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Migeru:
We now know that banks have created other entities not called banks and outsourced money creation (through credit) to them, thereby depriving the central bank of control over monetary policy.

I don't think that is strictly true.

All money = credit (other than notes and coin) has been and continues to be created by private Banks. What they have done is to outsource the risk away from their own proprietary pool of Capital: totally, through securitisation; temporarily, through credit default swaps, and partially, through credit insurance.

Migeru:

Why are banks regulated? Because they are allowed to create money through credit via fractional reserve banking. How did it happen that banks were allowed to outsource this function to unregulated entities? Were the regulators asleep at the wheel or complicit?

One of the things that is needed is a crackdown on "off-balance" items and specifically to make it so that a bank can sell a loan only to another (regulated) bank, not to some unregulated off-balance-sheet entity.

Banks' economic function has essentially been to guarantee borrowers' credit, and they back this guarantee with pools of regulatory capital. Anyone else to whom such risks are outsourced in return for a premium or payment - and in particular the "Monolines" like Ambac - should indeed be much more closely monitored by regulators, who were sleeping on the job.

Migeru:

Or perhaps we need a complete overhaul of the money system, but don't hold your breath for that one.

The effect of a "Debt/Equity" swap of the type I advocate - and which IMHO offers the only viable solution to  the ongoing "Credit Crash" - is actually to monetise future land rental values.

There is no alternative to reversing the polarity of the monetary system in this way froma defcit basais to asset basis: nothing else "works" at an acceptable political cost (ie will maintain a functioning society).

Moreover, to do so requires no legislation. There is nothing stopping banks from implementing such restructuring right now.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 07:45:17 AM EST
[ Parent ]
Btw I agree that one of the results is that Central Banks have indeed lost any measure of control over monetary policy as a result of this risk outsourcing.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 07:47:14 AM EST
[ Parent ]
But if central banks have lost control of monetary policy, what is the point of their existence?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue May 6th, 2008 at 08:28:52 AM EST
[ Parent ]
... lost a measure of control?

The ability to set the foundation interest rate is unaffected.

Wasn't the ability to dictate any substantial part of the mark-ups on the foundation interest rate surrendered decades ago?

Once they allowed commercial banks to count capital gains for increases in the guessed-at values of assets without a market (instead of waiting until a profit has been realized on an asset) ... that is, "mark to model" ... they surrendered capital controls.

So, lost control? More like they voluntarily gave up control.


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 09:16:48 AM EST
[ Parent ]
BruceMcF:
The ability to set the foundation interest rate is unaffected.

There are essentially two tools Central Banks can use: interest rates, and reserve requirements.

The Fed, BoE etc now find that interest rates have become entirely irrelevant, and this tool has therefore been lost.

Unlike the Chinese, the Fed, BoE etc choose not to use reserve requirements as a policy instrument, and that tool was therefore given up.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 12:30:33 PM EST
[ Parent ]
In what sense has interest rates become irrelevant?

Of course, if interest rates have become irrelevant, then so have reserve requirements, so that would be a two-fer.


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 12:36:50 PM EST
[ Parent ]
BruceMcF:
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.

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

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 04:44:09 PM EST
[ Parent ]
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
[ Parent ]
BruceMcF:
How does that make the cash rate irrelevant?

If falls in the cash rate have no effect whatever on the rate Joe Public pays on his mortgage or any other loans he takes out, I would say that makes the cash rate "irrelevant", but I guess that's just my opinion.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 05:55:21 PM EST
[ Parent ]
The central banks appear to be unable to lower the general level of interest rates by lowering the "cash rate", but if they raised the cash rate presumably that would result in a raise of the general level of interest rates.

This is reminiscent of the way Peak Oil means that OPEC can no longer lower prices by raising production, but they can still raise prices by withdrawing production.

Peak Credit?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue May 6th, 2008 at 05:59:55 PM EST
[ Parent ]
Its a floor. If the cash rate is pushed up, tomorrow, the mark-ups will remain about where they are, and the interest rates charged will increase.

On that logic, you are effectively dividing into two possible alternatives:

  • a direct, mechanical, 1-1 relationship
  • no effect

Since the reality is that the level of the floor affects the rates faced by bank customers, but is not the sole determinant, then what you've done is to leave reality in the excluded middle.


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 06:25:55 PM EST
[ Parent ]

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