Economics Questions and Class Participation
lken82
class_participation2.docx Comment on Aug 06, 2014, 8:30 PM
Re: DQ: 5.1 Interest Rates and Money Creation
Aug 06, 2014, 8:30 PM
Class
In the critical spirit that animated our discussion in week four, I provide here a link to some non academic sources that are outside mainstream government/academic/corporate thinking on the issue of the success or failure of the federal reserve system as a CENTRAL BANKING mechanism for the US and the entire world (at least the 147+ countries that are members of the International Monetary Fund).
http://www.batr.org/corporatocracy/121813.html
Choose any video from the selection and then consider that information when answering the key question in this thread, namely, whether the measures adopted by the Fed since its creation more than 100 years ago have bee effective or ineffective in addressing the major concern or concerns of the business cycle, as far as you can tell, ceteris paribus.
Thoughts?
Comment on Aug 07, 2014, 5:46 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by TIFFANY FERGUSON
Aug 07, 2014, 5:46 PM
What does the Federal Reserve take into account when establishing general and specific rates of interest? Describe the recent tools the Federal Reserve has used to influence the U.S. economy, and explain their effects. In your opinion, have these measures been effective or ineffective in addressing the major concern or concerns of the business cycle?
The federal reserve looks at the CPI, GDP, and wages to determine a specific rate of interest. The tools the federal reserve is to shrink or increase the money supply by adjusting the interest rate to control spending. Two things can be adjusted either the federal funds rate where the banks borrow money or the Federal reserves can adjust the required reserve that they require the banks to have which will free up more money for the banks to loan at an interest rate that would appease bankers. An example if bank A had $100,000 in funds and the Federal Reserve required them to keep 3% or $30,000 in reserves. The amount left to loan customers would be $70,000. In this instance the banks would have to adjust their interest rates to keep the required funds in the reserve. The banks could also borrow money from the Federal funds market to keep money in their reserves where they would only need to adjust rates slightly to charge bankers and pay back the market.
· Comment on Aug 08, 2014, 3:56 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by SARA MARKEL
Aug 08, 2014, 3:56 PM
I deal with the same everyday at work, we are required to only have a certain amount in the accounting office, not only for security reasons but if we don't have money to pay the bills each month and were talking over 13K in light bill, but also to be able to have a certain amount to be borrowed from to allow future purchases, kind of of like pre billing. I see this a lot in my company due to truck routes and invoices being delayed a week for the invoice clerk to pay the bill.
· Comment on Aug 08, 2014, 7:33 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by TIFFANY FERGUSON
Aug 08, 2014, 7:33 PM
To make this hit even closer to home, the same happens in our personal life. Before the bank approves loans, they often check your assets, how many bank accounts and how much money is in each. It's important to have a personal reserve fund. The same concept that the Federal reserves applies to banks is the same that individuals should have when managing their finances.
I know some maybe looking for a in-depth response but I think this is the best way to interpret the understanding of Federal Reserve and it existence.
· Comment on Aug 08, 2014, 11:00 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by WAWA NGENGE
Aug 08, 2014, 11:00 PM
Tiffany
The money creation process that is described in this chapter is a MONOPOLY of the Central Bank (the Federal Reserve in the United States) and the commercial banks acting as branches or extensions of the central bank.
If you have 100 hundred dollars and lend them to Sara, you lose access to those hundred dollars. Second, you can lend the 100 dollars only once to Sara and cannot lend it to, say, me, until Sara repays you. This is true of every company EXCEPT the Central Bank and Commercial Banks.
In practice, this means that ALL money in existence was BORROWED INTO EXISTENCE, but the amount needed to pay interest was not created at the same time. Interest must be paid from existing money. This means that the entire world is in debt to the Central Banks and the Commercial Banks, who have the monopoly to create money, and will never ever be able to come out of debt!
This explains why students have to borrow money to go to school; people have to borrow money to buy land, houses, cars, .... everything. Note that each loan transfers the amount of the PRINCIPAL+INTEREST to the Central Banks and Commercial Banks, and also gives them reserves in the form of deposits when borrowing money that they use to create even more money, using the MONETARY MULTIPLIER formula. This system is called PLUTONOMY by CITI BANK in a private memo for its investors ONLY
See video at https://www.youtube.com/watch?v=xZ3-OWMa92E
See summary here http://politicalgates.blogspot.com/2011/12/citigroup-plutonomy-memos-two-bombshell.html
Read the chapter carefully and watch at least the video before sharing thoughts
· Comment on Aug 09, 2014, 5:09 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by ALFRED MATHENA
Aug 09, 2014, 5:09 PM
Thank you for this explanation as it truly does clear it up. I think knowing that everything comes from debt makes it easier to understand the checks and balances portion of our economy. We always have accounts payable and its important to remember that although debt may have a negative connotation it is not always a bad thing. Debt and moneys owed is what makes our economy go round and it is imperative to know that you cannot come up with money out of thin air. Thank you again for the clarity.
