I'm still having trouble reconciling something.
I'm still having trouble reconciling something. Question: Are Fed open market operations and fractional reserve banking competing forces in regards to money supply? Example: The Fed increases the money supply through open market operations thereby lowering interest rates. The lower rates cause people to pull money out of banks towards other avenues thereby lowering the additional money supply that was previously achieved via fractional reserve banking.
Question: Are Fed open market operations and fractional reserve banking competing forces in regards to money supply? Example: The Fed increases the money supply through open market operations thereby lowering interest rates. The lower rates cause people to pull money out of banks towards other avenues thereby lowering the additional money supply that was previously achieved via fractional reserve banking.
Not quite... the money never really gets "pulled out", it just goes to different bank accounts. The only exceptions to this are if people are converting their bank accounts to cash-in-hand or transferring them out of dollars and into other currencies. But that's not what's happening. The fractional-reserve system is unaffected by transfers of cash from one bank to another. The effect of the lowered interest rates is to reduce the incentive to save and, conversely, increase the incentive to spend. But when you empty your bank account to buy a bunch of remodeling supplies at Home Depot, the money didn't get "pulled out" of the system, it just got moved into Home Depot's bank account.
The above example should work in reverse when the Fed tries to tighten the money supply with higher interest rates. People would be throwing money into the banks. My current working answer to my own question: The Fed remains the 800 pound gorrilla in regards to money supply. The effects of fractional reserve banking tend to offer a dampening force on changes to the money supply but do not neutralize them. Fractional reserve banking (once in place) only changes the money supply when the reserve requirement itself changes. Am I getting close?
I think it's the other way around, the fractional reserve system tends to amplify the actions of the Federal Reserve. Each one dollar of "high-powered money" on deposit at the Fed can be multiplied into as much as ten dollars of fractional-reserve deposits given a 10% reserve requirement. Lowering the reserve requirement can increase the amplification factor (there are other ways to increase it, witness the financial "wizardry" at the heart of this latest financial collapse). The Fed faces no obstacles if it chooses to engage in naked inflation, otherwise known as "quantitative easing" (QE).
Clayton -
"witness the financial "wizardry" at the heart of this latest financial collapse)..."
how did the latest fianancial collapse as yu call it occur???
"witness the financial "wizardry" at the heart of this latest financial collapse)..." how did the latest fianancial collapse as yu call it occur???
Um, Greenspan printed lots of money to prevent a recession after the dot-com/9-11 one-two punch to the economy. In combination with other regulatory moves by the Congress, huge moral hazards were created which channeled this inflationary cash into the housing market, fueling a speculative bubble in housing. To make matters worse, Wall Street found cracks in the regulatory structure that permitted them to build their own inflationary financial instruments (MBSs, CDSs, etc. etc.) Trillions of dollars in "assets" were created and the lucky few who cashed in before the collapse made lots of money while the idiots who bought and held these fictional "assets" lost their shirts.