This past weekend I reread Doug Irwin´s marvelous article on Cassel and the Great Depression. In many ways it´s like “back to the future”. Just call Keynes Krugman (PK) and Cassel Sumner. Take this passage from history and you´ll see that the current playbook is the same!
Arthur Burns was ignorant and arrogant. Pritchard used to read his correspondence with him in his Money and Banking class.
The Federal Reserve, under Chairman William McChesney Martin Jr., re-established stair-step case functioning (and cascading), interest rate pegs (like during WWII), thereby using a price mechanism (like President Gerald Ford’s: “Whip Inflation Now”), and abandoning the FOMC’s net free, or net borrowed, reserve targeting position approach (quasi-monetarism), in favor of the Federal Funds “bracket racket” in 1965 (presumably acting in accordance with the last directive of the FOMC, which set a range of rates as guides for open market policy actions).
Using interest rate manipulation as the monetary transmission mechanism is non sequitur. Interest is the price of loanable funds, the free market’s clearing price of credit. The price of money (the Fed’s bailiwick) is the reciprocal of the price-level, as represented by varied and specialized price indices
Using a price mechanism (pegging policy rates), has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless legal reserves, whenever the banks need to cover their expanding loans – deposits (legal reserves supplied after the fact - emasculating the Fed's Open Market power).
We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was entirely about ("taking away the punch bowl").
The effect of tying the FRB-NY trading desk's Open Market policy to a remuneration rate (or any other market-based interest rate), is to supply additional (and excessive, and costless interbank demand deposits) to the banking system whenever loan demand, or investment opportunities, expand (when the banks began in earnest to buy their liquidity, instead of following the old fashioned practice of storing their liquidity
It's the single biggest error that makes economics a dismal science. Economics is an exact science.
It's stock vs. flow. If monetary savings equaled investment there wouldn't be a problem. But the Japanese save more and keep more of their savings impounded in their payment's system. Their deposit insurance is unlimited for transactions based accounts. I.e., from the standpoint of the system, not any individual bank, all bank-held savings are frozen, destroying the velocity of circulation.
It is axiomatic. The only way to activate or liquify monetary savings, from an accounting perspective, is for their owners, saver-holders, to spend/invest either directly or indirectly entirely outside of the banks.
Arthur Burns was ignorant and arrogant. Pritchard used to read his correspondence with him in his Money and Banking class.
The Federal Reserve, under Chairman William McChesney Martin Jr., re-established stair-step case functioning (and cascading), interest rate pegs (like during WWII), thereby using a price mechanism (like President Gerald Ford’s: “Whip Inflation Now”), and abandoning the FOMC’s net free, or net borrowed, reserve targeting position approach (quasi-monetarism), in favor of the Federal Funds “bracket racket” in 1965 (presumably acting in accordance with the last directive of the FOMC, which set a range of rates as guides for open market policy actions).
Using interest rate manipulation as the monetary transmission mechanism is non sequitur. Interest is the price of loanable funds, the free market’s clearing price of credit. The price of money (the Fed’s bailiwick) is the reciprocal of the price-level, as represented by varied and specialized price indices
Using a price mechanism (pegging policy rates), has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless legal reserves, whenever the banks need to cover their expanding loans – deposits (legal reserves supplied after the fact - emasculating the Fed's Open Market power).
We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was entirely about ("taking away the punch bowl").
The effect of tying the FRB-NY trading desk's Open Market policy to a remuneration rate (or any other market-based interest rate), is to supply additional (and excessive, and costless interbank demand deposits) to the banking system whenever loan demand, or investment opportunities, expand (when the banks began in earnest to buy their liquidity, instead of following the old fashioned practice of storing their liquidity
It's the single biggest error that makes economics a dismal science. Economics is an exact science.
It's stock vs. flow. If monetary savings equaled investment there wouldn't be a problem. But the Japanese save more and keep more of their savings impounded in their payment's system. Their deposit insurance is unlimited for transactions based accounts. I.e., from the standpoint of the system, not any individual bank, all bank-held savings are frozen, destroying the velocity of circulation.
It is axiomatic. The only way to activate or liquify monetary savings, from an accounting perspective, is for their owners, saver-holders, to spend/invest either directly or indirectly entirely outside of the banks.