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Can the Fed raise interest rates?

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Re: Can the Fed raise interest rates?

#11

Post by jpollock »

acd wrote: post #9

Most central banks dictate that there should be 2% inflation, which means the economy needs to grow 2% per year. But we live in a world with linear resources so unless we talk about virtual goods the economy cannot grow that much and still be sustainable over the long run. Basically it will violate a nature law which says we cannot ventilate that much heat into space as the economic growth requires. "At that 2.3% gro…

As several people keep hammering into my head, inflation is not the same thing as what people would consider "growth".

Depending on your school of economic thought, inflation represents the increase in money supply. So, if I took away every $1 bill and replaced it with a $100 bill, the willingness of everyone to now pay $100 for a coke is inflation.

It seems to be an accepted principle that we want to keep people from hoarding cash, so inflation of ~2% is wanted. It gives everyone a nice buffer to avoid dipping into deflation.

Re: Can the Fed raise interest rates?

#12

Post by throwaway1967 »

chinathrow wrote: post #8
amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

Well written, thank you. It's beyond my understanding why the fractional reserve banking is allowed by western societies. Why should banks be able to do this, but not other companies or even private persons?

They do it without asking (the Federal Reserve Act was passed Christmas Eve 1913 - around the same time the IRS came into being, what a coincidence) and most people do not understand the harm in it (even here on HN).

Re: Can the Fed raise interest rates?

#13

Post by leaveyou »

"The Fed is by definition the safest place to put your dollars in the world—because it has the ability to create any money in might need to pay you back." This is fantastic. "The Fed can only pay interest on reserves to one type of institution: banks" This is not fantastic. Why can't I as a simple citizen, put my money at Fed and take advantage of the safest interests ever known to man ? This discrimination has to cease or am I missing something ?

Re: Can the Fed raise interest rates?

#14

Post by irln »

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

Some have argued that the reserves no longer exist in practical terms. [1]

[1] http://www.ny.frb.org/research/epr/02v08n1/0205benn/0205benn... tl;dr "They attribute the diminished force of the requirements largely to the spread of "sweep" arrangements—a banking innovation that allows depository institutions to shift funds out of customer accounts subject to reserve requirements."

Re: Can the Fed raise interest rates?

#15

Post by nostromo »

amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

Here's a great article that describes exactly this phenomenon in more detail.

http://www.theguardian.com/commentisfree/2014/mar/18/truth-m...

> There's really no limit on how much [money] banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit.

> What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.

...

> Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Re: Can the Fed raise interest rates?

#16

Post by irln »

chinathrow wrote: post #8
amluto wrote: post #4

That 10% reserve number is interesting. I learned about the 10% reserve ratio in macroeconomics class, where I also learned that there's this thing called the money multiplier. See, if banks are required to hold a fraction r (10%) of their deposits in reserve, then obviously they'll lend out the rest, which will in turn be held or spent by the borrower, and one way or another it'll end up back in a bank. So a (1-r) f…

Well written, thank you. It's beyond my understanding why the fractional reserve banking is allowed by western societies. Why should banks be able to do this, but not other companies or even private persons?

The fractional reserve system on its own is not necessarily the issue so long as those making the loans fairly value the assets that collateralize the loan. Which also dictates that the loans be collateralized in the first place :)

Re: Can the Fed raise interest rates?

#18

Post by roymurdock »

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side.

Thomas Palley [1] sums this up nicely in a 2011 critique of QE:

The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However, rather than fixing this problem, policymakers are again turning to ultra-easy monetary policy in the form of QE. Viewed from this perspective, QE can be interpreted as a form of asset market trickledown whereby supporting asset prices is supposed to jumpstart the macro economy…From a political standpoint, this is an enormous change from the world of forty years ago. The New Deal policy paradigm of wage floors and household income supports has been replaced by one of asset price floors and asset market subsidies. Viewed through a political lens QE therefore represents the triumph of plutonomics, and that makes it an obstruction to the extent it obscures the challenge of repairing the income and demand generation process.

The Fed has dug itself into a hole with QE, where it is losing the ability to control anything in the economy due to the lower 0 bound of the FFR and the economy's inability to handle an interest rate hike.

It is up to the Federal Government (which, democratically speaking, means we the people) to adopt New Deal-like investments in infrastructure, R&D, education, and tech to seed long-term prosperity in order to rebuild an economy with a strong middle class that will demand loans for things like mortgages, appliances, cars, and machinery, as well as drive invention and wealth creation rather than rent-seeking & arbitrage as we are seeing today.

[1] https://ideas.repec.org/p/uma/periwp/wp252.html

Re: Can the Fed raise interest rates?

#19

Post by acd »

jpollock wrote: post #11
acd wrote: post #9

Most central banks dictate that there should be 2% inflation, which means the economy needs to grow 2% per year. But we live in a world with linear resources so unless we talk about virtual goods the economy cannot grow that much and still be sustainable over the long run. Basically it will violate a nature law which says we cannot ventilate that much heat into space as the economic growth requires. "At that 2.3% gro…

As several people keep hammering into my head, inflation is not the same thing as what people would consider "growth". Depending on your school of economic thought, inflation represents the increase in money supply. So, if I took away every $1 bill and replaced it with a $100 bill, the willingness of everyone to now pay $100 for a coke is inflation. It seems to be an accepted principle that we want to keep people fro…

Point taken about inflation. But the thermophysics part still hold true though. You cannot increase economic output a lot without using more energy which will make earth boil.

Re: Can the Fed raise interest rates?

#20

Post by irln »

goodcanadian wrote: post #2

From the article: Why doesn’t the Fed sell its Treasury bonds then? Because there’s no one buyer big enough to purchase them. The Federal Reserve itself is now the world’s largest holder of US government debt, after its bond-buying programs pushed its holdings above those of China. In an otherwise interesting and well written article, this is just an absurd statement. They are under no obligation to sell all of them.…

Interesting point. Of the $2.46 Trillion of treasury holdings, $638 Billion have a duration of 10+ years [1]. Of the $1.7 Trillion of MBS, not surprisingly almost all are over 10 years.

[1]http://www.federalreserve.gov/releases/h41/Current/

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