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Tom Woods: Why Greenbackers Are Wrong

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

Unfortunately, not all Fed critics, even among Ron Paul supporters, approach the problem in this way. A subset of the end-the-Fed crowd opposes the Fed for peripheral or entirely wrongheaded reasons. For this group, the Fed is not inflating enough. (I have been told by one critic that our problem cannot be that too much money is being created, since he doesn’t know anyone who has too many Federal Reserve Notes.) Their other main complaints are (1) that the Fed is “privately owned” (the Fed’s problem evidently being that it isn’t socialistic enough), (2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed, and (3) that under the present system we are burdened with what they call “debt-based money”; their key monetary reform, in turn, involves moving to “debt-free money.” These critics have been called Greenbackers, a reference to fiat money used during the Civil War. (A fourth claim is that the Austrian School of economics, which Ron Paul promotes, is composed of shills for the banking system and the status quo; I have exploded this claim already – here, here, and here.)

With so much to cover I don’t intend to get into (1) right now, but it should suffice to note that being created by an act of Congress, having your board’s personnel appointed by the U.S. president, and enjoying government-granted monopoly privileges without which you would be of no significance, are not the typical features of a “private” institution. I’ll address (2) and (3) throughout what follows.

Continue:

http://www.tomwoods.com/paper/



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how banking actually works in

how banking actually works in our fiat regime

http://www.winterspeak.com/2009/09/loans-create-deposits-how...

If the government should not control exchanges.....

...then the government should not control the medium of exchange either. Money is too important to be entrusted to government. I am a localist as described http://www.amazon.com/Localism-A-Philosophy-Government-ebook...

It explains why money should be private, with the government only there to enforce contracts (as in, when a private mint holds its coins out as containing one tenth of an ounce of .999 fine gold then it allows prosecution if they violate the contract to keep their product to that standard). History shows us that government REPEATEDLY infringes on the implied contract of upholding the value of money. When they are one of the parties to the contract, you can't trust them with the power to enforce that contract. The light went on for me, and so much else makes sense now. Money is too important to be left to government. Its function should be decentralized because ANY kind of centralized power opens the door to tyranny.

Localism is for people who can still sleep at night even though somebody they don't know in a city they have never been is doing things differently. ("Localism, A Philosophy of Government" on Amazon for Kindle or Barnes and Noble ebook websites)

Cyril's picture

Well, Tom is preaching to the choir, on this end.

Well, Tom is preaching to the choir, on this end.

And fortunately enough, his works inspired others to make most of the same points as his, even more concisely, by denouncing the same frauds and/or flawed conceptions :

Bank Fraud in Ten Minutes

http://youtu.be/NZO9Io3PSmk

Also post-linked here for discussion :

http://www.dailypaul.com/275696/bank-fraud-in-ten-minutes

http://www.dailypaul.com/276145/bank-fraud-in-10-minutes-or-...

"Cyril" pronounced "see real". I code stuff.

http://Laissez-Faire.Me/Liberty

"To study and not think is a waste. To think and not study is dangerous." -- Confucius

Ellen Brown is a NWO Change Agent

Please, may no one be so gullible as to fall for NWO lies. They are peddling agitprop to swindle into existence another generation of useful idiots.

Have you been hearing the word "revolution" lately? Scam.

my comment on

my comment on tomwoods.com

There is no money multiplier. Reserves don't lead to loans, they are provided with a lag to keep up with bank money creation.

Loans create deposits. A loan is created and a deposit is created at the same time. The bank balance sheet expands on both sides, the loan is the asset the deposit is the liability.

The fed targets an interest rate on overnight interbank borrowing. That is the fed funds rate. If bank loans are expanding and banks need reserves, they brrow from each other. If there is a shortage of reserves, the rate goes above the Fed funds target and the Fed plays catch up by adding new reserves.

Loans are issued when there is a credit worthy borrower (not necessarily subject to sound underwriting practices).

Borrowers borrow based on the availability of profitable investment oppurtunities (not necessarily based on sound judgement).

