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The Fed orchestrated a rescue but did not put up any money. We don't know exactly what promises may have been made, but the major investors in LTCM increased their stake in the business for a principal share of the ownership. It is my understanding that the original owners, including the big name economists, took a haircut.

The Fed has two basic responsibilities, one to manage the price of credit, and the other to insure the stability of the financial system. The moral hazard problem is well-recognized and a very difficult one to deal with. Sometimes the perpetrators get off lightly, but not usually. There is always a judgement call in deciding when to apply the too-big-to-fail rule. It certainly makes no sense to allow a financial meltdown creating widespread havoc among innocent parties just to send a message.

LTCM bailout, the Asian debacle and the default of Russia. Rubin may have been a great investment banker, but bailing out your friends with liquidity ... this is like the banking ploy of injecting liquidity, creating the appearance of health, and then letting someone else become the bag holder.

The Fed had preemptively curtailed liquidity growth in early 1998, but abruptly changed course following the above mentioned events-- the M's started growing in low double digits - we now reap what was sown.

Greenspan does feel that he is a Delphic Oracle (I thought that they ((oracles)) were women.) This guy is going to go down as a goat.

Lastly, the (hedonic) price indices are all screwed up and productivity in the non "new-economy" economy is nowhere near the levels Greenspan believe. This stuff is just starting to surface in commentaries by Wall Street economists (even though Gene Epstein at Barrons has been railing for months.) Funny how a bear market reawakens the intellectual senses.

Makes me wonder when (if) banks will change to a mutual-fund type of arrangement. Depositors would get a "share" of the bank, so bad loans would instantly be reflected in a drop in the share price - thus no sudden, large withdrawls. This would seem to eliminate liquidity crises, but (if there is a zero reserve requirement) it would make monetary policy quite interesting (an infinite money multiplier?)

No. The money multiplier is not a transmission function. It is merely an after-the-fact observation of the multiple which itself is a function of many (economic) variables. Reserve requirements have very little effect on the growth of the money supply. In some countries (UK, Canada, Australia, Sweden, for example) there is no reserve requirement. What limits bank lending, aside from economic conditions, is the capital ratio requirement. That effectively limits a bank's loan portfolio to about 12 times its own capital.

In Canada the banks target zero reserves on a daily basis. For a better understanding of how this works see the paper.
Here is the abstract:

"Monetary policy can be implemented effectively without reserve requirements as long as cost incentives ensure a predictable demand for settlement balances. A central bank can then achieve the level of short-term interest rates that it desires, using market-oriented instruments only. In Canada, the framework provided by rules on interbank payments settlement and by the costs of deficits and surpluses on settlement accounts provides a strong incentive for the banks and other clearing institutions to target zero balances."

Again, the required reserve ratio is not what limits the growth of reserves. Large banks in particular often lend first and seek the required reserves afterwards. That can lead to a system-wide shortage of reserves that the Fed must react to by increasing the supply. The total of reserves is a dependent variable, not a control variable. That's why it makes no sense to talk about a "money multiplier" as if it were a transmission mechanism from reserves to the (credit) money supply.

There is nothing that relates to the interval between FOMC meetings. Even if the FFR target were changed, that would not change the amount of reserves required. It would only change the relative amount of borrowed versus non-borrowed reserves the CB would have to engineer. The CB must continue to respond to the demand for reserves in order to drive the FFR towards its target.

Yes, over time bank capital grows in a good economy. That's what allows bank credit (and therefore the money supply) to grow. However, reserve requirements are not a factor in controlling growth. That is obvious from the examples of other countries that impose zero reserve requirements on bank lending. The textbooks need to be brought up to date with the way things work in modern money systems. It would help if U.S. students read something other the U.S. texts.

If the "money multiplier" has any ex ante significance, it should be possible to say that the (credit) money supply at some time in the future will be X times the amount of bank reserves today. Further, it should be possible to change the amount of reserves today to target an X-times change in the money supply at the future date. X is the so-called money multiplier.
Neither of those conditions can be met. There is no way to know what changes will occur in the economy during the interim that affect the borrowing demand of the public. Nor is there any way to effect a specific change in the supply of reserves without losing control of short term interest rates which would cause unpredictable changes in borrowing demand.

The experiment of targeting money growth was a fiasco that resulted in wild fluctuations in interest rates which left businesses and consumers in despair about where things were headed. There was no effective control of interest rates or the money supply shown in the experiment. The fact that interest rates and borrowing moved in the expected direction doesn't say much.

This statement is a good illustration of what is wrong with the concept of the "money multiplier" as given in the standard texts. It leaves the student with the false understanding that the Fed controls the (credit) money supply by controlling the amount of banking system reserves. In truth, the Fed responds to the demand for reserves created by the lending activity of banks. It cannot avoid doing so as long as it pegs the interbank lending rate, i.e. the Fed funds rate, which it has done for most of the past 50 years. The monetarist experiment in the early 1980s of trying to control the money supply instead of the Fed funds rate was a disaster.

