{"id":7903,"date":"2015-05-07T06:35:51","date_gmt":"2015-05-07T11:35:51","guid":{"rendered":"http:\/\/olduvai.ca\/?p=7903"},"modified":"2015-05-07T06:35:51","modified_gmt":"2015-05-07T11:35:51","slug":"bank-reserves-and-loans-the-fed-is-pushing-on-a-string","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=7903","title":{"rendered":"Bank Reserves and Loans: The Fed is Pushing On a String"},"content":{"rendered":"

Bank Reserves and Loans: The Fed is Pushing On a String<\/a><\/b><\/i><\/span><\/h3>\n

The money multiplier effect no longer works.<\/i><\/span><\/p>\n

As you (hopefully) know, we live in a\u00a0fractional reserve banking system<\/i>:<\/b>\u00a0if the bank is required to have $1 in cash reserves for every $10 in loans, it means the bank\u00a0creates $10 of new money<\/i>\u00a0when it issues a $10 loan. When the $10 loan is paid off, that money vanishes from the system.<\/p>\n

 <\/p>\n

At that point, the bank is insolvent, i,e, its losses exceed its assets.The problem with fractional reserve lending is the leverage.<\/b>\u00a0A 10-to-1 reserve ratio means that if the bank issues a $10 loan, the borrower defaults and the borrower’s collateral (home, auto, etc.) only fetches $8 on the open market, the bank lost $2, which is more than the bank’s cash reserves ($1).<\/p>\n

In credit bubbles, the reserve requirements may reach absurd levels of leverage.<\/b>\u00a0At a reserve ratio of 100-to-1, a $2 loss of value in a $100 loan will push the bank into insolvency, as it only held $1 in cash as reserves against the $100 loan.<\/p>\n

Reserve requirements and leverage are one set of constraints on new loans; the other constraint is the income, creditworthiness and willingness of the borrower.<\/b>If households and businesses decide not to borrow more, regardless of the interest rate, then raising or lowering the reserve requirements will have no effect.<\/p>\n

This is where the Federal Reserve finds itself today.<\/b>\u00a0The Fed is anxious to spark more lending\/borrowing, and it has lowered interest rates to near-zero and made it easy for banks to build reserves–two things that in previous eras would have sparked increased borrowing.<\/p>\n

But in our debt-saturated, stagnant-income era, the Fed is pushing on a string.<\/b>Frequent contributor Dave P. explains why with the aid of two of his charts:<\/p>\n

Banks can create new money, but only within the limits of the reserve requirements set by the Fed.<\/i><\/p>\n

…click on the above link to read the rest of the article…<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Bank Reserves and Loans: The Fed is Pushing On a String The money multiplier effect no longer works. As you (hopefully) know, we live in a\u00a0fractional reserve banking system:\u00a0if the bank is required to have $1 in cash reserves for every $10 in loans, it means the bank\u00a0creates $10 of new money\u00a0when it issues a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[52,2230,127,175,3203,195,303,305,5231,488,4924,5230],"class_list":["post-7903","post","type-post","status-publish","format-standard","hentry","category-economics","tag-bank","tag-bank-reserves","tag-charles-hugh-smith","tag-credit","tag-credit-bubble","tag-debt","tag-fed","tag-federal-reserve","tag-fractional-reserve-banking-system","tag-loans","tag-oftwominds","tag-pushing-on-a-string"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/7903","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7903"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/7903\/revisions"}],"predecessor-version":[{"id":7904,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/7903\/revisions\/7904"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7903"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7903"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7903"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}