The loan creates a deposit when it is issued, and if loans are growing faster than reserves, reserves are added to hit the FFR target.

The banks at present have trillions in excess reserves. So much that the Fed has to pay interest on the reserves to prevent the FFR from falling near zero or below its target rate in any case. These reserves have no impact on the demand or issuance of loans.

Lots of central banks have eliminated reserve requirements altogether as they have no impact on lending.

There is no money multiplier, excess reserves are not inflationary or hyperinflationary. They do not enable loans or lead to loans or credit expansion. Credit expansion leads and reserve provision lags the cycle.

Private bank money comes first and reserves follow. This isn't just theory it is empirically demonstrated and well known.

Don't know why Tom is still promoting this nonsense.

Bill

numbskull.; must be one

numbskull.; must be one of
Obama's 3500 paid bloggers.

this video will explain

this video will explain everything to you in layman's terms.

http://www.youtube.com/watch?v=g1QCbXCezNc

Your analysis is exactly backwards.

It’s so flawed I don’t even know where to start. Establishing the proper function of banking and loan creation is as good as any.

There is no money multiplier. Reserves don't lead to loans, they are provided with a lag to keep up with bank money creation.

This is complete nonsense. The reserves requirements are a way to curtail leveraging up the banks’ balance sheet with loans. Reserves do lag loan creation, but not for the purposed you stated. In a 100% reserve system…..a bank could not make a loan. In a 50% reserve system a bank could make a loan while maintaining 50% for their reserves…..that loan would be deposited at another bank and that bank could only make a loan of 50% of that deposit. So there is a money multiplier in the form of loans in any factional reserve system.

I don’t have a problem with your description of the Fed Funds market other then it lacks detail for the people that are looking at this to learn…..well not problem until you stated this.

The loan creates a deposit when it is issued, and if loans are growing faster than reserves, reserves are added to hit the FFR target.

By definition of the reserve requirement the loans could not grow faster then the reserves. The banks might do a poor job of maintaining the proper reserves but that is not a product of loan growth but a product of poor management skills.

The Fed Funds system is a two week maintenance operation that allows banks to lend excess reserves or borrow reserves when deficient of the reserve requirement. The settlement date is every other Wednesday night. The Fed is there to act as an intermediary and to control the supply of reserves only as a instrument of monetary policy.The loan growth is insignificant to the operation because by terms of the loan deposit…..a reserve requirement must be maintained. The interest rate targets are a cost of money, controlled by the availability of funds either added to or withdrawn from the system by the Fed either buying or selling repo's & reverse repo’s when the banking system has either excess reserves or short reserves.

Then you said this:
The banks at present have trillions in excess reserves. So much that the Fed has to pay interest on the reserves to prevent the FFR from falling near zero or below its target rate in any case. These reserves have no impact on the demand or issuance of loans.

You are right that the banks do have trillions in excess reserves right not, but the reason is far from what you stated. The reason this is happening is because the Fed is giving the banks time to heal their balance sheets. By buying toxic assets,to the tune of about 3 trillion dollars. the Fed has taken bonds off the banks’ balance sheets that was technically making them insolvent and put cash (FRN) on their balance sheet……or tier one capital, which also carrys a lower reserve requirements but that not the point…….cash is dead weight to a banks. They are getting it free of charge but it’s not earning them anything. So the fed wanted to speed up the healing process so for the first time ever in their 100 year history( oh man we should have 100 year birthday party on Dec 23rd by burning 100 dollar bills), The Fed decided to pay interest on reserves. This is part of “quantitative easing” few understand.

then this:

Lots of central banks have eliminated reserve requirements altogether as they have no impact on lending.
Because they don’t want to hinder lending.

And then finally this:

There is no money multiplier, excess reserves are not inflationary or hyperinflationary. They do not enable loans or lead to loans or credit expansion. Credit expansion leads and reserve provision lags the cycle.
Private bank money comes first and reserves follow. This isn't just theory it is empirically demonstrated and well known.
Don't know why Tom is still promoting this nonsense.

