15 Responses to “Banking 16: Why target rates vs. money supply”

1. 

   Unoznixon February 9th, 2009 at 12:19 am

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2. 

   Roshibear February 9th, 2009 at 12:19 am

   This has been very informative, thanks for putting out this overview of the banking system. It filled in some gaps in my understanding. However, isn’t this whole finanical crisis due to the FED keeping interest rates artifically low and thereby encouraging just the kind of risky, potentially wealth destorying investment that it was designed to protect us from?

3. 

   i6i85 February 9th, 2009 at 12:19 am

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4. 

   i6i85 February 9th, 2009 at 12:19 am

   Sal, don’t u think that when the target interest rate is consistent, instead of banks immediately ‘loaning’ to projects which prefer low interest (less than 4%), banks will store that money/currency and wait until spring season (when demand for loans are high) and only THEN will they proceed towards lending that money/currency to people with low interest.

5. 

   michaelfresco February 9th, 2009 at 12:19 am

   The FED has an extremely difficult task to forecast the expected return on the projects undertaking by 305 million citizens.

   I believe that a free banking sytem, where there is not a single planning agency (FED) to project the required M1,M2 is a much better system. The current system is doomed to fail every 4 or 5 decades.

   Reference
   For more Google: Econtalk Selgin on Freebanking

6. 

   michaelfresco February 9th, 2009 at 12:19 am

   test

7. 

   HamiDjoukou February 9th, 2009 at 12:19 am

   For me it wasnt clear that the Treasury and the Fed were two different organisations; I assumed they were the same or somehow a department of government.

8. 

   khanacademy February 9th, 2009 at 12:19 am

   They are both actually consistent actions with increasing the money supply. As long as inflation does not become an issue and the total government debt does not become unsustainable, the Treasury could issue more and more debt which essentially gets bought by the Fed with newly printed notes. This is the Fed’s last tool to fight a deflationary spiral.

9. 

   HamiDjoukou February 9th, 2009 at 12:19 am

   Yeah, I was questioning the similar thing in the previous video.

10. 

    sgentry777 February 9th, 2009 at 12:19 am

    Thanks. Extremely helpful.

    In the context of the current crisis, the gov’t appears to be doing contradictory things concurrently–(1) as you explain, BUYING Treasuries in the Open Market in order to ‘lower FF rate’ and thereby INCREASE money supply/liquidity while at same time (2) SELLING Treasuries (borrowing) in order to fund ‘bailouts’ , thereby DECREASING (or mopping up) liquidity. I’m confused.

11. 

    jdrizd2 February 9th, 2009 at 12:19 am

    Assuming the amount of transactions can keep up with the cost of staying in business.

12. 

    khanacademy February 9th, 2009 at 12:19 am

    Just to hit the point home, let’s say that you start with $.99 that you use to buy an apple which you sell for 1.00 (so .01 gross profit or 1% gross margin). You can then use the 1.00 to by another apple and repeat. If you do this 100 times in a year, you will make upwards of $1.00 (since you can reinvest the profit) on a .99 initial investment. That is a 100% return on investment despite only making a 1% margin on each transaction.

13. 

    khanacademy February 9th, 2009 at 12:19 am

    Those percentages aren’t expected returns, they are the funding rates at which the projects would proceed. My point is that by focusing on rates, the “quality” threshold for projects stays constant. Also, low gross/operating margin at a retailer doesn’t mean a low expected return on their investment (I’ll eventually do a playlist on topics like that).

14. 

    acidtrashy February 9th, 2009 at 12:19 am

    I have only understood about half of what I’ve seen from you. But I am better off for it. Thank you.

15. 

    jdrizd2 February 9th, 2009 at 12:19 am

    Just because the expected return on an investment is low doesn’t mean it is risky if it is a necessity, I believe that most supermarkets profit margin is low but they are high necessities. Other businesses are highly risky, i.e. airlines and automakers, yet can persuade banks and government to create loans. Why is there so much socialized baiilout for high risk businesses?