An increase in bank-created demand deposits brings forth an increase in the amount of bank reserves, not vice versa. The ratio of bank reserves to demand deposits is a function of the required reserve ratio. That ratio is currently set at 10%, last changed in April 1992 (down from 12%). Since that date, the actual ratio of reserves to demand deposits has fluctuated in the range of about 12% to 16%.

The "money multiplier" is elaborated in standard texts with the description of how a new bank deposit (newly injected reserves) propagates into an increasing amount of bank loans as a function of the reserve ratio. Each bank retains 10% of its deposits and loans the balance, resulting in an asymptotic total of new bank loans 10 times the original deposit. This simplistic tale perpetuates the notion that reserves are the control variable, whereas they are in fact the dependent variable. It makes no sense to talk about the transmission from the output variable to the input variable, but that is what is implied in the "money multiplier" concept.

So you would prefer to have the Fd board elected? What about all the other key officials in government? Like the Fed, most of them are appointed by those we elect.

I shudder to think of what kind of a Fed we would have if its members were elected by popular vote. We would probably get Donald Trump, Bill Gates, Ross Perot, and a few other multi-billionaires with the ability buy up all the TV time. Alan Greenspan wouldn't have a chance.

The Myth of the Money Multiplier

Everyone who has studied money and banking has been introduced to the concept of the money multiplier. The multiplier is a factor which links a change in the monetary base (reserves + currency) to a change in the money supply. The multiplier tells us what multiple of the monetary base is transformed into the money supply (M = m x MB). Since George Washington's portrait first graced the one dollar bill students have listened to the same explanation of the process. No matter what the legally cash loan required reserve ratio was, the standard example always assumed 10 percent so that the math was simple enough for college professors. What joy must have spread through the entire financial community when, on April 12, 2002, the Fed, for the first time, set the required reserve ratio at the magical 10 percent. Given the simplicity and widespread understanding of the money refinance loans multiplier it is a shame that the myth must be laid to rest.


The truth is the opposite of the textbook model. In the real world banks make loans independent of reserve positions, then during the next accounting period borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend the banks whatever they need.


Bank managers generally neither know nor care about the aggregate level of reserves in the banking system. Bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return on an asset and the fed funds rate is wide enough, even a bank deficient in reserves will purchase the asset and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase more money in the fed funds market than their entire level of required reserves. These banks would actually have negative reserve levels if not for fed funds purchases i.e. borrowing money to be held as reserves for Cash Advance.

If the Fed wants to increase the money supply, devotees of the money multiplier model, including numerous Nobel Prize winners, would have the Fed purchase securities. When the Fed buys securities reserves are added to the system. However, the money multiplier model fails to recognize that the added reserves in excess of required reserves drive the funds rate to zero since reserve requirements essentially do not change until the following accounting period. That forces the Fed
to sell securities, i.e., drain the excess reserves just added to maintain the funds rate above zero.


If, on the other hand, the Fed wants to decrease money supply, taking reserves out of the system when there are no excess reserves places some banks at risk of not meeting their reserve requirements. The Fed has no choice but to add reserves back into the banking system, to keep the funds rate from going, theoretically, to infinity.


In either case, the money supply remains unchanged by the Fed's action. The multiplier is properly thought of as simply the ratio of the money supply to the monetary base (m = M/MB). Changes in the money supply cause changes in the monetary base, not vice versa. The money multiplier is more accurately thought of as a divisor (MB = M/m).


Failure to recognize the fallacy of the money-multiplier model has led even some of the most well- respected experts astray. The following points should be obvious, but are rarely understood:

1. THE INELASTIC NATURE OF THE DEMAND FOR BANK RESERVES LEAVES THE FED NO CONTROL OVER THE QUANTITY OF MONEY. THE FED CONTROLS ONLY THE PRICE.

2. THE MARKET PARTICIPANTS WHO HAVE A DIRECT AND IMMEDIATE EFFECT ON THE MONEY SUPPLY INCLUDE EVERYONE EXCEPT THE FED.

Press review - TI Reports 2Q07 Financial Results

Acording to
cnn TI Revenue Up 7% Sequentially- EPS of $0.42, Up 20% Sequentially- Record Gross Margin as Company Progresses Toward Higher Profitability GoalsConference Call on TI Web Site at 4:30 p.m. Central Time Today http://www.ti.comExcept as noted, financial results are for continuing operations. The sale of TI's former Sensors & Controls business was completed on April 27, 2006, and that business is reported as a discontinued operation.

And in signonsandiego
The big battle: “Eisner created a masked-crime-fighter comic book, 'The Spirit,' in his youth; he was not a modest man, but legions of admirers forgave him that, as they forgive his work's cornball histrionics. Rooted in German Expressionism but more reminiscent of MAD-type burlesques than of George Grosz, his characters rub their hands, tear their hair, and, if they happen to fancy something, slaver.”

Money Multiplier

I just gonna give in future some advices how to get money from our government - tax refund and some other tricks.