A loan by definition in a fractional reserve system is a money multiplier. If you can exchange the proceeds from the loan for any other good or service today, then you are bringing future purchasing power to the present and taxing the current productive power of the economy. This may not be the definition of inflation but it certainly the result of it, the definition is it is diluting the purchasing power of the current money stock.

Tom Woods knows exactly what he is saying…….you my friend haven’t a clue.

you're putting the cart before the horse

try re reading it......i think i stated my point clearly....you don't have a clue as to how the system works.

re-stating your claim is not

re-stating your claim is not evidence of your claim.

could you be more concise. i

could you be more concise. i didn't see you disagree with me on any point but just said a lot of unrelated stuff. thanks!

I copied your reply and I

I copied your reply and I deleted everything that had nothing to do with what I said, and will reply to the bare bones that's left if anything.

>...there is a money multiplier in the form of loans in any factional reserve system.<

When I said there's no money multiplier, I mean that a dollar of reserves/base money does not lead to 9 or 10 dollars in bank money, as the myth goes that T. Woods repeated.

That's demonstrated pretty obviously by the excess reserves and the empirical studies that have been done showing that bank money expands endogenously and is followed later by reserve provision.

>By definition of the reserve requirement the loans could not grow faster then the reserves.<

False. If a bank is short reserves it borrows them in the open market. If there is a system-wide reserve shortage, the FFR goes above target and the Fed adds reserves. Reserves lag credit expansion w/ a lag as has been shown in empirical studies and acknowledged even by the Fed. Only fools are clinging to the textbook multiplier myth that has been exploded for years.

>>You are right that the banks do have trillions in excess reserves right not, but the reason is far from what you stated.<<

I didn't state a reason.

>> The Fed decided to pay interest on reserves. This is part of “quantitative easing” few understand.<<

They're paying IOR to prevent the FFR from dropping below target due to excess reserves. I didn't say why there are excess reserves or mention QE because it isn't relevant to the point of my post. Let's try not to lose focus.

>>A loan by definition in a fractional reserve system is a money multiplier.<<

Its arguable whether we have a FRB system. I won't argue it here. Money multiplier in common parlance means a dollar of reserves will lead mechanically to the multiple in loans. This is what Woods said and what I objected to. You are perhaps working w/ a different definition. There is clearly no money multiplier by that definition and this should be obvious to any competent observer.

Wow so delete what I said for your purposes…..

…..I said your analysis is backwards and I stated it clearly:

The reserves requirements are a way to curtail leveraging up the banks’ balance sheet with loans. So any defense you present after that statement is relevant because your analysis from a starting point is flawed.

I'm Sorry you don't understand......maybe you should get some of those text books and figure it out before you expose yourself as a bigger fool.

reserve requirements DO NOT

reserve requirements DO NOT restrain leveraging up. banks NEVER look at reserve levels. they look for loan opportunistic and make the loans. if they need reserves, they go borrow them. if the system-wide rate goes above the fed's target, the fed adds reserves AFTER THE FACT. banks are not reserve constrained. if the Fed is targeting a FFR, they are playing catch up to bank money expansion.

however, none of what i just said was necessary since the original dispute was over the mechanical money multiplier claims made by t woods. a dollar of reserves leads to a multiple in loans. this is obviously not true since banks make loans first and then look for reserves later. the banks have trillions of excess reserves. they do nothing with them because they have no role in their lending decision and have nothing to do with how banking works.

yes but to save readers' time

yes but to save readers' time i chose not to quote each sentence you wrote that had nothing to do with anything i said or went off on a tangent or was mere special pleading "youre wrong, youre clueless, etc."

i replied above to every point u made that contradicted me. u failed to respond.

I will not argue beyond the point I responded to

but I will repeated it one more time so that you finally hear it.

Reserves are part of the process that pervents banks from leveraging up their balance sheets with loans.

