While you’re at it, why not borrow more money to spend, that’s got to help, right? Has it ever helped?

You Keynesians need to wake up and stop preaching this nonsense. Fractional Reserve Banking is a ponzi scheme, which the bankers win and WE lose.

Read this article which explains it all “What has Government done to our Money?” By Murray Rothbard.

http://mises.org/money.asp

Here’s a quote from the article which debunks the myth that money must be constantly ‘circulating’:

“Economists err if they believe something is wrong when money is not in constant, active “circulation.” Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.” For that money is being held now in wait for possible future exchange–it supplies to its owner, right now, the usefulness of permitting exchanges at any time–present or future–the owner might desire.”

One thing I’d like to add to comments about banks not lending. One other reason they aren’t lending in addition to the fears of default is the fear of future losses in collateral debt obligation (CDOs) and need to have enough money in reserve for this. Recent relaxation of mark-to-market may help somewhat.

Here is how it works with mark-to-market. A bank has a certain amount of money invested in CDOs. The value of these CDOs is counted among the amount of the bank’s capital. CDOs are backed by mortgages, some bad, some good with the majority of mortgages still performing and bringing interest. But with mortgage defaults, the value of CDOs drops as fewer people want to buy them. Mark-to-market requires a bank to value CDOs at today market value, so as soon as the value of CDOs drops, the bank has to write down the losses in paper value and put more money into reserve to compensate. At this point, banks may want to get rid of CDOs, even CDOs it would rather hold to maturity. Since no bank can trust CDOs credit rating, no bank wants to buy them, and their value drops further until the point the market value of a CDO is well below the value of underlying loans. But more losses are still expected. Since the bank doesn’t know how big these losses will be, the bank hoards the money – just in case. I.e. to allow for future losses. It’s possible that the current relaxation of mark-to-market will help with lending.

There is also an issue of panic. Last October some people were withdrawing their deposits and putting them into pillows. So banks need additional money in reserve in case there is run on banks.

Normally, bank keeps about 10% in reserve. I.e. for every $100 it gets in deposits, it keeps $10 and lends the rest. I am not sure about now, but in January major banks kept over 100% in reserve – all the deposits and part of government TARP money just for future losses.

This graph and story is really interesting. It is nice to hear some new terminology used to explain the same thing we all know… the economy is still in the toilet!

Obama’s imminent election was apparent before the selloff — if you were reading fivethirtyeight.com.

The continuous decline was related to the increasingly obvious disastrous 4Q companies were about to have. Indeed, the S&P 500 earnings were negative (in aggregate, not just financials) for the first time EVER.

Also, the money identity is M*V = P*Q — velocity is technically independent of money supply. What’s happening now is that M is ballooning while V is cliff-diving, resulting in *generally* stable prices.

King Picker of Nits,
-Mike J

There may be several reasons we are in the current debacle. One mega-trend might be the fact our economy has been too much service oriented, and not enough manufacturing oriented. Perhaps we have over-valued services to the point the bubble burst?

Perhaps the stock market started a precipitous sell-off once investors started fearing an Obama election and Obama’s campaign promises to significantly raise the capitol gains tax, as well as fears of other tax hikes? Perhaps most of us average Joe’s are saving more and spending only what is necessary in reaction to our 401k’s being decimated?

In terms of banks lending less being a factor, I’d like to weigh in on this a bit. Yes, the amount we lend out is based on Fed regulations and the amount in deposits we have. Theoretically speaking, if people are leaving their money in the bank accounts, banks and credit unions should have more to lend and can therefore lend a hand in stimulating the economy. But, don’t forget, people have lost confidence in the banking system. The trend that we’re seeing is that people are withdrawing their money from the account to take and keep at home. This decreases the amount that banks can lend because they balances aren’t there. But, another problem we’re seeing with the lack of confidence is the fact that the creditworthy borrowers are not the ones looking to take out new loans. We’re seeing an influx of people who have some challenges looking to their banks and credit unions to bail them out. The reality is, banks who’ve already undertaken risky loans are in a position where they have to turn people like that away because the books can’t handle any more risk, nor will the stockholders allow it. Likewise, a bank with bad mortgages and other investments on the books has to keep enough capital to cover any that fall under. That limits them even further on what they can lend.

There’s a lot more that goes into it than banks just not lending. All of these things are tied together and the only way we’re really going to be able to get this big machine moving is to restore consumer confidence.

The economic term for the benefit of spending money in an economy is the “multiplier effect.” My dollar spent today at Mcdonald’s will go to the owner of Mcdonald’s, who then uses it to pay his/her employee, who then goes and buys a new stereo at Wal-mart, which is then used to pay an employee there, which is then used to pay for groceries, which is then used… etc…

Spending is good. That’s why I believe in CUTTING TAXES to stimulate the economy.

But as far as spending goes? If we could get a decent INTEREST RATE on our savings we’d have more money to spend!

I know that banks are only allowed to lend a certain amount, and it’s a function of the reserve requirement (aka reserve ratio) set by the Fed and of the total of their customers’ deposits.

So doesn’t keeping your money in the bank actually allow them to lend more? (And in fact, a multiple many times the amount of your actual deposit?) And don’t these loans provide money to other people who eventually spend it?

In short, is the decrease in velocity really the result of us spending less? Or is the problem simply that the banks aren’t loaning?