Sunday, April 05, 2009

FRB and liquidity

I know that by measures of the money supply that include money in circulation and on deposit, fractional reserve banking (FRB) increases the money supply. But I've been mucking around with making economic models using javascript, so they run interactively in a web browser (for fun... how sad is that?) and from mucking around with models of FRB it strikes me that on a more limited view of money, one that doesn't double count the notional deposits and the loans they've in part become, what FRB really does is increase liquidity.

And I've been wondering why, for some commentators, liquidity is a good thing when supplied by markets and a bad thing when supplied by institutions.

UPDATE: That's badly put. I've been wondering why for some commentators liquidity is a good thing when provided by (stock) markets and a bad thing when supplied by (banking) markets. I guess there is some kind of argument to be had about regulation and what sort of % reserves regulators should require banks to hold, or indeed whether there should be regulation of this instead of allowing people to decide between higher-interest:higher-risk/lower-reserves deposits and lower-interest:lower-risk/higher-reserves deposits, if that is indeed the way these ratios are formed. Wisdom of lending might also enter into it.

1 comment:

Retardo said...

My impression has been that those on the libertarian right who object to FRB do so not because they know what it is, but because they are cranks.

Hell, they may very well be right, for all I know, but if they are, it's by accident.