Until you grasp that everything else is gibber gabber

this is false. banks leverage

this is false. banks leverage their capital. you seem to think capital and reserves are the same thing.

banks will make any loan that walks in the door, subject to their capital levels, and the availability of worthy credit risks. they will never worry about reserves. if the day ends and a bank is short the legal reserve requirement, it will borrow reserves at the overnight rate. if the overnight rate is above the fed's target, the fed will take that as a signal that it needs to add reserves and will do so. reserves have no impact on bank lending decisions, do not constrain loan origination, do not have any impact on banks leverage vis a vi capital.

furthermore, as per the original point at issue, there is no multiplier effect of reserves > loans, at 1:10 or any other ratio. the banks have trillions in excess reserves, and nary a one ever looked at their excess reserves and thought "gee, look, reserves, let's lend them out!" it doesn't work that way.

banks make loans if there are credit worthy borrowers, and if the have the capital. if they need to get their books in order re legal reserve requirements, they borrow reserves in the interbank loan market or directly from the fed. if the fed didn't add reserves, it couldn't hit its target. if it added 5 trillion in excess reserves, this wouldn't create a single new loan opportunity, nor would it add a single penny to the amount of money in circulation.

this is empirically demonstrable, it is how everyone involved in the banking system knows that it works, and it is exactly what is happening today, contra all the hysterical claims of excess reserves leading to a 1:10 hyper inflationary event by those who are still trotting out the textbook multiplier myth.

banks finance their balance sheets

After their initial capital from liabilities.......they borrow short term and lend long term. That is why they are inherently insolvent. I don’t know how to explain a system to someone who has a flawed understanding of the system.

But let me make sure I get you……according to you there are no bounds to the amount of lending the system can do as long as the fed keep feeding the system with the reserves……Then what the point of having reserve requirements?

>banks finance their balance

>banks finance their balance sheets after their initial capital from liabilities<

this neither refutes nor addresses anything i said.

>they borrow short term and lend long term.<

again.

>I don’t know how to explain a system to someone who has a flawed understanding of the system.<

is this a form of argument? just let your statements speak for themselves, you don't need to say stuff like that, it doesn't advance the discussion and means nothing.

>according to you there are no bounds to the amount of lending the system can do as long as the fed keep feeding the system with the reserves……Then what the point of having reserve requirements?<

banks will continue to make loans as long as they see profitable loan opportunities. they are restrained by their capital, and by the presence of sound credits to lend to.

capital requirements are of both a regulatory nature as well as a market nature. how much leverage over capital is prudent and/or legal is up to the bank, subject to all the vicissitudes of market mania, moral hazard and human folly.

whether the system can go on like this is subject to any number of factors, economic and non economic. i haven't made any statements addressing the longevity of such a system in the real world.

however, that is how the system works. banks don't lend money. banks create loans. there is a difference.

banks are not hindered by reserves or cash from creating loans.

if someone walks in and wants a loan, the underwriter stamps approval, creates 100k in bank money and deposits it in the account of that person. the loan is an asset and a receivable, the money is placed in the borrowers count as a deposit and is a liability. the bank creates a loan (asset) and a deposit (liability) at the same time, expanding its balance sheet.

what is the point of reserve requirements? its a policy tool, like the interest rate. it is an artifact from when reserves were physically limited by gold deposits, when the money supply was tied to gold. the fed manages interest rates by setting the overnight rate on reserve borrowing. they engage in QE by buying US govt securities off bank balance sheets (swapping them for reserves). this allows them to target rates further out on the curve (longer term).

reserves are used to manage clearing operations. settling balances between member banks.

just do a simple thought experiment. if the Fed required banks hold 20% instead of ten percent bank reserves, what would happen? every bank would be over the legal limit, they would bid over the FFR, and the Fed would do OMO to add reserves to hit their target.

it wouldn't reduce loans or constrain loans. the FED always provides whatever amount of reserves are demanded by the banking system at the rate they set. if they set the rate at 5%, they provide whatever amount is demanded at 5%.

likewise, no amount of excess reserves can cause a bank to issue a loan it wouldn't otherwise issue based on its capital levels and underwriting procedures. banks don't worry about reserves. they're a policy tool of the central bank. banks are interested in credit quality and capital levels.

