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The problem with low haircut high multiplier scenarios could well be that of creating 10 or 20 to one multipliers with "high powered money" and then using that money to blow asset bubbles in stocks and commodities.

The multiplier is irrelevant. It is an ex post accounting construct, not an ex ante operational constraint. As long as the financial regulator does not wish to ensure that banks do not finance speculative ventures, and as long as the central bank wants to retain control of the overnight funding cost (that is, the monetary policy rate), a lower multiplier simply means that more of the trash goes on the central bank balance sheet and a higher multiplier that it stays on member bank balance sheets.

If, as I suspect, the TBTFs are doing this starting with Fed money from one of the many "credit facilities", it will make it very difficult for the Fed to ever rein in the money supply by raising rates or reserve requirements without causing a monster crash.

Well, yeah, if you're using Maiden Lane facilities to cover up the fact that your big money market banks are insolvent, then it will end with Stuff Blowing Up. But a high money multiplier won't make stuff blow up any more spectacularly than it would with a low money multiplier. The money multiplier is a liquidity thing. You are having a solvency problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 15th, 2011 at 06:04:29 PM EST
[ Parent ]

The insolvency of the general population - or rather a 'solvency' dependent purely upon inflated property prices - is a much greater problem than the related problem of the insolvency of the intermediary banks.

As Michael Hudson points out, 90% of the population are in debt to the other 10% who own substantially all the unencumbered productive assets.  

And again, as he points out as an economic historian, there is nothing new about this: it's what always happens when compounding debt combines with private property in land, and is why debt relief such as Jubilees has been necessary, and is once again.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 16th, 2011 at 09:19:57 AM EST
[ Parent ]


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