· Comment on Aug 09, 2014, 3:07 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by KEITH MAJORS
Aug 09, 2014, 3:07 PM
Tiffany,
I agree with you in that we need to operate our personal finances similar to how the Federal Reserve requires banks to operate their finances. I have recently spoken with a loan institution regarding a home loan and they do look at all of my different assets and liabilities when qualifying me for a loan. The loan institution essentially requires me to have a solid reserve of money or reserve of assets that would be able to back the loan. I believe this is important for loan institutions and/or banks to do when considering handing out loans.
Just as important as it is for individuals to have a reserve it is equally important for banks to have a reserve before they are allowed to hand out more money in to form of a loan. There are many questions in my mind regarding money when it comes to a central bank and the other banks who support our economy, and I'm hoping to gain a better understanding of all of it by the end of this course.
· Comment on Aug 09, 2014, 6:36 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by ALEJANDRIA CATINDIG
Aug 09, 2014, 6:36 PM
Tiffany, thank you for that post. I like the way you correlated personal reserve funds with federal reserves. We just recently refinanced our home and the bank required so many things before approving our loan. The whole loan process felt like buying a house all over again. They wanted to see all our assets, liabilities, and what we have as personal reserves. All the requirements are needed to support our loan and for the banks to see if we are financially capable to pay the loan. Same goes for banks, they need reserves on hand to be able to give out loans.
· Comment on Aug 09, 2014, 8:25 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by SARA MARKEL
Aug 09, 2014, 8:25 PM
They do this with cashing of checks now too, they want to know if it something that will clear the bank, and if not then they put a hold on the check until the funds are available. This is a safe way to ensure that they are getting the money.
· Comment on Aug 08, 2014, 10:42 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by WAWA NGENGE
Aug 08, 2014, 10:42 PM
Sara
Unless your company is a CENTRAL BANK or a commercial bank, it does not have the permission to create money using the MONETARY MULTIPLIER that is explained in Ch 32 and which I have summarized with a mortgage example in my response to Tiffany in this thread
To help move the discussion forward and dispel some critical myths that still linger in the minds of students in this class, Here is a summary of the key elements of DEBT MONEY CREATION process in a FRACTIONAL RESERVE SYSTEM like the one that exists in the entire world today. This quick summary is from chapter 32. Note the highlighted text
"Quick Review 32.2
· Banks create money when they make loans; money vanishes when bank loans are repaid.
· New money is created when banks buy government bonds from the public; money disappears when banks sell government bonds to the public.
· Banks balance profitability and safety in determining their mix of earning assets and highly liquid assets.
· Banks borrow and lend temporary excess reserves on an overnight basis in the Federal funds market; the interest rate on these loans is the Federal funds rate."
Please review the ENTIRE chapter carefully along with my response to Tiffany and then share your thoughts.
· Comment on Aug 09, 2014, 8:53 AM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by JOHN RUIZ
Aug 09, 2014, 8:53 AM
· Comment on Aug 08, 2014, 10:33 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by WAWA NGENGE
Aug 08, 2014, 10:33 PM
Tiffany
Good try about the net amount that would be available for lending if the reserve requirement were 30%, which is not realistic in today's world anyway. If you review the MONETARY MULTIPLIER formula in Ch 32, the subject of this thread, you will notice that the monetary multiplier formula is m=1/r, where m is the final amount of money that the banks can create given any single unit (1) of THIN AIR MONEY RESERVES by the Central Bank and r is the required reserve ratio.
In your example, m=1/.3=3.33; when multiplied by the original 100,000, we get a new total of 333,333 dollars! This is very different from the 70000 that your analysis showed. The current reserve ratios or capital requirements mandated by BASEL III agreements in 2010 set the maximum at 8% and a minimum of 0%! (See slide #4 at http://media.mofo.com/files/Uploads/Images/Basel-III-PPT.pdf) Note that the lower the reserve or capital requirement, the more money a bank can create out of thin air and lend to borrowers.
Let us assume new reserves of 100 000 as stipulated by you.. Let us further say the requirement is 2%. Therefore, m=1/0.02*100 000=50*100 000=5 000 000 or FIVE MILLION dollars !!!!!!!!!!!
So if a person buys a house with a nominal price of 1 million dollars, and puts down a required deposit of 100 000 dollars, the banking system can create a total of 5 million dollars net before interest payments. The system then lends 1 million to the borrower plus interest, without using any of the preexisting deposits at the bank!
Review the chapter again carefully and then share your thoughts
· Comment on Aug 09, 2014, 12:59 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by SHARRISE WILLIAMS
Aug 09, 2014, 12:59 PM
Last Word: The Bank Panics of 1930 to 1933
A Series of Bank Panics in the Early 1930s Resulted in a Multiple Contraction of the Money Supply.