Just to follow up……

when a bank receives a deposit it enters this on its balance sheet as a liability, with a corresponding entry on its balance sheet as an asset in the form of CASH……this is the basis of their RESERVES……it’s called cash. Therefore its reserve position DID increase from which new loans could be made. In a 10:1 ratio………. 9 dollars of new loans for every dollar in CASH (reserve) it received from it new liability can be loaned out.....but that doesn't mean it has to....but if the bank want to make money it will loan it out. Now if they were stupid and lent out that last dollar…..then they would be deficient in their reserve requirement with the Fed…….if you keep being deficient in your reserve requirements this brings out the auditors……if there one thing a banker hates it’s an audit. The reserves are kept in defense of your shareholder equity in the case of asset impairment. Assets can decline in value…..but the liabilities never decline in value……shareholder equity does.

Case in point…….bank A levers up its balance sheet 20 to 1 with questionable assets called CDO’S. , finance first by shareholder equity and then by taking on liabilities to make as much profit as possible.
The 20:1 ratio reduces the number of shares outstanding (and shareholder capital by defination) so that the larger profit by using so much debt leverage only has to be shared with the least amount of shareholders. This is the old M&M model of proper capitalization found in those musty old finance text books. But anyway……so the day comes and loans start going bad. Well it will only take a 5% decline in those CDO (if anyone needs a further explanation on bond valuation just e-mail me……that includes you to Bill) to wipe out shareholder equity……..because the bank didn’t keep enough reserves (Cash) for a raining day. Oh and by the way……it wouldn’t have to take a decline in the bank’s assets…..what if you had a run on the banks with 5% equity and no reserves…….bankrupt.

From the Federal Reserve website
Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.
The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (see table of reserve requirements). Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero.
The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This "exemption amount" is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Monetary Control Act of 1980 at $25 million. This "low-reserve tranche" is also adjusted each year (see table of low-reserve tranche amounts and exemption amounts since 1982). Net transaction accounts in excess of the low-reserve tranche are currently reservable at 10 percent.

So let me ask you a question Bill. In 2008 there was a financial crisis that was on its face a liquidity problem as opposed to a solvency problem (we can debate that at another time). So why didn’t the Fed just flood the system with reserves. If it is limitless……and the banks were suffering from a lack of liquidity. Under you logic they could have papered it over with not a worry…….banks would have continued to lend without regard to reserves……didn’t matter if asset prices were declining……just add more reserves…….their only lending decisions was only who needed a loan………EVERYONE DID!

I am sorry Bill but Tom Woods in correct and you are boring me to death because of your lack of any attempt to understand......if you think we live in a world on endless money creations......either by printing or loans......i have got some loans that need you to finance for some carry trades......do you have enough in reserve or will you need to check with the Fed.

a bank can be perfectly well

a bank can be perfectly well capitalized and hold no reserves with the central bank. canadian banks have no reserve requirements. this hasn't got anything to do with capital. reserves are just a required percentage of deposits to be held as balances with the fed and as vault cash to handle daily withdrawals. this has absolutely no relationship with a bank's capital position. this last reply from you really highlights the problem here.

http://bilbo.economicoutlook.net/blog/?p=9075

quote:

"Reserve requirements place not such limit on lending for reasons I have explained often. Commercial banks hold reserve accounts at the central bank for the sole purpose of facilitating the payments system (clearing house). Many countries have no reserve requirements other than the accounts must not be in the red on a sustained basis. The US is currently considering eliminating the positive requirements.

Reserve requirements are an artefact of the old gold standard and are irrelevant in the current monetary system. They do not reduce bank risk nor do they comprise a buffer that can be drawn on when there is a run on a bank.

To understand why reserve requirements do no constrain lending you have to understand how a bank operates. Banks seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share (this is one of Minsky’s drivers).

These loans are made independent of the banks’ reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these horizontal transactions will not add the required reserves.

In these cases, the bank will sell bonds back to the central bank or borrow outright through the device called the “discount window”. There is typically a penalty for using this source of funds. At the individual bank level, certainly the “price of reserves” may play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter. So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend.

So the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.

The major insight is that any balance sheet expansion which leaves a bank short of the required reserves may affect the return it can expect on the loan as a consequence of the “penalty” rate the central bank might exact through the discount window. But it will never impede the bank’s capacity to effect the loan in the first place."

you don't know the difference

you don't know the difference between reserves and capital. that is all.

i know the difference and so do you now

tired of typing....so i cut and pasted this just for you Bill

Capital reserves, or the money a bank has immediately on hand, can take on a few different forms. These are roughly divided into Tier-1 capital and Tier-2 capital. Capital reserves do not necessarily have to be cash. Rather, they just need to be reasonably safe, diversified access to cash or its equivalent in equity.

Reserve Requirements
• Banks are required to hold a certain percentage of their total deposits as cash. This requirement ensures that there is money available to cover customer withdrawals.
Purpose of Reserve Requirements
• Because banks use deposits to invest and lend, the reserve requirement ensures that all of the money is not invested at one time.

Capital Requirements
• Capital requirements ensure that banks hold in cash a percentage of the amount of money invested.
Purpose of Capital Requirements
• By adhering to this requirement, banks are able to simultaneously absorb investment losses and cover withdrawals. This ratio between investments and cash also helps determine a bank's safety relative to other banks.
Effect of Requirements
• The effect of these regulations is to help ensure the banking system remains as stable as possible. The FDIC and the Federal Reserve balance the safety of customer deposits with the desire of the bank to invest those deposits

Tier 1
• Tier 1 capital reserves are the book value of a bank's stock plus its retained earnings. The book value is the value of the company when liabilities are subtracted from assets; it is not the market value of the stock. This is because the market value can be different from the book value and is also subject to supply and demand laws on the stock trading floor--it does not reflect the bank's actual value as accurately as the book value does.
Retained earnings are profits that have not been paid out in dividends but have instead been invested back into the bank for development. So, if a bank invests $100 million in one year and makes a 10 percent profit of $10 million, but only pays $7 million in dividends, then its retained earnings are $3 million.

Tier 2
• Tier 2 capital is the bank's loan-loss reserves plus its subordinated debt . Loan-loss reserves are money that the bank puts aside in the event of people defaulting on their loans. It is essentially in-house insurance.
Subordinated debt is debt owed by the bank to account holders who have chosen lower-priority accounts. This means that these account holders receive a higher interest rate than standard account holders do, but if the bank should fail then other account holders will receive their funds before the subordinated debt holders do

Cash
• Cash is also a legitimate source of capital reserves. However, it is not necessarily in the bank's best interests to have a lot of cash around--cash does not gain interest, and a bank's business model is based around investing cash. However, a large amount of cash can reduce a bank's risk-adjusted capital, which in turn reduces its need for Tier 1 and 2 reserves, which is explained below.
Requirements
• Banks are required by law to have a certain amount of these capital reserves on hand. This is a total of 8 percent of their risk-adjusted assets, of which at least 4 percent must be Tier 1 reserves.
Risk-adjusted assets are the value of a bank's holdings multiplied by a number to compensate for their riskiness. Cash, for example, is solid, so it is multiplied by zero. Unsecured loans, however, are substantially riskier, so they are multiplied by 1. Mortgages, with houses as collateral, are not as risky as the bank has the house to fall back on in the event of default, and therefore are multiplied by 0.5

with all due respect, your

with all due respect, your previous comment shows you don't know the difference. it doesn't matter what you copy and paste after the fact. there's nothing wrong, lots of people don't know the difference. it is clear as day from your previous comment and i won't belabor the issue. thanks for the interesting discussion.

