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Is the suggestion that the Fed announce who it lends to through the discount window with no time lag or that the discount window be abolished altogether? That the lender of last resort function be voted on by Congress?
"Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy."
I don't think so Matt. In fact, it seems to me that what Randy Wray is saying is that the willingness of banks to lend has little to do with the supply of cheap funds to banks, and everything to do with the demand for credit among credible customers for loans. What makes the demand for credit effective is that the person who wants the credit can offer the seller of credit something of sufficient value in exchange for the credit. What people offer in exchange for credit is a promise of repayment with interest.
But in an economy with sagging demand for almost everyone, fewer people are in a position to offer a credible promise of repayment with interest. Nobody wants to lend to entrepreneurial ventures that seem likely to fail. And consumers who can barely meet their existing credit obligations don't want to acquire new ones.
Trying to point out that "the problem with that scheme" wasnt that people were tapped.
The problem was that is not the way things work. Like Warren sez: "Kid in the car seat turning the plastic fake steering wheel thinking that he is really driving the car".
This explanation leaves open the "loanable funds theory" as an accurate understanding of things, someone who believes in "loanable funds" will keep on believing that after reading this.
"Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year." (oh brother)
How is it alleged that the Fed "committed" $7T when the balance sheet never rose more than about $1.2T????
Then it is alleged that "the Banks" just "bought Treasury securities" with the loanable funds.
I checked the Feds Z.1, from Sept 30, 2008 thru March 30, 2009, the amount of USTs held by commercial banks actually FELL by a small amount over those 6 months right when all of the liquidity programs were implemented. So how is it that "banks bought USTs" when they actually sold them?
How is it alleged that the Fed "committed" $7T when the balance sheet never rose more than about $1.2T????
Maybe for the same reason Tsy sells more than the entire public debt in a single year ($65T last fiscal year), short term debt is counted over and over again.
Is the suggestion that the Fed announce who it lends to through the discount window with no time lag or that the discount window be abolished altogether? That the lender of last resort function be voted on by Congress?
ReplyDelete"Using the excuse of the crisis, the Fed lent funds at near-zero interest to the banks. This was supposed to encourage them to begin lending to firms and households, to spark economic growth and recovery. Of course, the problem with that scheme is that households were already underwater with debt (hence, the recession), firms had no sales hence no reason to borrow to increase production, and banks were loathe to lend to households and firms that face a bleak future on account of Wall Street’s crashing of the economy."
ReplyDeleteLoanable funds theory confirmed???
I don't think so Matt. In fact, it seems to me that what Randy Wray is saying is that the willingness of banks to lend has little to do with the supply of cheap funds to banks, and everything to do with the demand for credit among credible customers for loans. What makes the demand for credit effective is that the person who wants the credit can offer the seller of credit something of sufficient value in exchange for the credit. What people offer in exchange for credit is a promise of repayment with interest.
ReplyDeleteBut in an economy with sagging demand for almost everyone, fewer people are in a position to offer a credible promise of repayment with interest. Nobody wants to lend to entrepreneurial ventures that seem likely to fail. And consumers who can barely meet their existing credit obligations don't want to acquire new ones.
Dan K,
ReplyDeleteI like your words better.
Trying to point out that "the problem with that scheme" wasnt that people were tapped.
The problem was that is not the way things work. Like Warren sez: "Kid in the car seat turning the plastic fake steering wheel thinking that he is really driving the car".
This explanation leaves open the "loanable funds theory" as an accurate understanding of things, someone who believes in "loanable funds" will keep on believing that after reading this.
Resp,
And then there is this from the Bloomberg report:
ReplyDelete"Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year." (oh brother)
How is it alleged that the Fed "committed" $7T when the balance sheet never rose more than about $1.2T????
Then it is alleged that "the Banks" just "bought Treasury securities" with the loanable funds.
I checked the Feds Z.1, from Sept 30, 2008 thru March 30, 2009, the amount of USTs held by commercial banks actually FELL by a small amount over those 6 months right when all of the liquidity programs were implemented. So how is it that "banks bought USTs" when they actually sold them?
I dont see where this is going...
How is it alleged that the Fed "committed" $7T when the balance sheet never rose more than about $1.2T????
ReplyDeleteMaybe for the same reason Tsy sells more than the entire public debt in a single year ($65T last fiscal year), short term debt is counted over and over again.