Re: Y2K

Peter C. McCluskey (
Sat, 20 Feb 1999 17:42:32 -0800 ( writes:
>Peter C. McCluskey, <>, writes:
>> If the Fed loans banks unlimited amounts of cash with little regard to
>> the bank's ability to repay the loans, then they can fairly reliably
>> prevent runs on the banks before Jan. 1. But that strategy will probably
>> cause significant inflation, inflation, and invite a repeat of the kind
>> of recklessness that produced the worst of the S&L failures, so the Fed
>> will be hesitant to act as if runs are likely without clear evidence of
>> an imminent panic.
>I don't see why it would cause inflation. The money supply would not
>increase. All that happens is that there is a transfer from bank balances
>to cash holdings. The total money in anyone's possession does not change.

Loans by the Fed increase the money supply because the money involved would otherwise not be in circulation.

>In fact, it is likely that in such a time of economic uncertainty people
>would want to increase their total savings (cash plus bank accounts).
>This is a common response to hard times. People want to build up a
>savings "buffer" in case they lose their jobs or face other economic

Yes, there will be plenty of unusual factors affecting the demand for money. If the Fed judges the magnitude of these effects exactly, it can keep prices of average goods stable. I doubt the Fed will be able to anticipate unusual effects perfectly.

Peter McCluskey          | Critmail ( | Accept nothing less to archive your mailing list