Posted on 08/20/2009 4:26:09 PM PDT by chuck_the_tv_out
President Obama, once considered as politically agile and deft as a gazelle, is now looking increasingly like a deer caught in the headlights.
His poll numbers on everything from job approval to his handling of the economy, health care, taxes and bailouts are dropping faster than a cement shoe in the Hudson River. Perhaps even more worrisome, Rasmussen Reports shows that fewer Americans consider him “trustworthy.”
His popular support is hemorrhaging because all of his major initiatives are either failing in execution or in the legislative process. According to a new USA Today/Gallup Poll, 57 percent of Americans say the $787 billion economic stimulus is having no effect on the economy or is making it worse.
An even higher percentage -- 60 percent -- doubt the stimulus will improve the economy in the years ahead. A new Fox News/Opinion Dynamics poll shows a whopping 72 percent of Democrats, Republicans and independents would like to see the balance of the unspent stimulus money -- about $600 billion -- returned to taxpayers.
(Excerpt) Read more at washingtontimes.com ...
America’s socialist “community organizers” ALWAYS resort to racial smears and call for race violence in an effort to overcome their minority status in the Nation. NOT TRUST
WORTHY!
I guess you don’t buy our cat food and kitty litter at Walmart.
Does it explain how a bank can make $10 million in loans with only $1 million in deposits?
Sure does.
LOL. You've got to be kidding. Read article if you want. If you don't that's OK too.
You have a source which proves your point and you won't show the relevant portion? Who's kidding who?
It’s a one page article. You can read the whole page in less time than it takes you to do these posts. And it specifically covers the case we are discussing. A glance at the page and you can see it. It jumps right out. If you are not willing to do that little bit of work why should I help you. Up to you. Read it if you want. Otherwise stop complaining.
No it doesn't. Not even close.
For Chase Manhattan is delighted to get a check on the Fed, and rushes down to deposit it in its own checking account at the Fed, which now increases by $10,000,000. But this checking account constitutes the "reserves" of the banks, which have now increased across the nation by $10,000,000.
See, we're not talking about the Fed buying anything, we're talking about a bank with a single deposit of $1 million. The reserves held by the bank would be a portion, say 10% of that deposit, $100,000.
The banking system is allowed to keep reserves amounting to 10 percent of its deposits,
See, 10% of $1 million would be the reserves. Still nothing about a $1 million deposit in a bank allowing that bank to loan $10 million.
Try again?
You didn’t read it so you can’t comment on it.
I did read it and it has nothing to do with your original, wrong headed claims.
Money is not wealth. Money is only particular and minor kind of asset. Many other forms of wealth are measured in money or have contractual terms involving payment of money, but this does not make them money. On the other hand, some are so near to money in all practical economic senses that they are regarded by market participants as perfectly acceptable substitutes for actual money. But are nevertheless legally different.
Savings accounts and CDs are liabilities of banks denominated in money. Money market funds are liabilities of their varied issuers also denominated in money. We speak of all of these things as being "broad money", but they are not "narrow money".
Money is not magical or any more "real" than any other kind of asset. A CD isn't less real or less valuable than an equivalent amount of federal reserve notes in physical form. It is marginally more valuable as a store of value, since it pays interest, and marginally less useful as a medium of exchange, because you can't buy a coffee with it at starbucks. Since you can, however, pay at starbucks with a credit card and pay the card off in a month when the CD matures, there really is remarkably little difference between them in convenience terms, for someone set up to use the CD form properly. The reality of your spending power includes all the credit you possess, and your ability to meet all demands on that credit can be met with savings forms of money as readily as transactional forms of it (physical notes or a checking account balance e.g.).
But savings forms are not narrow money, and narrow money is all the Fed controls with the reserve requirement.
Banks have *assets* to cover all of their liabilities, and to spare, and if they don't then their regulators close them down. Narrow money is one form their *assets* can take - vault cash and federal reserve deposits, or equivalent checkable deposits at a larger bank, for example. They can also have narrow money *liabilities* - the checking accounts of their customers, and checks written against them in process of collection. But neither is remotely their total asset or liability position.
There are three main forms of regulation governing the practices of banks, plus prudential concern for their own profit. The *reserve* requirement says they must keep on hand as an *asset*, vault cash or a deposit at their federal reserve branch, *or* borrow such deposits from other banks ("federal funds"), a set percentage of their total *checkable* deposits. When a bank customer withdraws cash through its ATMs or pays its checks to other banks, it uses a bit of this asset, and when it receives checks for its customers or notes are deposited over its counter, it gains some. It also gains such cash when its loans are repaid, interest or principle, from checking accounts at other banks and the like.
It can also *sell assets* for such cash, or simply let some of its longer-dated claims that run in its favor, mature into cash. Or *borrow* federal funds from another bank that has more than it requires and wants to earn interest in its extra balance (which neither physical cash nor Fed bank deposits earn).
This requirement bound much more tightly when banks promised to repay their deposits in gold, and lots of outdated discussion of fractional reserve banking pretends the situation then is the same today, but it is not remotely the case. The reason being, of course, that modern banks only promise to pay out federal reserve notes, which they can get on demand for their deposits.
In practice, this regulatory requirement *does* limit the growth of M1, narrow spendable money, and that has an effect on the price level. But in practice, this regulation does *not* limit bank lending activities. They simply operate on the liability side in broad money categories instead of the narrow ones - in CDs and savings and money market accounts, and not in checking accounts.
The second and by far the most important governing requirement of banks is that they *make position* each day. This means that whatever the level of their assets, they need to fund all of them with some liability or other. They have some long term equity capital, they have some term bonds that will not mature for some time, providing them a base of stable funding. But whenever they lend out anything more than that, they need to get the funds they are lending, by issuing some corresponding liability, to some willing counterparty.
