I’d say jimmy is correct. I’m not the expert in this area, but I have spend lot of time reading about this (as a hoby).
When FED wants to lower interest rates, it will engage in OMO, buying securities from banks. That adds liquidity to the system (ex nihilo) and pushes down short term interest rates (changes supply/demand balance). FED’s balance sheet is expanded - both assets and liabilities side are expanded. It also pushes long term interest rates to some extent, but longer term rates are bit ‘sticky’. Check following page:
Notice the spread between ARMs and FRMs which begins to disappear now. That’s because of FED buying longer term mortgages. Also, government intervened in mortgages market through GSE’s (Fanny Mae & Freddie Mac) in effort to push FRM rates down.
As for inflationary effect, money has to do something in order to get inflating prices. Now, all money that FED creates (about 800 billion $ in the last year) is just sitting in the reserves. It is not lent. Doing nothing. That’s why there is no inflation now. Imagine if US mint would print 100 billion $ in notes and distribute it to the citizens, just throwing it above cities. And everybody that’s receiving new money simply puts it in the cookie jar. Inflation? No. As long as that money sits in the jar, nothing will happen.
I have a question that is sort of related to the national debt myth but not exactly the same, since I’m referring to the money supply and not to whether or not the interest payments can be made.
How does the total money supply increase, except for continual increases in lending from the Federal Reserve? What I mean is, if the Federal Reserve allowed the Treasury to pay off all its debts to the Fed, it seems as if the money supply will fall, or rather stay constant as the Fed transfers the interest payments back to the Treasury. So it seems as if the only way that the base money supply rises is by allowing the Treasury to continually roll over on its old debts.
I’m pretty sure I’m wrong. I can’t figure out where I’ve made the mistake though.
The Fed buys the mortgages with NEW reserves, reserves that didn’t exist before. Do they get created from thin air? I guess so.
Is it inflationary? That depends. You have to understand the different between reserves (held by commercial banks at the Federal reserve) and money (used to purchase goods and services and thus capable of bidding up prices and causing price inflation). The reserves are what the commercial banks need in order to extend loans and the quantity of loans that the commercial banks can lend is limited by the availability of reserves. Increasing the quantity of reserves in the system could potentially cause inflation but only if the commercial banks use the new reserves to extend new loans and thus get new money into the economy that is bidding up the price of real goods and services.
Recently the Fed has massively increased the total quantity of reserves in the system. This has not, as yet, resulted in the extension of a correspondingly massive amount of loans on the part of commercial banks and has thus, as yet, not yet resulted in uncontrollable inflation (as you will not doubt have noticed, wandering around the shops in your area - prices will no doubt be more or less in line with what they were a few months ago or even a year ago).
Heck, we’re not clarevoyants here so it’s kind of hard to say exactly what would happen. But here’s one possible set of outcomes:
The price of the RMBS securities etc. that the Fed is buying would continue to fall until they reached a price that could attract private investors. The banks that owned those securities would have to write off large sums of cash and would be technically insolvent. Any banks they owed money to would also then have to write off whatever they’d loaned. The FDIC would have to pay out massive quantities of cash to depositors as various banks rolled and the FDIC itself would probably have to be declared bankruptcy as well, since it wouldn’t have enough cash to pay out all the deposits. Either lots of depositors would lose their money or the government would have to step in with new money printed not to buy mortgages but instead to pay back depositors. New banks and smaller solvent banks would take over the assets and operations of the failed banks.
Like I say, all of the above comes with the caveat that I am not a psychic but mostly it seems like a pretty fair set of assumptions.
"The Fed buys the mortgages with NEW reserves, reserves that didn’t exist before. "
new reserves…do these new reserves come from newly opened banks? where do new reserves come from…do you know?
are new reserves simply a computer at the federal reserves making up new money?
azazel states “Now, all money that FED creates (about 800 billion $ in the last year) is just sitting in the reserves…”
the federal reserve “creates” and then money is sitting in “reserves”
i had read that the federal reserve had purchased about 1.2 trillion dollars of mortages…i asked how this took place and you claim the federal reserve buys ‘stuff’ with new reserves.
are the reserves just instant money just poofed into existence by the federal reserve? this would seem to me to be extreme direct inflation?
FED just electronically increase the balance of bank account that sold security to FED. New money, out of nothing. FED also takes ownership of the security. That’s it.
Now, banks have new money that they can lend if they wish so. But banks don’t want to lend and leave that money alone. That money has potential to enter economy. But until banks actually extend credit to people or companies, it will not create inflation. All that money is sitting idle in the bank’s cookie jar. FED on the other hand, thinks he can sterilize that reserves in case inflation kicks in. Probably he can. I don’t know for sure.
says: “At no time during that interval, however, did the amount of commercial-bank credit outstanding fall below the amount outstanding at the beginning of the year. In short, credit was actually ample, indeed, at an all-time high; it simply stopped growing as usual for six months,…”
i dont know if this article is telling the truth or not.
but if the article is correct…i guess ther are hundreds of billions of dollars entering the economy via bank loans? over roughly the span of a year or so?
with the federal reserve buying the ‘bad’ mortgages - does this somehow keep house prices above what many would be.
in other words, if the fed had done nothing would a great deal of houses begin to fall in value. a liquidation of house prices in other words?
