rationalskepticism.org

stevecook172001 wrote:

GT2211 wrote:

babel wrote:I think it's normally called a monetary multiplier and is very common in banking ever since the gold standard was abandoned. Since the new bank regulations have come into effect, I think the multiplier has been adjusted so that banks are legally required to hold more cash in reserve than before.
I'm not sure what you suppose can be a solution to the simple fact that there's not enough 'base' around to fund the entire economy?

edit: money multiplier. Dutch doesn't always translate well into English, it seems. http://en.wikipedia.org/wiki/Money_multiplier

There is no money multiplier.

Yes there is. Its mechanism has been laid out in detail here and it t is also thoroughly researched and understood.

See below:

http://en.wikipedia.org/wiki/Money_multiplier

Simply baldly stating you do not believe it to be true in the absence of any attempt to explain why borders, frankly, on the religious in tone and makes you sound like the kind of creationist who would be rightly mocked on a forum such as this. Refute the specifics of the argument, if you can. Otherwise, your blank denial will be rightly dismissed.

The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a
direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons. First, when money is measured as M2, only a small
portion of it is reservable and thus only a small portion is linked to the level of reserve balances the Fed provides through open market operations. Second, except for a brief period in the early 1980s, the Fed has traditionally aimed to control the federal funds rate rather than the quantity of reserves. Third, reserve balances are not identical to required reserves, and the federal funds rate is the interest rate in the market for all reserve balances, not just required reserves. Reserve balances are supplied elastically at the target funds rate. Finally, reservable liabilities fund only a small fraction of bank lending and the evidence suggests that they are not the marginal source of funding, either. All of these points are a reflection of the institutional structure of the U.S. banking system and suggest that the textbook role of money is not operative.

While the institutional facts alone provide compelling support for our view, we also demonstrate empirically that the relationships implied by the money multiplier do not exist in the data for the most liquid and well-capitalized banks.Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks.