The evolution of 100 percent reserve banking

by on March 7, 2009 at 5:19 pm in Economics | Permalink

Mark Thoma directs us to the following:

So, for these folks: good news! We don't have fractional reserve banking
anymore.

In statistics-speak, since last November, the monetary base has exceeded M1,
which means, more or less, that bank reserves (plus surplus vault cash) exceed
liquid deposits.

In fact, as of December it seems we had 121 percent reserve banking, give or take.

Comrade Coinz March 7, 2009 at 5:38 pm

Wouldn’t M0 have to equal M2 to really be 100% reserve banking? Savings, CDs, and time deposits are theoretically available at any time, though their might be a penalty for early withdrawal.

Tyler Cowen March 7, 2009 at 6:01 pm

Kevin, it means we are fucked.

salacious March 7, 2009 at 6:17 pm

Doesn’t it mean we are fucked at the moment, but that we have the potential to become unfucked if we can get the banks lending again? Or am I missing implications here?

babar March 7, 2009 at 6:25 pm

looking at the h3 release, it is apparent that the increase in base money almost exactly tracks the increase in bank reserves. is this because banks are getting interest on these reserves?

Ludwig von Mises March 7, 2009 at 7:56 pm

Mark Thoma can suck my Austrian dick.

wintercow20 March 7, 2009 at 9:47 pm

The St. Louis Fed just put out a working paper to discuss this further.

I am sure Mises and Hayek and Rothbard would be chuckling about how this came about.

Given the info from a few posts ago, shouldn’t the Fed be penalizing banks for holding excess reserves, not paying them not to lend?

rjkwahoo March 7, 2009 at 10:36 pm

“Tyler! Such language from such a distinguished commentator on culture!”

In some cases, “…we are fucked” is apart of the culture. So cut the prudish nonsense of academia. Sometimes, the need to offer the middle finger along with a smile is needed to cut through the nonsense polite academic discourse. Aristophanes describes walking out of the the thinkery[The University], in his play “Clouds”, as the same as walking out on stage with a “…bird in each hand…”. So yes, being fucked is not so funny, but having someone tell you: you are fucked, is funny and in some cases is so very needed.

Aristophanes wrote, in “Clouds” :

“STREPSIADES:
I have a scheme for not paying my debts.

SOCRATES:
Let us hear it.

STREPSIADES:
Tell me, if I purchased a Thessalian witch, I could make the moon descend during the night and shut it, like a mirror, into a round box and there keep it carefully….

SOCRATES:
How would you gain by that?

STREPSIADES:
How? why, if the moon did not rise, I would have no interest to pay.

SOCRATES:
Why so?

STREPSIADES:
Because money is lent by the month.”

dsm March 7, 2009 at 11:39 pm

Shouldn’t we expect the toxic assets to be in the broader aggregates of the money supply? I’m thinking that the debt that gets written off is going to come out of M2 and M1 while the TARP funds went into M0. Since no one is borrowing/lending the M0 dollars haven’t worked themselves into the broader aggregates. In general, doesn’t debt unwind from the broader aggregates down while money creation/inflation propagates from the narrower ones up?

Grammar nazi March 8, 2009 at 3:09 am

> In fact, as of December it seems we had 121 percent reserve banking, give or take.
> In fact, as of December it seems we had 121 percent reserve no banking, give or take.
fftgj

Tom Hanna March 8, 2009 at 4:58 am

It means there is definitely a liquidity trap and it’s time for Ben to fire up the choppers!

Eduardo Castro-Wright March 8, 2009 at 6:40 am

“It’s almost like a significant percentage of consumers realize that they might have been living beyond their real means†

Billare March 8, 2009 at 10:01 am

Look at the all the modern-day Savaranolas moralizing about debt and banking, just as were in the Middle Ages or something. Only a few blogs like Falkenstein’s and CR’s are even attempting to do any quantitative work on what caused the crisis. The left weaves its moral tale of taxes and unions, the right does so similarly with illegal immigrants and the CRA, and the Austrians of course get their turn to bash fractional reserve banking and the scary notion of debt. All content to intellectually masturbate in an accommodating environment.

Bizgig March 8, 2009 at 2:01 pm

Billare: a response in the form of alternate time-lines.

2003: Billare believes all the economists who insist there can’t be a GDII because they can manipulate multipliers. He invests heavily in stock markets and a fat house thanks to a sweet ARM. 2009: Billare spends much time on the internets making fun of the Middle-Age-minded Austrians while watching every thing he worked for wash away.

2003: Billare watches Ron Paul, Jim Rogers or some other fossil on MSNBC and doesn’t just point and laugh. He accepts the idea that central-bank driven cheap credit leads to mal-investment booms and busts. He buys gold and other commodities. He chooses to rent. 2009: Gold has more than doubled. Most commodities hold. He’s flush with cash and buys some foreclosure at half what it sold for new. His friends (who laughed at Billare the gold-bug before) now grovel before him. Oh, life is sweet.

I’d choose the second time-line if I were you. Oh wait, you can’t, Billare, and you and the other right-thinkers still believe all this aggregate demand B.S.

Current March 9, 2009 at 10:35 am

“From this we may infer that Aristophanes invented chewing gum.”
Can someone explain this joke?

The article is a bit of a joke. We have nothing remotely Austrian until we have got rid of the Fed.

Mr. Econotarian March 9, 2009 at 8:07 pm

All the Fed needs to do is “time the market”…

“The key is that the Fed will have to drain reserves when the economy begins to recover if it is to prevent a rapid acceleration of inflation.”

http://research.stlouisfed.org/publications/review/09/03/Gavin.pdf

I’m sure they’ll get be able to suck up the tidal wave of reserves at just the right time, right?

Alan Meltzer talks about the inflation risk here as well:

http://www.econtalk.org/archives/2009/02/meltzer_on_infl.html

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