. The term is used colloquially for any kind of Linkback. This is similar to comment spam but avoids some of the safeguards designed…

Banks and their shareholders played chicken with the US taxpayer and they won a pyrrhic victory in the Senate. This plan is a about one thing, not diluting into oblivion JPM, BAC, C, WFC etc. And yet we see JPM hit 52 week highs. This must be what it was like on the Russian Stock Exchange in 1986.

Hardly, the DIDMCA created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions.

The intermediary financial institutions effected were the nation’s savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks were commercial banks for many years.

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves.

Legal reserves increased by a factor of 3.5 from 1981 until 2006. And during this same time period, the commercial banking system’s expansion coefficient doubled.

“There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are NOT BINDING. Banks need central bank deposits for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets”

Richard G Anderson
Federal Reserve Bank of St Louis

THE MONEY SUPPLY CAN NEVER BE MANAGED BY ANY ATTEMPT TO CONTROL THE COST OF CREDIT.

What happens is that to get those dollars, the Fed takes as collateral securities or loans that the banks have and then issues cash to the banks. This is where the Fed prints money (literally). You give the Fed something of value as collateral, the Fed shows up with an armored truck full of green paper.

For this to work, the banks have to give the Fed something of value. Some security or loan or treasuries. If the banks have nothing of value to give to the Fed or anyone else, they can’t get dollars to loan out, and so they start cutting back on the dollars that they have.

Exactly. The US had to direction to take in the 30s:

1. Inflation
2. Reduce the work week

Washington chose inflation – which worked for six decades, but now has foundered on the rocks of consumer debt.

Perhaps this time we could try the other, and let the creidt market unwind in a way which doesn’t hurt ordinary people.

I honestly have no idea what long term changes the US has to make in its economic structure, and what happens next will involve a lot of debate and heated discussion.

However, in order to have that discussion we have to get the economy into some shape where we can put it on autopilot for a few months and think and discuss what to do next. The problem with the current situation is that if you “do nothing” then you going down exactly the same path that “do nothing” did in early-1930.

What you are missing is that someone has to buy non-treasury dollar assets. That is the Fed. The Fed is buying loans – aka lending money – which are collateralised with the banks’ dodgy assets (which, pending the TARP, remain on their books).

Pushing on a string is something different. That occurs when, because the demand for money, being a relatively risk-free asset, is so huge that increasing the money supply does not increase spending. Instead the additional money is readily held. I do not think we have reached the point yet where the Fed are expanding the base money supply (ie lending without selling treasuries), but with all the schemes going on, it gets a bit hard to tell!

The banks need dollars. The Fed gives them dollars. To get those dollars, the Fed sells Treasuries. To buy those Treasuries people are selling dollar assets, such as hedge funds and money-market funds. Money-market funds then have less money to invest in commercial paper. Banks are able to raise less money via cp. Companies are able to raise less money via cp, and thus turn to their credit lines at banks. So banks need even more dollars. Am I missing something?

Maybe this is called “pushing on a string” or “liquidity trap” – I don’t know. But if the Fed has really used up its balance sheet, having the Fed lend money to banks with its right hand while its borrowing money via Treasuries with its left, will not help over-all dollar liquidity at all.