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Can the Fed raise interest rates?

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Re: Can the Fed raise interest rates?

#61

Post by dragonwriter »

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?

> Why should banks be able to do this, but not other companies or even private persons?

Other companies besides "banks" (savings and loans, credit unions, etc.) can. Other other companies and private individuals only can't in the sense that there are rules governing this to prevent abuse, and if you jump through all the hoops required to do that, you have become a bank, savings and loan, credit union, or some other entity allowed to do it. Banks, etc., are just the name given to entities that have met the requirements to engage in particular activities.

Re: Can the Fed raise interest rates?

#62

Post by jhulla »

The problem is that the Fed must corner the market in Fed Funds in order to meet their objective. They must set the price floor. In the past, this market was small and controlled by the Fed.

Now in ZIRP, the Fed claims they will solve this problem by doing reverse repos with a wide array of counterparties. The list of counterparties is here: http://www.newyorkfed.org/markets/rrp_counterparties.html

Their current limit is $300B - what happens when say, $4 trillion dollars shows up asking to be paid at the Fed's targeted rate. If the rate were 0.5%, that would be $20 billion a year that the Fed would need to pay out. If they limit it to the first $300B, then they cannot hold the rate at 0.5%. Can the Fed pay $20B in interest a year?

IMHO, long way of saying, after taking the economy to ZIRP, the Fed has to find a safe way to drain the system of excess reserves before they regain control of Fed Funds.

Re: Can the Fed raise interest rates?

#63

Post by igravious »

chralieboy wrote: post #57
mpweiher wrote: post #38

Earlier quoted context omitted.

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Precisely. In Silicon Valley it would be like a company that is raising record amounts of money at mind-boggling valuations but whose revenue isn't growing at the same pace. One of the major question marks has been wage growth during the recovery. Stock markets have been skyrocketing, but wages have generally remained stagnant. Similarly, labor participation (i.e. of the people who could work, how many are actively l…

Don't you mean "more sketchy", as in we look at the S&P and think "Yay" But we are getting dubious signals from the so-called real economy that do not correlate with the signals we are getting from the stock market. Hence, "more sketchy", no?

Re: Can the Fed raise interest rates?

#64

Post by dragonwriter »

davidgrenier wrote: post #28
MaysonL wrote: post #17

Earlier quoted context omitted.

Why?

Creating money out of thin air ends up devaluing the currency that is currently in circulation. My understanding is weak and I'm still not clear whether the Zeitgeist Movement's position on the matter is correct, but I'd recommend watching the second of the Zeitgeist Movement's video on the matter to enrich your opinion.

> Creating money out of thin air ends up devaluing the currency that is currently in circulation.

To some extent, compared to not doing so, it does. But whether the extent a particular injection does this is undesirable or not depends on conditions, and manifestly the large injections of money by the Fed over recent years have not resulted in significant inflation.

Re: Can the Fed raise interest rates?

#65

Post by curiousgeorgio »

chralieboy wrote: post #57
mpweiher wrote: post #38

Earlier quoted context omitted.

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Precisely. In Silicon Valley it would be like a company that is raising record amounts of money at mind-boggling valuations but whose revenue isn't growing at the same pace. One of the major question marks has been wage growth during the recovery. Stock markets have been skyrocketing, but wages have generally remained stagnant. Similarly, labor participation (i.e. of the people who could work, how many are actively l…

I'd venture to say that our wage and labor problems have less to do with the economy itself and more to do with a shift in global demand and specialization. All of those manufacturing jobs are going to China (whether we like it or not, China's labor costs are probably always going to be more cost effective for business), and the US labor market is demanding more skilled labor. We have an enormous oversupply of unskilled labor that isn't meeting the shift in labor demand.

Instead of using politics and complex tax systems to try and gain back those manufacturing jobs, I wish our government would focus more on helping our workforce adapt to the things where our country can have a competitive advantage in the world: education, technology, engineering, etc.

Re: Can the Fed raise interest rates?

