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In what sense has interest rates become irrelevant?

The rates at which Banks are lending are increasingly parting company from the Central Bank rates. That's because the premium they charge for their implicit guarantee has gone up with the perceived likelihood of default.

Yes, the mark-up over the cash rate has gone up.

How does that make the cash rate irrelevant? The mark-ups of bank lending over banks cost of funds have not been locked in place since direct regulation of bank lending rates was dropped.

Why do you say that if interest rates are irrelevant so are reserve requirements?

What do reserve requirements do? They establish the underlying leverage of central bank operations to inject and withdraw reserves, to manipulate the cash rate.

What else could they be doing? They are not contingency reserves for capital adequacy, because they are not free to be used to meet capital losses. They are not a tool to manipulate the quantity of money in the system, because the central bank cannot manipulate the quantity of credit-money in the system and already has the power to manipulate the quantity of fiat currency in the system.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 6th, 2008 at 05:05:33 PM EST
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