Thursday, November 5, 2009

The Fed's Explosion of Money

There is a lot of research that I want to do for this blog. Some is reasonablely interesting like looking at the thoughts of capitalist economists and supporters of freedom. Some is like driving nails into your head, e.g., looking at government statistics. Of particular interest to me is the activities of the Fed. The Fed is always important, because it is so important to the economy, unfortunately. It is even more so now, and I have been in their website lately.

Specifically, I wanted to look at the manipulation of bank credit by the Fed. The Fed makes a lot of information available online. Some is very revealing. Other parts are difficult to dig through. I am only in the early phase of my work, but I found something that you might find interesting, and frightening.

I was looking for member bank’s deposit information. I found two such listed entries in a release of weekly data on the Fed’s open market operations page. These two entries were derived in different ways, in spite of being listed with identical titles. They tracked each other, so I don’t think that it is a major issue. They also vary a lot from one week to the next. I haven’t yet figured out why. The Fed does a lot of different things to the member’s deposit accounts, so there are a lot of moving parts. I also figure that over time you can see trends. But what I found is amazing.

I began collecting the data from the two listings beginning with the first week in 2007. Throughout 2007 and most of 2008, the levels of the two listings vary with a band of about $15 B on what I call MD1, with a bottom of say $5 B, and $25 B on MD2, with a lower figure of maybe $8 B (approximations). Then in September 2007, all hell broke loose.

Why is this important? The Member’s Deposits is the primary tool the Fed uses to expand bank credit and thus the money supply. Each bank (I am talking about the large banks) must have 10% of its demand deposits (checking account deposits) in its “reserve” account at the Fed. If it falls short the bank can borrow (from the discount window or from another bank). The Fed can also add or take money away from this account. When it adds, the bank can expand its demand deposits by making more loans. The Fed can also change the percent of deposits required and what constitutes the required deposits. The current practice is one of the loosest that I know of since the Fed was created.

So here we have these important deposits staying fairly level for a year to two. Actually the records accessible online go back into the 90’s. I want to look at it all. Now I say level. Actually when I look closer I expect to see an upward trend. I haven’t looked because what I found just blew everything else away.
Okay. What did I find? Up until mid-September, 2008, the average for MP1 was, say, $8 B, and for MP2 $15 B. By the end of September each was about $100 B, by the end of the year $800 B, today $1 T. There is no limit on bank lending. This isn’t a gentle push. This is a demand that banks loan money, lots of money. They aren’t, not yet, but they will. (I've got an Excell graph. If I figure out how to upload it, I'll put it in. It is the hockey stick!)

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