#66

Post by igravious »

roymurdock wrote: post #54
mpweiher wrote: post #38

Earlier quoted context omitted.

You mean: "we keep pouring money in at the top, but it just isn't trickling down" ?

Yes. I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper). Here are the 5 channels: 1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further…

Not an economist but let me try to see if I really have as good a handle on all this macro-economic stuff as I like to think I do.

Ok. My guess is that QE goes directly to banks. Banks should start lending. QE is inflationary so the economy artificially grows and exports are helped cuz the $ gets cheaper but imports are hurt. This is not so bad for the $ because it is the world's reserve currency and a lot of commodities are traded in it.

Anyway, for some reason, the institutions don't lend the QE money into the real economy they buy portfolios of stocks because the return is greater and the risk is lower. That's my guess. I suppose for proper bonus points I need to be able to say why the stock market seems like a better bet than the real economy. And maybe #3 hasn't panned out because companies aren't paying dividends like they ought to.

crosses fingers

Re: Can the Fed raise interest rates?

#67

Post by rhino369 »

roymurdock wrote: post #18

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,…

>playing with the supply side of money while having absolutely no effect on the demand side.

This is a strange position to take on a website that glorifies start ups. Cheap capital can unlock demand by lowering barriers to entry.

People looking for investment opportunities fund companies like Uber. And uber turns around an creates massive demand for private adhock drivers.

That sort of incentivize won't reverse a recession like deficit spending can. But it has a real effect.

The critiques of QE never really panned out.

>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.

The fed always has the option of last resort. Actually printing money and buying debt from government directly.

Re: Can the Fed raise interest rates?

#68

Post by irln »

carsongross wrote: post #53
irln wrote: post #40

Earlier quoted context omitted.

As long as a loan is collateralized by an asset that a reasonable market would value at or above the amount of the loan, the only issue is liquidity...right? So whether the ratio is 10%, 2%, etc. is kind of irrelevant. If folks want their money all at once, no reserve requirement would be sufficient. But at least the idea here (not that it has been followed) is to keep things stable enough so no large group runs for…

That is not correct. For demand deposits there should be a 100% reserve requirement. No bank run is possible: if everyone shows up and wants the money they are legally able to demand at a given moment, it's all there. Loans are then (strictly) duration matched with financial instruments offered to the public. Collateralization provides the banks with assets to offset the inevitable bad loans, but "investors" can't de…

> Loans are then (strictly) duration matched with financial instruments offered to the public.

So loans are funded by the public?

> It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away.

Why are folks like you so afraid of discussing issues that might challenge your worldview? I would argue that only by being able to articulate answers to these questions (some of which you claim have such obvious answers) can we obtain a better understanding. Maybe your schooling encouraged a blinders mentality, but I humbly suggest you be open yourself to provide answers and not insults.

Re: Can the Fed raise interest rates?

#69

Post by forgetsusername »

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?

>Why should banks be able to do this, but not other companies or even private persons?

Companies and individuals are most certainly able to create "money" on their own. You can issue all the debt you want, as long as you find a willing counterparty and sign your own name to it. It's balance sheet expansion.

For example, you go to purchase a new car, and sign a note telling the dealer that you will pay the price of the car, plus interest, over five years. You've created an asset out of nothing, for which the bank is more than willing to pay the dealer cash for. People and companies create such assets every day. There is no magic to issuing your own liabilities, which is what the Fed does when it prints money.

Re: Can the Fed raise interest rates?

#70

Post by igravious »

irln wrote: post #45
Animats wrote: post #37

The US Treasury could raise rates on their paper (T-bills and bonds) to push rates up, but then the Treasury would be paying above market rate.

I believe the rate is determined by the bidders at the auction and not by the Treasury. https://www.treasurydirect.gov/instit/auctfund/work/work.htm

Exactly, otherwise Greece and other countries wouldn't have been locked out of the commercial markets if they could set rates. German rates were/are low because the German economy is thought to be a decent shape, Greek rates are high because the opposite.
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