The rationale for targeting interest rates instead of directly having a money supply target.
Duration : 0:11:40
Banking 16: Why target rates vs. money supply
The rationale for targeting interest rates instead of directly having a money supply target.
Duration : 0:11:40
(This is the …
(This is the beginning of my comment).
Sal,
Not only entrepreneurs have estimations and preferences — investors have ones too.
If an investor cannot find an investment that looks good enough for her, she will sit on her money and wait.
You can incorporate this in your drawing by specifying a minimum interest rate on each loanable fund, just as you specified a maximum interest rate on each project.
(Continued).
In a …
(Continued).
In a free market, loanable funds are just like any other product or service: the price (in this case, interest rate) is determined by the supply curve and a demand curve.
(Your model assumes a fixed supply of loanable funds while it should be a CURVE depending on interest rate.)
(Continued).
Now, …
(Continued).
Now, if an investor thinks there is a seasonal (=temporary) lack of good projects, she will NOT lend her money for a risky long-term 3% project, but instead, she will sit and wait for the next planting season.
There is no need for a central banker to step in and bridge the seasonal gaps. The market can do a better job.
yes but maybe 19% …
yes but maybe 19% ROI projects are chinese crappy toys and 3% ROI projects are antidesertification projetcs (very low economic return but very useful for our environment)
i too enjoy playing …
i too enjoy playing on paint. doesnt mean i make videos talking about gold pieces
the whole point of …
the whole point of banks is that they invest the average person’s money for the average person and take a cut for themselves. the point is the saver is not an economist and he does not realize that a project with a 2% yield is a high risk project and not economically sound, so in actually the system is stopping the guy who wants to invest in a project with 2% from making a bad economic decision. if you dont want the goverment deciding what your money should be invested in don’t put it in a bank
Sal, your comments …
Sal, your comments on elastic money supply is the main cause of the mess we are in… Please rethink your arguments… flexible money supply does not work…, Why do you want a goverment bureaucrat to decide if a 2% project should get funded or not?.. if a saver think 2% i enough… then 2% is enough.,. do not let goverment decide it,,, greenspan proved that he couldnt do it. Please read more of mises and rothbard.. i have forced to rate this video as poor, due to information in video.
controlling the …
controlling the money supply by targeting M2 etc might work if we had a truly competitive banking system.
The negative result …
The negative result is that the very good £10,000 p/a wage of 1973, is now a poverty line wage, and savings, since 1973, have very little value. New lines of production are relegated to that which carries no more risk than the likes of call-centres and supermarket checkouts, since they more closely coincide with the government’s demand for the market to match the model. As per Stephen King: You go out broke. But must you go out broke, at almost a decade before a working lifetime has finished.
And let’s not …
And let’s not forget that all these treasuries the Fed has bought will be due with interest. Interest the government will not have. The banks just soaked up the cash. Nobody wants to borrow it. M1 remains the same. The bankers actually take a bunch of it and put it into their personal accounts (AIG). This system requires some serious assumptions.
Another reason for …
Another reason for not targeting M1 is that it depends on people’s willingness to borrow, which isn’t always there. As we can see during much of 2009, even with virtually zero rates, that isn’t getting people borrowing and therefore M1 isn’t increasing as expected.
Isn’t fixing the …
Isn’t fixing the money supply and floating the interest rate what Volcker did in the 80′s?
mortgageartist. com …
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You need to go back …
You need to go back and explain ROE and ROA, expected returns so this is more clear.
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Does money supply …
Does money supply have to do particularly with new projects undertaken, or is that just an example? I thought it was mostly intended ordinary purchases versus money in checking accounts. An increase in checking account balances happens whenever money gets deposited into checking from a source other than another checking account. That can be a new loan, or it can be from CD, money market, etc. For individuals, isn’t that mostly a matter of expectations about paychecks vs spending?
keep them up!!!!
keep them up!!!!
He was talking …
He was talking about the return on the projects, not on bonds. Banking’s always prioritizing the safer projects, so they could get the interest plus the lending back at last.
the reason is …
the reason is because the person who wants to borrow the money will only be willing to borrow at a certain rate…if your project will yield a 30% return on investment then you would be willing to pay 20% in interest where as if you will only receive 5 percent return then you would not be willing to accept any rate of interest above 4 percent because then you would be either breaking even or losing money. it is the assessment of risk by the borrower not the lender in this instance.
i dont understand …
i dont understand why a good project would lend with higher interest than a bad project? shouldnt the bad project lend with higher interest due to its higher risk?
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This has been very …
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?
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