That can be a new depositer, it can be a bond market participant buying more of their longer term debt, it can be a money market participant buying their commercial paper, it can be an interbank loan overnight, it can be a repurchase agreement secured by the collateral of bonds they own, whatever. But every dollar in assets they hold must be financed by some liability, every day by the close. They balance their books literally every day, and any discrepancy even appearing in the last hour, they must make good by the day's end.
Understand that every day banks clear all of their checks running against each other, canceling equivalent cross payments and paying over the difference remaining in narrow money. Every asset they can claim is a liability for someone else, and all of them balance daily. Their position-making traders must ascertain their approximate cash flow for the day before the last hour of business, and enter into equal transactions to "make position", meaning raise as liabilities all the funds they need to finance their whole asset position.
But making position balances any asset and any liability. It doesn't give a damn whether this asset or that liability is magical money or not, because money is just one kind of asset and no more real nor valuable than anything else.
The requirement to actually make position daily is the requirement of solvency and in every practical sense it is the governing concern for each individual bank. It can't make huge new loans unless it can place corresponding liabilities to fund them. If it opens a line of credit of a billion dollars for some corporate client, it knows that client will pay someone who isn't one of the same bank's client with some of that line of credit soon, and as soon as it does so the bank must "make position" by getting a new lender to replace the loan to it of the corporation's deposit. If it can't then it is insolvent and it will not open the following day.
The third regulatory requirement is the capital adequacy requirement, which is a prudential requirement to limit the level of risk a bank takes, imposed by regulators in return for deposit insurance. This rule governs only the *assets* of the bank. It specifies that the equity capital and long term debt on the liability side, must equal or exceed some fraction of the banks total *risk adjusted* assets. The risk involved in that adjustment has several components, but the biggest is credit risk. Simply put, government bonds do not count and corporate loans count full, while loans secured by mortgages of real property fall in between.
Capital adequacy requirements can be met by (1) limiting the growth in total loans (2) limiting the credit risks taken on by altering the composition of those loans or (3) by raising additional capital in long term form, not short term borrowings or deposits. In practice again, in the down part of the economic cycle, capital adequacy binds more tightly than reserve requirements. Banks find it expensive to raise more capital - their share prices are low and credit spreads are at their widest at such times. To meet impaired capital, therefore, banks reduce their loans outstanding by letting old ones pay off into cash, or they shift their lending toward safer forms (e.g. government bonds) and away from riskier ones (e.g. industry).
The only limit on bank's ability to expand their savings-form liabilities (e.g. CDs) to fund new loans to business, are their own prudence and those capital adequacy requirements. If they can readily raise new long term capital, then only their own prudence and other men's willingness to hold deposits with them in CDs etc, limits their loan expansion.
If their customers do not want to hold savings, but spend instead, then money will leave that bank. It cannot on its own increase its supply of narrow money, except by calling in loans or letting them run off into cash, or selling its assets to other market participants. If a bank finds itself needing to borrow federal funds every day to meet its reserve requirements, it takes this as a sign to limit its operations - and especially so if the Fed funds interest rate is high (e.g. mid 2007).
Banks can, between them, run up the broad money supply any amount their wish, provide they can find customers willing to lend to them. If every new loan one of them makes winds up lent back to some bank or other as new CD deposits, then their loans are self-financing, taking all banks as a group. But if their customers do not want to hold that much in CDs and shift it to checking instead, then all the banks will find themselves short of reserve funds to cover, and must let assets run off into cash to force a narrow-money cash flow in their favor, from their customers.
This limiting process is emphatically not centrally directed by the Fed. It is up to the savings vs. spending decisions of bank customers, and the prudence or risk-taking desired by the banks. The banks cannot force money into existence that their customers do not wish to save, but can accomodate any willingness to save their customers show, provided they lend the funds so raised prudently and their assets cover the liabilities they assume in doing so.
Prudence limits banks in all of the above because their liabilities are considerably "harder" than their assets. In every category of loans, some will fail, and they are priced with that in mind, to amortize loan losses over a whole loan portfolio. But when a bank is wrong about the ability of its lendees to repay, then it still has to repay its depositers. As it recognizes bad loans, it must still make position daily with a reduced value of assets. Its regulators will close it down if it fails to do so for a single day. This means every asset-loss must be met with a realized asset, or ongoing profits from other loans, or those set aside beforehand as loan-loss reserves, or by sale of some asset.
To illustrate, Citigroup has reduced the size of its balance sheet since the summer of 2007 by $372 billion. That has forced an epic cash flow of narrow money in its favor, covering the reduced value of its assets. It has had to borrow extensively and sell large number of shares of preferred and common stock to "make position" even at the smaller size of its balance sheet. The bank is 5/6th of the size it was 2 years ago. Did it have any option to instead just create lots of new money for itself? Not remotely. Was this due to any reserve requirement for vault cash, or any shortage of it or danger of running out of it? Not remotely.
Fractional reserve anything simply had nothing to do with it, as the issue was not about narrow money vs. other assets, but simply about making position as the value of the asset side of its balance sheet fell. It was only able to do so by running off a sixth of its assets into cash, and simultaneously raising capital by every means available to it.
For what it is worth. None of these things are as simple as the cartoons you two are exchanging, I'm afraid. It is all driven far more by the practical issues of banking and far less by anything do to with formal legal rules or policy.
So surprising!
Tax cuts are the only known fix the government has in its arsenal; why not use them.
You give him too much credit. He specifically claimed, in post #23,
"Banks loan out more money than they have as deposits or capital........ The bank takes in $1,000,000, loans out 5 or 10 times that much and collects interest on this phony credit that they created out of nothing"
Was that post intended for the LSD thread?
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