The Fed has Eliminated Reserve Requirements for All Depository Institutions
- Thread starter gaussian
- Start date
It's not Earth shattering. Canada has had no reserve requirement for years, ditto Australia I believe, but I did not confirm. Targeting Aggregate reserves has been the mechanism the CB in the U.S. used to target the funds rate. But there are other ways to do this. Banks that are solvent will always be able to come up with enough cash to satisfy any obligation. I suppose in an unusual situations there could be a very minor delay. Regardless of whether your particular bank is solvent, your deposits are safe up to the insured limit, and your check will always clear so long as you have deposited enough to cover it. In other words, depositors losing their money when a bank goes under is a thing of the distant past.
Don't take anything for granted my friend...
Maybe I'm not understanding something then. Here's my mental model obviously simplified:
1. I am a guy people trust with money. They leave their money in my house and my wife says that I have to keep 10% of it around because the last time I didn't they almost torched the front yard.
2. This presents a sort of problem though. I have 10% of the money I store sitting under my mattress. I'm making pretty good money lending the other 90% out to third parties for mortgages, business loans, etc. I try to be good about credit checking but it's gotten to be such a hassle I trust my friend John to do it for it me.
So far so good.
3. My wife is feeling good about the way we're making money and she says people won't torch the lawn anymore because they have insurance guaranteed through our state. So I lend out the last 10%. My balance is $0 and I'm issuing IOUs to people stating "I'm good for it" and by golly I am. I've been in this business for years!
4. Suddenly my good loans start defaulting. The economy is going tits up and John, god love him, didn't see it coming. I need to collect fast.
5. It starts getting worse. People need cash so they come to me. I tell them "I'm working on it" and write some Gaussian IOUs the stores trust. Meanwhile I'm panicking. More and more of the 100% of my assets being lent out are defaulting and I can't collect it all back. I'm losing racks of cash.
6. People stop trusting me. They run my house, torch my lawn, and take all my money.
How do you suggest this is prevented?
The only way there would be a panic is out of ignorance. Though there will always be such a thing as panic, there is no longer such a thing as a run on the bank where you wouldn't be able to withdraw your money. You will always be able to regardless of whether your particular bank is solvent.
I don't think fed is fully controlled by gov.
Depends what is meant by gov, if bankers are governing us then yes.
The problem is not that there are loans. It is that there is INTEREST on the loans. So where does the extra interest come from?
The posts in this forum simply indicate how few really understand Central Bank-Treasury operations and modern money. The vast majority of people think that government finances mirror private sector finances. But that's quite wrong.
I have been dealing with a lunatic in the economics forum, Peter Morgan, he has an economic blog "Morganist Economics" Almost everything he believes is wrong at least with regard to the U.S. Central Banks and U.S Commercial Banks. I finally got so frustrated, I recommended a little book by Warren Mosler to him entitled "Soft Currency Economics II. What everyone thinks That They Know About Monetary Policy is Wrong." I can highly recommend it to you as well. It's cheap in paperback, only 88 pages. Most importantly, it is correct.
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