Part 6: Ed Dolan's Econ Blog » Whatever Became of the Money Multiplier?

I like this article: EconoMonitor : Ed Dolan's Econ Blog » Whatever Became of the Money Multiplier?. It doesn't lean quite enough in the direction I've been suggesting, but it leave some room for a wide range of semantical understanding.

I believe I've been discussing the Multiplier as a theory that the Fed could still choose to exercise while others have been simply discussing the current practical lack of its application. With that, I'm fine provided it's understood that the "tool" remains there: exists.

EconoMonitor : Ed Dolan's Econ Blog » Whatever Became of the Money Multiplier?I wouldn't call it "dead" unless one wants to term it "resurrected" if and when it's more obviously used in the manner Ed Dolan and the others described that it used to be. I just think of it as a tool that either exists or doesn't. It's still there. One might rightly call it window dressing since the Fed keeps the requirement- and penalty-language links to the regulations "alive" on the Fed's site.

I still view it as a constraint to a small degree though after the fact and certainly not to the exclusion of the other types of "money" Ed and others have mentioned.

One earns money and then pays the tax. If one spends it all before that, the penalties ensue. If a bank under the Multiplier were to lend and then the Fed were to check for the reserves without the Fed having either lent them to the bank or expanded the reserves where the total system-wide reserves had already been reached and that bank were to come up short, the Fed could legally penalize that bank under the current rules. It's discretionary. The IRS can settle too.

Of course, it's a chummy club. The Fed may have issued a statement internal to the banks (confidential) that states that the Fed will not again apply the Multiplier.

It's hard to be a fan of their system. I'm not one. It's way too elitist.

Anyway, I think I've exhausted my point. I stand by it even while I understand how others don't view things exactly how I'm seeing them.

I don't think the discussion has done any harm. I believe I read in Dolan's article some deference for at least slightly dissenting opinions. He doesn't come off as smug at all. He doesn't come off as viewing those who are unfamiliar with the ideas as necessarily stupid or the like.


Update: September 27, 2013:

"There's a number of tools still at the Fed's disposal," including lowering the interest on excess reserves, he ["Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, a voter on policy next year"] said. The symbolism of such a move "could be relatively powerful" because it would provide evidence of the central bank's resolve to support the economy, he said.

Source: Kocherlakota Says Fed Must Do 'Whatever It Takes' for Growth

That's what I've been talking about. That would be applying the Money Multiplier in addition to forward guidance. He doesn't know what he's talking about? I think he does.

Update: Sept. 28, 2013:

To be clear, Kocherlakota said lower the rate paid on excess reserves. I have said charge interest on excess reserves. They'd find credit-worthy borrowers.

The Fed has been pushing on a string. I'm talking about using a rod.

The tool is there.

It's not my first choice by any means. As I've said, I'm not a fan of the Federal Reserve System.

Update: October 14, 2013:

I found this interesting: "Money multipliers, real and imagined"

It appears to me that the way Scott Sumner has employed the term "stable" is akin to what I've been saying here in this series. It is, of course, a complicated subject for among other reasons, that it is loaded with jargon subject to semantical misunderstandings.

So, I don't intend to be putting usages in Scott's mouth. I'm only saying how the use of the term "stable" there strikes me vis-a-vis what I've been saying about the conscious lack of the practical application of the multiplier as opposed to it being dead, which is so finite, in secular terms anyway.

Part 1: My Questions to L. Randall Wray on the Money Multiplier.

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  • Tom Usher

    About Tom Usher

    Employment: 2008 - present, website developer and writer. 2015 - present, insurance broker. Education: Arizona State University, Bachelor of Science in Political Science. City University of Seattle, graduate studies in Public Administration. Volunteerism: 2007 - present, president of the Real Liberal Christian Church and Christian Commons Project.
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