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| John - You are correct in your analogy and I do appreciate your honest comments on local banks below.
The only thing I would add to your analogy is that the bank is constricted from making too much money by the Equity Reserve requirement. To help others understand this point, let's say the bank has $10M in Equity and is already $100M bank. They are capitalized at 10%. Lets then say they have real strong loan demand of $10M from various customers and put the loans on the books as an asset and put the money in the customer's account as a liability, they are now a $110M bank, but their capital has remained the same $10M, so they are now down to 9% capital area. One can now understand how the bank is constricted from creating too much money. That is the fractional Reserve Requirement imposed on a bank by bank basis all across the nation.
Thus, on the Macro level, when the Money supply is too great, the FED lowers interest rates to disincentives borrowers from borrowing, or alternatively, when the Money Supply is too small, interest rates should be lowered to have the opposite effect.
Complicating the matter further, though, is when the FED decides not rely on the normal monetary creation system detailed by both posts, and just prints dollars to stimulate the economy. That is a good reason for owning some Gold. I have no clue how they are ever going to unwind that transaction. | |
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Banking, one more time....
