The Re-establishment of Pegs

The re-establishment of pegs (like during WWII), i.e., after the 1951 Treasury-Reserve Accord, also occurred under William McChesney Martin Jr., when he abandoned the FOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket” [again targeting interest rates and accommodating the banksters and their customers whenever they saw an advantage in expanding loans, thereby usurping the Fed's "open market power"], beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation).

Note: the Continental Illinois bank bailout / rescue, provides a spectacular example of this practice.


The proper volume and rate of growth of our means-of-payment money supply can never be achieved through a policy of accommodation (creeping peg), vis-à-vis following a practice in which the banksters know, will automatically provide them with the volume of additional legal reserves necessary to validate their previous lending practices.


Using a price mechanism as a monetary transmission channel, to ration Fed credit, is non-sense. The rules of a market society do not apply to the rates pegged, charged, or discounted at a penalty rate, by the Reserve banks, or the member banks, on their loans and advances.


The effect of tying open market policy to a fed Funds rate is to supply additional (excessive and costless legal reserves) to the banking system when loan demand increases. Since the member banks (up until reserves became “non-e-bound”), operated without any excess reserves of significance (beginning in 1942), the banks had to acquire additional reserves, to support the expansion of deposits, resulting from their loan expansion.


If they used the Fed Funds bracket (which was typical), the rate was bid up and the Fed responded by putting though buy orders, reserves were increased, and soon a multiple volume of money was created on the basis of any given increase in legal reserves. This combined with the rapidly increasing transaction velocity of demand deposits resulted in a further upward pressure on prices.


This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70's.


The fed cannot control interest rates, even in the short end of the market except temporarily. By attempting to slow the rise in the effective fed funds rate, the fed will pump an excessive volume of legal reserves into the member banks. This will fuel a multiple expansion in the money supply, increase money flows - and generate higher rates of inflation — and higher interest rates, including policy rates.


By using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating and executing monetary policy, the Federal Reserve has always been, esp. c. 1965- inflation's engine.


The money stock (and DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit, R *, or Wicksellian: equilibrium/differential real rates, [or thru a series of temporary stair stepping or cascading pegging of policy rates on “eligible collateral”; or thru "spreads", "floors", "ceilings", "corridors", "brackets", IOeR, or BOJ-yield curve type control, YCC, of JGBs, etc.].


Economists should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.


Interest is the price of loan-funds (a free market clearing rate). The price of money is the reciprocal of the price-level (the FRB_NY trading desk’s bailiwick). Keynes liquidity preference curve (demand for money), is a false doctrine.


The effect of these operations on interest rates (now largely via the remuneration rate), is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the payment's system.


The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves.


The validity of the money multiplier as a predictive device is predicted on the assumption that the commercial banks will immediately expand credit and the money supply (invest in some type of earning asset), if they are supplied with additional excess reserves.


The inconsequential volume of excess reserves held by the member commercial banks during 1942 and Sept. 2008 provides documentary proof that they undoubtedly did.


In other words, without the alternative of remunerating excess reserve balances (which turned non-earning assets into bank earning assets), it's virtually impossible for the CBs to engage in any type of activity involving its own non-bank customers without an alteration in the money stock.


After the introduction of the payment of interest on IBDDs, the CBs obtained higher rates of return by accepting a riskless, policy floating/chasing (when the Fed raised rates), remuneration rate. The remuneration rate “inverted” the short-end segment of the wholesale funding yield curve (destroying money velocity). The 1966 Savings and Loan Credit Crunch (where the term credit crunch originated) was the antecedent and paradigm.


The remuneration of interbank demand deposits, IBDDs, by Bankrupt-u-Bernanke emasculated the FRB-NY’s “open market power”, the power to inject ex-nihilo, and gratis, showering money both exogenously and endogenously, into the payment’s system -- by Simon Potter’s Market Group “trading desk”.


Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-parties is largely unpredictable, so too now is the volume and rate of expansion in the money stock. FOMC policy has now been capriciously undermined by turning excess reserves into bank earning assets.


This is in direct contrast to targeting: *RPDs* using non-borrowed reserves as its operating method (predating Paul Volcker’s October 6, 1979 pronouncement on the *Saturday before Columbus Day*), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.


This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis. What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.


And the whole process is now initiated by the member banks, via proffered bankable opportunities, not by the monetary authorities.

Under the rubric of deregulation, and Congressional acts which implicitly assume that the money stock is self-regulatory, as time passes, the Ph.Ds. on the Fed’s technical staff will know less and less about money.


Bankrupt-u-Bernanke should be in Federal prison for bankrupting Americans. He thought that the GFC, the U.S. recession, was due to a “capital crunch”, and not a “credit crunch”.


LSAPs liquidity channel is non sequitur. Even so, the Federal Government is the largest credit worthy borrower.


The first rule of legal, or complicit reserves and reserve ratios should be to require that all deposit taking, money creating financial institutions, DFIs, have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. There is no reason for differential reserve requirements in the first place.


By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal, fractional, reserves (not prudential), ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" & "reservable liabilities exemption amounts" c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.


Monetary policy should delimit all reserves to balances in their District Reserve bank (IBDDs, like the ECB), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange".


-Michel de Nostradame (the best market timer in history)