and broke and in debt? Not that there are many more American businesses left.
Are we doomed then?
Probably.
As for sooner or later they will lend it anyway? Probably, as you say.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I weakened my previous post with a whole bunch of 'maybe's because I tried listening to the talk again and I could not find the critical `in excess' part. Maybe I missed it, maybe I imagined it. If I imagined it, the issue still remains.
Again, could use some clarification from knowledgeable ppl. Note my post count.
Gautham Anil:Totally sucks.So they take $100 of good money (good as it gets that is,) and lend out $900 of funny money?
The "funny money" is not just the $900 in this case, for the $100 the Fed injected is even funnier.
"the balance in the checking account the banks have at the FED has increased from $45 billion to $829 billion in one year..."
i dont know if thats true or not. george hw bush was decieved by a pr firm into thinking that babies had been taking from incubators in kuwait.
if the federal reserve suddenly decided to increase the balance that the banks have at the federal reserve by ...what percent increase is 45 billion to 829 billion? that seems like a drastic change in federal reserve policy. if the robert murphy is truly a gradute of of some respected college with an advanced econ degree i would think that he would have an idea as to why. the federal reserve would have some type of steatement as to why they did such and i expect the robert murphy would know that. as well as many others.
does any one have any link form the federal reserve as to why they did what they did - if they even did it?
is increasing the balances at the fed a safety measure? making dollars available should claims arise?
But I can't say what due to me needing clarification on the fractional reserve lending.
is this still such an unknown? how many pages at the mises sites describe frb? are they lying?
have you considered contacting a bank?
If you don't like being asked the same question again and again, you don't have to answer it. In fact, you don't even have to be in this forum. If everyone was very good at research, this whole forum would be redundant. These forums are there to help fill gaps in interested people's knowledge, some gaps more trivial than others.
So yeah, this will not be that last time by a long shot that this question will be asked in this very forum. If I hear this question again from someone, I will probably send him a link to the Murphy video. If nothing, I will at least have the courtesy of keeping quiet and will not bite the poor guys head off with cruel sarcastic remarks.
Having said that, the verified answers in this thread http://mises.org/Community/forums/t/6197.aspx had not answered my question. That is why I asked. After you complained, I looked for it in the archives and found an article http://mises.org/daily/3820. I also found this post too. http://mises.org/Community/forums/p/8938/273181.aspx.
MORE QUESTIONS
Anyway, with a reasonably solid agreement on part b, I have more questions. Again probably answered elsewhere, looks like an obvious question, but bear with me. If $100 becomes say $1000 and not say $90, then what exactly prevents two banks from loaning to each other until they are richer than sin?
Say Bank A initially has 10million. It loans 100million to Bank B, which loans 1b to Bank A which loans 1b back to bank B. Now, bank B has 100mil in reserve, 1b in excess reserve, Bank A has 110mil in reserve, 900mil in excess reserve, and both a ready to loan out more than 19 billion in funny money. Starting with just 10mil in one bank. Is this right correct?
Say Bank A initially has 10million. It loans 100million to Bank B, which loans 1b to Bank A
i'm guessing the buck stops here. By which I mean [I assume] that bank B has to have 100 million of cash, not 100 miliion of a check issued to it from bank A. And if they cash the check, bank A is out of business, not having 100 mill, only 10 mill. So in any case bank B will never have a reserve of 100 mill in this scenario.
which loans 1b back to bank B. Now, bank B has 100mil in reserve, 1b in excess reserve, Bank A has 110mil in reserve, 900mil in excess reserve, and both a ready to loan out more than 19 billion in funny money. Starting with just 10mil in one bank. Is this right correct?
There is such a thing as the "search" function. If you don't like being told to use it, perhaps you shouldn't be here. Being told to use the tools at your disposal isn't cruel or sarcastic; it's something proper. This is not a government-run school where you get a gold star for just showing up and are told that you're special all the time.
As to your question, it has to do with banking regulations and at least some business acumen.
Smiling Dave: Say Bank A initially has 10million. It loans 100million to Bank B, which loans 1b to Bank A i'm guessing the buck stops here. By which I mean [I assume] that bank B has to have 100 million of cash, not 100 miliion of a check issued to it from bank A. And if they cash the check, bank A is out of business, not having 100 mill, only 10 mill. So in any case bank B will never have a reserve of 100 mill in this scenario. which loans 1b back to bank B. Now, bank B has 100mil in reserve, 1b in excess reserve, Bank A has 110mil in reserve, 900mil in excess reserve, and both a ready to loan out more than 19 billion in funny money. Starting with just 10mil in one bank. Is this right correct?
What I think is, banks won't issue checks that they can't cash. Why would it be worth anything?. Since part b in first post is true, the check will definitely cash. That is what I was trying to find out by the whole question in the opening post. Bank A can give 100mil to B. Bank A is broke if it turns out that B can't pay it back or is completely broke. Then A has 100mil debt and its asset (the debt agreement with B) just became worthless. So A is in 100mil in debt interestingly to itself. Man... funny money.
Alternate scenario aside, the original question about A and B still stands.
Knight_of_BAAWA: There is such a thing as the "search" function. If you don't like being told to use it, perhaps you shouldn't be here. Being told to use the tools at your disposal isn't cruel or sarcastic; it's something proper. This is not a government-run school where you get a gold star for just showing up and are told that you're special all the time.
You did not get my point. If you limit questions to only the level you find challenging, you are effectively closing the forum to only those who can get to your level without even a little hand-holding. That may be you, and a few other people, but not everyone. I could be wrong, but I am not sure that is the kind of high-academic walled-up forum mises.org was going for. If you want laymen to understand economics, you WILL get some silly questions.
You would have been traumatized in my school. I am not from the US.
Knight_of_BAAWA:As to your question, it has to do with banking regulations and at least some business acumen.
Is that all you know? Could you at least give me link to some articles? Or tell me what to search for?
@DD5 Thanks for the help. Don't stop. :-)