mannfm11 wrote:
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What people think the Fed is doing isn't what the Fed is doing.
The Fed isn't putting money in the banks so the banks can loan. The Fed is replacing the lack of liquidity in the system or at least attempting to do so for liabilities already present. These injections are to replace the interbank lack of money as best possible and are limited by the amount of good assets available. The primary reason the banks needed the bailout of their assets is they were out of good assets in my opinion and most likely the Fed itself was holding assets that stood on perilous ground and needed the government to get them off their balance sheet.
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There really aren't any transactions involving the Fed that don't involve settling liabilities between banks on transactions that have already happened in the banking system. When the Fed repos securities, it is generally to force the Fed funds rate down by using securities as collateral to issue electronic cash. It makes banks more willing to lend, but then again, the banks can buy the securities and give the Fed the cash. I think one reason that t-bills have collapsed is that banks that want to get their money back when they lend it are selling cash to the Fed for T=bills
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Sure.
I am definitely not an expert in economics, but i am sure that everything should be explained in the small scale...
AND simple - of course.
It is clear that FED does not put money in the system. Fed
only allowed banks to do it. I think that is called "leverage".
Lets go to little to - the past.
I try to understand it in simple example:
- Lets say that we have just ONE man in the village - who has money to lend (he is the richest man there).
With time - he lent quite much money to other there - with interest of course.
Also, he realised and persuaded other people in the village, that the best way to safe their money (this time perhaps it was gold) - is to put it in his treasury and get interest on it too, since "he has the best security in the complete village".
With time - he also suggested that people could pay each other with notes - he printed (with his guarantee)!
The explanation is also simple - security and simplicity by paying with notes, in stead to have always the small bag with gold.
The offer looks quite fer at the beginning.
As long everybody - BELIEVE - that banker has enough gold (money) in the treasury.
But with time the banker (the richest man) realized that he CAN print more notes that amount of money he has in the treasury and use it for lending with interest!
Nice cash - for little printed paper.
(
He just "developed" - the leverage)
With time - the banker just overdid.
Everybody realised that something IS wrong with bankers sudden fortune.
And - one day:
All common villagers tried to get their own money from banker - at the ONE and SAME day!
Of course - he had not it.
He was probably killed (same as his family too) and his property was destroyed -
BUT REAL (measured in the hard work of the villagers) money was NOT back!
The only guaranty for their money was - the bankers word.
Simple.
NO banker - NO money.
It were probably more similar event at this time, and those caused disorder in the kingdom too.
On the end - the King decided to calm the situation and of course, to gain some money too - for him personally.
Then in stead of just bankers guaranty- HE gave it, and it was "the Kingdoms guaranty" - for the "Kingdoms notes"!
He just "developed" - the "modern" money system!
The banks in the Kingdom still would to "leverage" villagers money so much they can - BUT now there were the King AND his treasury - who guaranteed for the notes which were printed WITH "Kings stamp"!
They did NOT permitted the bankers to leverage as much they wont!!!
The disobedience - would be punished!
The King (actually his advisers) - decided how maximum "the leverage" in the Kingdom can be!
He just "developed" - the FED and the Treasury!
The amount of notes permitted to flow in the Kingdom is decided by King on the periodical basis.
If he decided that more money need to be printed for some reason (perhaps he planed a war, or spent too much on courtesans) - it would be printed.
With other words - he increased "liquidity" in the Kingdom. (Actually - he inflated "the Kings notes")
So the system is more or less the similar even today except the King.
Additionally, we have more Kingdoms with different notes (and different level of "leverage") which handling between on some rules they stated - once upon a time.
Now if we from this simple example (complicated are always - bad) - i can not understand:
1. Who is in control of money printing (or data money "printing")? (I can understand that in US the FED is private owned, but still the State (the King) should have control of it)
2. Remember, ALL money in the Kingdom has "the Kings stamp" - which means that he (State) guarantee for it - the leverage on the stock same as the leverage on the credit markets should be on the in connection to the King (the State).
3. If the State (the King) had control of the leverage, and possibility to punished disobedience - why now the State (the King) bailing out the disobedient bankers??? - (Obviously - the rolls are changed with time. The King MUST to obey the bankers!)
4. If the State (King) put more "liquidity" with "the Kings stamp" in the system which is now starving - (
same as old banker when ALL villagers came at just one day to pick up their own money) - the notes with "the Kings stamp" will inflate and of course loose the value in the REAL world.
5. We can just speculate that other kingdoms (states) who have a huge amount of notes with "foreign Kings stamp" in theirs treasury - would like to with ALL possible measures - to keep notes value flouting... The question is until...? (Since they have own interest too)
So, my conclusion is that State must have control of the Fed and Treasury and that they (NOT the bankers) - "put the money in the system". Admittedly, not directly but allowing bank "to leverage" the real money.
That must be case - even in situation that the Bankers are in full command over the King (the State)... (but this is definitely a deviation in the system then)