Re: Economic Dimensions

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

William F. Hummel wrote:
>
> On Thu, 30 Oct 1997 John O'Donnell wrote:
>
> <snip>
> >
> >[The FED also has the much cruder control of changing reserve
> >requirements that can cause very large changes in credit
> >availability, but it is not used for such delicate changes as are
> >ordinarily done.]
> >
> The reserve ratio requirements is not used by the Fed as a means
> of changing credit availability.  Whenever it makes a change in
> the reserve requirement, it compensates by supplying the
> necessary reserves to maintain the Fed funds rate on target.  If
> it failed to do so, it would give up its control of short term
> interest rates.
>
> This common misunderstanding owes its origin to the standard econ
> texts in describing the money multiplier concept.  While the Fed
> has the power to directly intervene in bank lending practices, it
> has almost never done so.  Under normal conditions, credit
> availability is not controlled by the Fed.  The only effective
> tool the Fed has for controlling the amount of credit money is by
> influencing demand through its setting of the Fed funds rate
> target.

Yes, you state pretty much the way the FED does things. However,
this looks to me like another example of why it is significant to
separate measures from controls.

Setting reserve requirements are a legal duty of the FED. I quite
agree that they are a foolish way to accomplish the goal of
limiting credit expansion, but they do exist and they do affect
credit availability, credit cost and a few other variables.

My own choice of the control to set a formal floor on credit
expansion is a capital / asset ratio such as I propose in _Can It
Be?_ on my web page. There does, of course, exist the informal
control of banks keeping some small change about to dissuade bank
depositors from panic because the bank can't immediately monetize
assets. But such informal requirements are always challenged by
some hot shot go-go type who knows he can handle any surge of
withdrawals.

The need for a formal requirement, however, does nothing to
explain why the requirement is changed as is occasionally done by
the FED. I can find no useful purpose for making these changes.
Do you know of any?

Louis-Philippe Rochon wrote:
>
> I can't believe post-Keynesians are still discussing the impact of changinf
> reserve requirements on the 'availability' of credit, especially in systems
> where reserve requirements are increasingly meaningless (Canada no longer
> has requirements).  Anothe step back for post-Keynesians !!!

As to the tolerable subject matter of discussion by
post-Keynesians I do hope that those [Paul Davidson, Basil Moore
and ?????] with the credentials to speak for the content of
post-Keynesianism beliefs are concerned with seeking truth even
if it may occasionally vary from the established rules of
post-Keynsianism, whatever those rules may be.


			-- jbod
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