The history of the bank panics made the older generation very uncomfortable with depositing their money into banks. I remember as a child, my grandfather would always have money and change laying around the house in him and my grandmother's home. As children, my cousins and siblings always thought that grand pop was rich because after he passed away my mom and aunts were cleaning out the house and found thousands of dollars scattered in different spots in the house. I didn't understand then, but as I became older, my mom explained to me that my grand pop had lost money in the bank and he vowed that he would never use a bank again to hold his money. He cashed his checks and took his money home and after reading the story of the bank panics, I now understand why. I don't blame him because back then there was nowhere near as much technology as there is today and as a working person, we want to make sure that our money is not just lost. I recently experienced this scenario with a few of my patients at my nursing facility. Once they are accepted to stay here long term, and apply for Medicaid, their income is due to the facility except for $45 that they can keep each month and they are able to continue to pay healthcare insurance/pharmacy premiums each month. Up until last March, Social Security checks were coming in paper form, but as on Marc 1, 2013 it became mandatory for social security checks to be deposited into an account for all recipients. A number of my older patients were hesitant to do this because they lived through or heard of the bank panic and their loved ones had to convince them that it was ok to have their funds deposited in a patient account for themselves. Again, I don't blame them for feeling the way that they felt, because it was almost as if they were being forced to deposit their money.
Aug 09, 2014, 10:27 PM
Comment on Aug 09, 2014, 3:27 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by KEITH MAJORS
Aug 09, 2014, 3:27 PM
When establishing a specific interest rate the following items are taken into consideration: This information is from the Components of Interest Rates video.
Risk-free Rate: Rent on money, Inflation of money
Risk Premiums:
Individual buyers:
Credit history,Home ownership, Length of employment, Credit card debt, Bankruptcy, Other.
Business Borrowers:
Experience of management, Length of time in business, Debt carried, Cash flow, Level of equity, Other.
The risk-free rate is something that remains relatively constant, but still has some fluctuation. The risk premiums are dependent upon the borrower and have a much higher fluctuation because it is based on each borrower. From the video we are told the higher the risk the higher the interest rate.
· Comment on Aug 09, 2014, 8:28 PM
Re: DQ: 5.1 Interest Rates and Money Creation
posted by SARA MARKEL
Aug 09, 2014, 8:28 PM
Bankruptcy is a large factor in being able to get a good interest rate when you purchase a car or a home, it seems that with a move in the slightest amount could be the difference between thousands of dollars.
Re: DQ: 5.1 Interest Rates and Money Creation
posted by JEREMY ECKLIN
Aug 09, 2014, 10:29 PM
The Federal Reserve considers the desired equilibrium interest rate, specifically the demand for money and the changes in the supply of money when establishing rates of interest. The equilibrium interest rate occurs where the demand for money, the combination of the transaction demand and asset demand, meets the supply of money (Brue, McConnell, & Flynn, 2009, p. 663). The supply of money is highly influenced by monetary policies of the Fed used to increase or decrease the supply of money through different tools. The Federal Reserve can influence the supply of money and thus the equilibrium interest rate through four different tools consisting of open-market operations, the reserve ratio, the discount rate, and the term auction facility. Through open-market operations, the Fed can buy and sell government bonds and securities to the public or commercial banks to change the supply of money into the market. The Fed can also adjust the reserve ratio to influence the supply of money. An increase in the reserve ratio would lead to a lower supply in money because banks would be required to increase their reserve amounts in the Central Banks thus lowering the amount available to lend to the public. Conversely, a lowered reserve ratio would decrease the amount required in the reserve thus freeing up more money to loan out. This is not a commonly used method by the Fed.
The Fed has used the discount rate and term auction facility recently as a response the financial emergency caused by the housing market crash. By lowering the discount rate, the Fed was able to encourage commercial banks to borrow directly from the Federal Reserve at lower rates to encourage the issuing of new loans despite the recent losses in 2007 of the housing market crash. The Fed lowered the rate a number of times incrementally over the course of a year down to 2 percent to stimulate the supply of money in an attempt to prevent a recession (Brue, McConnell, & Flynn, 2009, p. 682). Additionally, the Fed implemented the term auction facility consisting of a secret auction where financial institutions and banks secretly bid for a set amount of borrowable money each stating their desired borrowed sum and interest rate they were willing to pay. The term auction facility would then rank and distribute loans based on the best interest rates up to the total auction amount increasing the supply of money by the Fed through a secret and optimal situation where Fed receives the best rates to stimulate lending. All four of the tools can be used by the Federal Reserve to influence the supply of money thus adjusting the equilibrium interest rate up or down. These methods are somewhat effective in addressing the business cycle but are concerning because they are based on faulty measures of the GDP that are based on lower actual inflation rates creating a lower equilibrium interest rate.
Brue, S. L., McConnell, C. R., & Flynn, S. M. (2009). Economics. Principles, Problems, and Policies (18th ed.). New York, NY: McGraw-Hill Company.
