Re: Zero Interest rate and Partial Reserve Banking

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

       Another factor that is related to this although
partly exogenous in the U.S. are regulations on
loans quality by the Comptroller of the Currency,
a little known agency located in the U.S. Treasury.
This entity can declare that a bank has bad loans
and in conjunction with the requirements to have
not too many bad loans can force banks to reduce
their lending.  Thus, even though the Fed is striving
mightily to engage in stimulative monetary policy,
it is being offset to a significant degree by the OCC
that is ordering banks to reduce loans because of
all the bad loans they have on their books, many of
these in the now collapsed dot.com sector.
      The irony is that it is an economic decline that has
made these loans bad.  This turning of good loans into
bad ones then essentially automatically triggers this
regulatory reaction that induces a tendency to a
contractionary monetary policy, despite the efforts of
the Fed.  Some in Congress are now calling for the OCC
to be put under the Fed exactly to avoid this kind of
absurd impasse.
Barkley Rosser
----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, November 14, 2001 1:10 PM
Subject: Zero Interest rate and Partial Reserve Banking


> Aside from a liquidity trap, partial reseerve banking tends to
> neutralize the Fed's effort of monetary ease through lowering of the Fed
> funds rate.  The Fed eases money supply through bank lending.  The
> general theory is based on supply-demand realtionship of funds.  Yet the
> conditions that lead to the Fed lowering the FFR also lead banks to
> raise the credit standards for lending, thus widening the interest rate
> spread and shrinks the demand for loans by qualified borrowers. Thus the
> Fed is put in a situation of pushing a credit string.
>
> Henry C.K. Liu
>
>