This article is a response to:
Polleit, Thorsten, “The Fed’s Great Unwind: Will It Sink Us?” The Austrian 3, no. 6 (2017): 4–6.
Which is published here.
I thought the Fed was a central government bank that all of the commercial banks with government charters were members of. Since the commercial banks’ lending adds to the stock of liquid money quantitatively, based on the Feds regulatory capital requirements, in the event that some bank lacks physical cash the reserves storded at the Federal Reserve is there to bail out the commercial bank experienceing the physical cash bank run. So, in an era of no FDIC insurance and zero system wide controls on collective debit (denominated in Federal Reserve Note Dollars) the Fed is an “indispensable institution.” However, we have the FDIC, so having the Fed require commercial banks to have reserved cash on deposit is redundant. And, now that these so-called “Federal Funds” (the commercial banks’ bank-run reserves,) you know, actual physical Federal Reserve Note currency and any ‘true physical currency’ the Fed owes commercial banks (but have yet to be minted,) are so plentiful that some commercial banks have excess reserves.
Long story short. If there are any excess reserves of currency in the system then the federal funds rate is basically zero percent. Supply and demand… the more excess funds in the system to ‘fund’ the Fed’s reserve requirements the less the cost to borrow those ‘real dollar’ reserves from some other commercial bank and put them on deposit at the Fed so the reserve regulation is met.
I shouldn’t have to explain that in 2009 the banking crisis was not a bunch of folks running to the bank to get cash. It was a massive solvancy catastrophe. So, the Fed wasn’t designed to address that. And, the FDIC made the Fed basically useless. Now, that doesn’t change the fact that the New York Fed still regulates government chartered banks in the USA. It can set capital requirements on commercial banks with a policy that is wholistic to, you know, have some predictable control on the total stock of money in existence and how that capital stock grows or shrinks. And the Fed can still have a, you know, legislative law that specifies a regulatory requirement for reserves on deposit in case of, say, a solvency crisis. Heck, The Fed could always increase it’s unminted reserves on the fly and directly bail out some layman brothers, but those idiots needed to be punished for failure, so the entire asset market felt the interdependent effects of the pain. And, TARP allowed a debit to be created, by the Treasury, to offset the massive increase in capital that the Fed was making (rather than any commercial bank, which typically does that,) so, the Treasury created capital to spend (via borrowing from the Fed.) Thus offsetting the Feds massive increase in actual unminted currency (a credit on its balance sheet) with the collectiveized TARP debit. Then the Treasury, now in possession of the credits, ”Keynesianed” them on over to the commercial banks in need of bailout and haircutting.
Anyways, the point is that the Treasury and GSEs create capital for transfer via ‘borrowing’ physical currency from the Fed, although any ‘interest’ paid to the Fed is simply returned, so all that really matters is the term for which the Treasury or GSE has agreed to spend the money into the main st market for. Whereas commercial banks, as you are familiar, create capital by faking real currency within the Fed’s regulatory capital requirements thus expanding the stock of liquid Dollars beyond MB to M1, M2, ecetra. So all of the “poor peoples” mortgages, student loans, car loans, credit cards, oh and corporate debit, are collectiveized in with government and GSE debit by commercial banks thus randomly (with each loan) increasing the amount of Dollars we collectively think exist. This is a great way to make more ostensible millionaires and bid asset prices higher. But, if the poor people ever reduce their indebtedness it will most likely be with new real currency that the Fed makes for use by the Treasury or a GSE. In other words, the poor indebted will repay their loans with an increase in the actual currency (MB). An increase in actual currency that “catches up with” the fake currency that banks counterfeited and that the wealthiest are hoarding on deposit at some commercial bank or in paper cash on a pallet “under their mattress.”
We’ve gotten ourselves massively confused because we equated Treasury and GSE borrowing with corporate and consumer borrowing. But, Treasury and GSE borrowings is the creation of real currency for a specified term by fiat. Whereas corporate and consumer borrowing is the production of “counterfeit fake” currency (by fiat,) for a specified term, with interest that produces commercial bank revenue.
The result is that commercial banks become valuable assets (that provide the vital function of facilitating trade in the main st market) and poor indebted people are poor and indebted. It is a house of cards based on leveraging.
When the Treasury or a GSE “borrows” it is simply guaranteeing that the money “borowed” will exist (for market spending) during the loans’ term. Calling it “borrowing” and then setting a “debt limit” is disingenuous. Fundamental market policy (that politicians can never change) is needed. The amount of money in existence shall be a function of what needs to do the valuation evaluations: US Citizens. That is done via new banking regulations at the Fed regarding capital and reserve requirements. With those set at well defined rates Congress will know exactly what its yearly fiscal budget is limited to.
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