OK FOR THE LAST TIME

Reserve Requirements
• Banks are required to hold a certain percentage of their total deposits as CASH. This requirement ensures that there is money available to cover customer withdrawals.
Purpose of Reserve Requirements
• Because banks USE DEPOSITS TO INVEST AND LEND, the reserve requirement ensures that all of the money is not invested at one time.
Capital Requirements
• Capital requirements ensure that banks hold in CASH a percentage of the amount of money invested.
Purpose of Capital Requirements
• By adhering to this requirement, banks are able to SIMULTANEOUSLY ABSORB INVESTMENT LOSSES AND COVER WITHDRAWALS. This ratio between investments and cash also helps determine a bank's safety relative to other banks.

Reserves are CASH or CASH like instruments it doesn’t matter if they are “reserves held for withdrawal or loan loss provision”…..CASH is fungible.”

Your comment stating that I don’t know the difference between “reserve requirements” and “capital requirement” has proven to be irrelevant.

From the Fed website:
Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Capital requirement reserves help ensure that banking organizations have the ability to lend to households and businesses and to continue to meet their financial obligations, even in times of economic difficulty.

The Fed Funds market is a tool to implement monetary policy not a source of funding for the banks…..so you don’t really have a complete understanding of the Fed Funds market or how banks acquire funding or why reserves exist and why there are so much excessive reserves in the system right now.

Your original premise was to dismiss Tom Wood’s explanation of “reserves and loan multiply effect” as irrelevant because “reserves” could always be acquired at the Fed, which is just wrong.
.
And according to logic:

If “A” is a true axiom, than all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must be true.
The antitheists of this logic is if “A” is false then everything that follows “A” is false.

And this is my original point
Reserves in a factional reserve system by definition are for the liabilities on the banks’ balance sheet and by default curtail credit expansion of assets (loans). If you didn’t have to meet a reserve requirement then you could loan to infinity and beyond.

I am sure you enjoyed this little exercise to try and impress everyone to how smart you are. I only engaged in this to enlighten people so they wouldn’t go out and repeat your nonsense. Tom Woods is 100% correct and I respect him. But if he had gotten his information from YouTube as opposed to those musty old text books he would probably think like you….if you can really call it thinking.

all of the banks that became

all of the banks that became insolvent in the past 6 years were within reserve requirements. reserves are not capital and have nothing to do w/ solvency.

banks don't lend based on their reserve position. i could quote the Fed to that effect because they've stated it numerous times in the past couple of years. they have also been clear that there is no money multiplier effect from additional reserves.

but quoting the Fed doesn't prove the point as you seem to think.

my original point remains correct. there is no money multiplier effect. loans are issued based on creditworthy borrower + adequate regulatory capital. loans create deposits and the bank balance sheet expands on both sides by creating the loan and the deposit.

banks seek out reserves after the fact to keep up w the Fed's reserve requirements, and they acquire them in the market by borrowing reserves at the overnight rate.

if banks in aggregate need reserves they bid up the FFR, and the Fed engages in OMO to provision new reserves to hit their target.

they could also just reduce reserve requirements.

reserves are there to settle balances (clearing). vault cash (small subset of reserves) handle withdrawals.

reserves play no role in bank solvency.

reserves play no role in bank loan decisions.

excess reserves are not lent out. banks don't make loans just because they hold excess reserves.

the money multiplier is a myth.

if the money multiplier was

if the money multiplier was correct as tom woods argued, the excess reserves in the trillions would have ballooned at the rate of the multiplier. this is what bob murphy, tom woods etc., thought would happen. it has not happened, ergo it is not how it works.

Like I said

if “A” is false then everything that follows “A” is false.

Just stop Bill at this point you are just embarrassing yourself.

"reserves play no role in bank solvency."

Com’on Man

Hah. they dont. : D

Hah. they dont. : D

You claim that "reserves

You claim that "reserves don't lead to loans", but you admit that, as reserves are drawn down, the interest rate begins to go above the target rate, and this necessitates new reserves to bring the rate back to the target.

So the effect of greater reserves, according to what you have written, is to lower rates. Do lower rates not create an increased demand for borrowed funds, for loans? In other words, greater reserves DO lead to more loans. If they didn't insert more reserve money the rates would go up and there would be a decreased demand for what would be more expensive loans, so I'm having a hard time following you. You seem to contradict yourself.