Yes the Fed control the increase in the narrower measures of money, through require reserves and their effect on banks' ability to make new loans. But it is there new loans that directly create or destroy new dollars. And MZM is much broader than the items the Fed directly controls. M1 closely, M2 loosely, yes. MZM, no.
But there is a more basic error in your comment, when you say only more short term money can allow stocks to be sold at higher prices. This is obviously just false. The same $1 million can serve to liquidate any amount of stock, just by using it over and over. A typical dollar in the financial circulation in New York turns over literally 50000 times faster than a dollar in the rest of the economy.
Once someone sells a stock, what do they want to hold instead? If it is a dollar balance at a bank, then it will increase the demand for dollars, which would raise the value of dollars (cause deflation) if the quantity of them were fixed. Since the quantity of them isn't fixed, it doesn't do that either, it just prompts the Fed to ease a little to accomodate the higher demand for held dollar balances.
But if they want to hold art, or gold, or Brazilean Llama futures, then no, it doesn't increase the demand for dollars, the dollars turns right over as many times as people want to move from one asset to another through as many intermediaries and at any prices they please, and those dollars have performed their medium of exchange function, without the amount of gold or art or stocks or llamas or written contracts or little green slips of paper, having changed in the slightest.
First, that is not the argument. Second, you are incorrect. The argument was whether or not the federal reserve controlled the supply of short term money. They do, every economists says they do, and I will defer arguing any idiotic contention to the contrary.
Imagine an economy with 200 people. 1/2 of the folks have Picassos valued at $.5M per copy and $.5M in near term cash holdings. The other 100 have each $1M in near term cash holdings. Now the 1/2 could liquidate their art collection, assuming willing buyers. Each of the 100 Picassos could sell at $.5M. At the end of the day, total cash holdings are unchanged, assuming there is a willing buyer for each. Imagine, a panic in Picassos where everyone is a seller and no one a buyer. The the Picassos suddenly become worthless. Of course at some price $.01 on the dollar, say, some smart guy will step in and buy all the Picassos. But regardless, at the beginning and at the end, whether you liquidate no Picassos or all the Picassos total cash holdings are unchanged. Individual holdings change all over.
There is an enormous difference between assets that are not regarded as near term money equivalents and near term money equivalents.
The same $1 million can serve to liquidate any amount of stock, just by using it over and over.
First, this is irrelevant to the creation of near term money equivalents. Second, this is wrong. $1M cash cannot liquidate more than $1M in stock. If the seller of the original $1M in stocks uses his cash to purchase another $1M shares of stock then there has been no net liquidation, which is the point that panics Bernanke. So long as there is only swapping of financial or real estate holdings at near peak market valuations everything is ok. The panic comes when there is an attempt to create NET liquidation in favor of short term cash. What the FED attempts to do is to create so much short term cash that there is little desire to hold short term cash and folks are willing to hold financial assets instead. It takes a lot because you cannot liquidate much of a highly leveraged asset without sucking all the cash out of the economy.
Once someone sells a stock, what do they want to hold instead? If it is a dollar balance at a bank, then it will increase the demand for dollars, which would raise the value of dollars (cause deflation) if the quantity of them were fixed. Since the quantity of them isn't fixed, it doesn't do that either, it just prompts the Fed to ease a little to accomodate the higher demand for held dollar balances..
First, increasing demand for dollars does not change the supply of cash $. The quantity of them isn't fixed ONLY because the FED expands reserves to make more of them. It is the whole point of central banking. Really. It is what central banks do and it is why we have them.
MZM is much broader than the items the Fed directly controls. M1 closely, M2 loosely, yes. MZM, no.
I would agree with the Austrians that what counts is M0, but the Fed thinks that anything in MZM is really money, and their recent actions show their willingness to use anthing in MZM as money, so it is for these purposes money. Since the regulators of our currency think it is money and will treat it as money in the creation of bank reserves, and they created an extra $2T of this kind of money in the last year or so, I will concede the argument to the FED.
Me I am against this kind of funny money accounting as the kind of flimflammery that got us into this mess, but if you disagree run your argument with the FED, not with me.