Banks are not lending new cash they receive (check FEDs balance sheet, under excess reserves). Of course that landing is not stopped 100%. Mortgages are probably down a lot, car loans etc. Consumer credit probably is not falling that much. Check what prices are falling or what inventories are raising, there is your credit contraction. In order to inflate, you need to constantly add new money, credit must grow exponentialy. When that stops, as it has stopped now, prices stop to rise. Where credit is contracting, prices fall. Not all asset classes are hit to the same extent. This inflationary ponzi scheme stops when credit stops growing. The emperor is naked…
ok…i dont understand.. i have an article that says (i assume the author isnt lying, but i am not sure) commercial bank credit plateaued for six months or so in 2008 and then began to increase and you say that banks are not lending. i would think there would be some serious bank layoffs taking place…loan officers , etc. but anyway
this link says "At no time during that interval, however, did the amount of commercial-bank credit outstanding fall below the amount outstanding at the beginning of the year. In short, credit was actually ample, indeed, at an all-time high; it simply stopped growing as usual for six months, stuck at about $9.4 trillion…__After the six-month pause, commercial-bank credit zipped upward again, so that by the end of the year, the amount outstanding stood more than 8 percent highe__r than it had a year earlier. " chart on linked page
does commercial bank credit somehow exclude mortgage loans? again, it seems odd that bank would suddenly be clinging to excess reserves when all they do is lend.
remember, my main point here is to try to find out how the federal reserve inflates…and if these recent actions have placed numerous billions of dollars into the economy.
also..my previous question, unresponded to…have house prices been artificially propped up do the the federal reserves mortgage buying…if the federal reserve had done nothing would a significant drop in some house prices have taken place - house price liquidaton, iow?
Banks are not lending NEW money they receive from FED. Almost all new money is held against excess reserves. If it was lent, it should be moved to statutory reserves (or whatever that is called in English). Banks already have reserves which allow them some lending. However, FED would like that banks EXTEND credit using new reservers, but banks are not doing so. Credit is still more or less growing, but at much slower pace or declining in some areas. Check for actual numbers:
ok…i looked at a chart titled bank credit of all commercial banks it shows a steady increase since 1990…a tapering of for nearly six months in late 2008 …its shoots up rapidly agin for a short time and has leveled off again.
has this happened before…a trillion dollars or so ‘created by the federal reserve’ to buy a bunch of bad bank loans only to have banks keep a trillion or so in reserves to just ‘sit there’.
is there a lending explosion on the horizon? if such loans began to take place…would this be the inflation that is federal reserve induced…the point of my actual post.
I’m too lazy to check… Obvious candidates are 1929. depression and most notably, Japan’s lost decade. Japan tried to reinflate heavily, but has failed. But on this scale in so short time? I think not.
"what i didnt see was the federal reserve/us treasury job of creation of currency.
what i believe is called the monetary base. "
“I don’t think you’re using the term “monetary base” correctly… you seem to be using this to mean physical cash - which is not how it is commonly used.”
"The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency component of the money stock, plus (3) (for all quarterly reporters on the "Report of Transaction Accounts, O_ther Deposits and Vault Cash…"_
vienna may have a different definition but my post bagan with ""How open market operations are conducted in the USA"
"The seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally adjusted currency component of the money stock, plus (3) (for all quarterly reporters on the "Report of Transaction Accounts, O_ther Deposits and Vault Cash…"_
the above link www.federalreserve.gov says of the adjusted monetary base “total reserves” “currency component of the monetary stock” and “other deposits and vault cash”
to refresh…"three ways of federal reserve inflation.
the open market operation, the discount rate, and fractional reserve banking - which is i guess is a necessary mode of commercial banking that necessitates a central bank in the first place.
what i didnt see was the federal reserve/us treasury job of creation of currency.what i believe is called the monetary base. "
this was in my original post
you replied with “I don’t think you’re using the term “monetary base” correctly… you seem to be using this to mean physical cash - which is not how it is commonly used.”
I guess it’s really a semantic debate and different sources will use different definitions for the monetary base. I can’t really see much use in discussing things in terms of a limited definition such as physical coins and cash though, since the majority of loans (and thus the majority of fiduciary media) are not extended off the back of physical coins and cash but rather off virtual reserves at the central bank - digital leger entries in a computer system these days (although they were no doubt ink in a paper leger many years ago) which can be expanded or contracted without the necessity to actually manufacture real notes and coins (or call them in).
I find it hard to see the relevance of physical coins and paper money in any but the most disasterous of scenarios (such as that painted by Reisman in the Financial House of Cards article that I also linked to in an earlier post in this thread).