Re: ECON: The Fed's Y2K Recession of 2001

Date: Fri Apr 06 2001 - 00:12:48 MDT

In a message dated 4/5/01 5:18:41 AM, writes:

>You are only looking one thing: loans. When I parenthetically mentioned
>reserves in the quoted statement, I meant it.:) A bank that sets its
>interest rates too low would notice a net drain in reserves. If it sets
>it too high, it would notice a net inflow of reserves. (This is regardless
>of the reserve used.)

That would have more to do with the bank's rates relative to other banks.
In any case, banks can and do change the number of loans they give out,
independently of interest rate. Slowdowns get triggered when banks
simply refuse to loan much, regardless of interest rate. Banks can control
reserves easily under "incorrect" interest rates.

>In American banks, there were certain limits placed on the banks before the

>Federal Reserve System. Many of these limits were placed by states and they

>included requiring the banks to hold a certain amount of state bonds

>(thereby monetizing government debt), branch banking (disallowing banks to

>network and spread offices between regions), portfolio requirements (what

>banks could invest in), minimum capitalization requirements (how much money

>one needs to start a bank), reserve requirements (how much reserves a bank

>must have on hand) and limits of interest rates (usury laws; probably didn't

>have as big an impact).

All true; but none of this is related to the herd mentality problem.

(snip various discussion of how the above limits could make banking less
efficient, which I basically agree with)

>> It isn't immediately obvious whether free-market

>> or relatively apolitical central banking will generate the "better"


>I guess the Great Depression and the myriad inflations and hyperinflations

>are not evidence enough?

Data does vary by country, which is why I put in the "relatively
independent" caveat. In the US case, growth volatility has been much
less after the Fed came in than before. With the Fed, we had the deflation
of the 30' and the inflation of the 70's, which I agree would not have gone
on nearly so long under market systems. The Bundesbank has never had
that kind of major goof in 50 years. No "myriad inflations" here, or
in Japan, Germany, or Switzerland.

Free banking, then, would increase short-term volatility compared to our
current system while protecting from long-term mismanagement. Which
is more important is not immediately clear. Further, the Fed hyper-deflated
*once* and hyper-inflated *once* and now seems acutely aware of both
risks. The chance of a repeat occurance should be less than the once-in-
40 years we got in this century.

(to be fair, you could make a case that short-term volatility has long-term
benefits. But you do have to demonstrate that first.)

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