hal@rain.org (hal@rain.org) writes:
>Peter C. McCluskey, <pcm@rahul.net>, 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
>problems.
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 (http://crit.org/critmail.html): http://www.rahul.net/pcm | Accept nothing less to archive your mailing list