bennet@gymble.UUCP (Tom Bennet) (06/25/85)
>From steiny@idsvax.UUCP (Don Steiny) Sat Jun 22 02:35:33 1985 >Subject: Re: Re: Re: "World Banking Crisis" -- what is it? >Message-ID: <173@idsvax.UUCP> > The banks have to borrow their money from the Federal >Reserve. The interest rates are under the control of the Federal >Reserve, specifically Paul Volker, they have been for many years. Banks which are member of the Federal Reserve System (which includes all large and most medium ones) may borrow money from the Fed at the "discount rate" which the Fed sets, generally below market rates. Most of the money they borrow comes from private lenders in the market place at rates which are determined by the market. That's not to say old Paul doesn't have a lot of power to manipulate the market, but he doesn't "set" those rates. I think there are some limits or restrictions on what banks can borrow from the Fed, but I don't know what they are. >> >> I've heard of interest rates being >> affected by inflation, not the reverse. >> Which economic model? >> >> Brett Fleisch > > The model is called "Keynesian Economics" ... > >...Supposedly, when [money supply] M1 gets >very large, inflation happens. It is the old "printing money >to pay debts" thing. To prevent M1 from getting too large, >the Federal Reserve *increases interest rates*. ... > >pesnta!idsvax!steiny >Don Steiny - Computational Linguistics >109 Torrey Pine Terr. Santa Cruz, Calif. 95060 >(408) 425-0832 > A little trivia: The Fed was founded around the turn of the century, long before Keynes or FDR, based on the Monetaristic theories present then. The idea was that the value of a dollar is equal to the national wealth divided by the total number of dollars, so to prevent inflation, one should try to manage the number of dollars so that it grows at the same rate as the national wealth. A monitarist would say that if interest rates rise, there will be less borrowing, hence less money creation in the banking system, and deflation. This also gives business slowdown and unemployment. If rates decline, the converse. Keynes advocated using deficit spending during recession and surplus taxation during expansion in order to try and even out the business cycle. Inflation is said to be caused by overall demand outstripping overall supply in the upswing, and unemployment caused by overall supply outstripping overall demand in the downswing. By pumping money you increase effective demand and by taxing it away you decrease effective demand, and if you do it all just right, you can smooth out the business cycle and have no inflation or recession. (You notice that this tries to manage demand in the economy, hence the term "supply side economics" which asserts that Keynes misses the effects of taxation on supply, hence the Laffer Curve.) Anyway, the point is that the Fed was never really designed to act along Keynesian theory since it was created long before Keynsianism and does not have power to implement those theories, i.e., to adjust taxes and spending. (This is fine with me; I like democracy, even if it is the reason for Congress being as stupid as it is.) Just what theory, if any, it operates on now is a little hard to tell. -- ------------------------------------------------------------------------------- A balanced diet is important: one must | Tom Bennet @ U of MD Comp Sci Dept occasionally change pizza places. | ..!ihnp4!seismo!umcp-cs!gymble!bennet