Federal Reserve Open Market Actions - What is the target? the impact?

By
Mortgage and Lending

The Federal Reserve determines and carries out monetary policy to promote goals of high employment, sustainable growth, and stable prices. The Reserve tightens monetary policy to curb inflation. It loosens monetary policy to ease unemployment.

There are three basic tools that the Reserve uses to implement monetary policy. Open market operations, discount window operations, and establishing banking reserve requirements.

Open-Market Operations are the purchase and sale of government securities issued by the Treasury Department and sold by securities dealers. It is called Open Market because these purchases are made on the open market from approved securities dealers. Purchasing the securities infuses cash into the banking system by putting the cash into the dealers' own depository banks.

The reserves of these banks are increased which enables them to lend more to consumers or other banks through the federal funds accounts.

The use of open market operations - buying more securities to infuse cash or selling more securities to limit cash - has as the present goal targeting the Federal Funds interest rate. That has not always been the goal. In fact open market operations has not always been the primary tool for monetary policy. It has evolved into its present role since the Depression, focusing at times on the money supply and at times on the Federal Funds Rate.

The primary target now seems to be just bare liquidity.

Have the bank losses from foreclosures, securities, derivatives, credit default swaps, dropped the bank reserves so low as to require these hundreds of billions of dollars just to keep the banking system at its 10% reserve requirement?

Is the Federal Reserve infusing massive amounts of money, by buying securities, simply replacing balance sheet capital that has been lost?

Who has the money that has been lost?

If a home is bought with a loan $100,000 and is foreclosed and sold at $80,000, the home owner has lost a home and the bank has lost $20,000. But has the money supply fallen by $20,000?

The bank has lost $20,000 capital, and therefore cannot make $200,000 in new loans.

Is this the problem that the cash infusion is fighting?

Are there other issues?

In normal times the Federal Reserve uses open market operations to offset normal fluctuations in money supply, technical adjustments to allow for moderate growth and to counter temporary supply fluctuations caused by the normal conduct of business at a national level.

At times the Federal Reserve decides to act to fight unemployment or inflation. To do this the Reserve will increase or decrease open market purchases more than needed for daily technical correction.

The recent infusions though go beyond technical adjustments or even inflation or employment targets.

What is the target? What is the future impact? Have we permanently increased the money supply? Who has the lost money? Will the Federal Reserve need to counter this current cash infusion later with an equally restrictive policy?

Who might know the answers to these questions?

 

 

Richard Smith
American Acceptance Mortgage, Inc
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Tags:
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Rainmaker
30,822
Richard Barbee
Realty Executives Assoc - Knoxville, TN

Great Article Richard.  Good name too!

This is one of the most interesting blogs I've read on ActiveRain.  You did your research and know your stuff.

Great job.  And my answer is that this entire charade has been one huge group-think, irrational, socialist mess!

Oct 25, 2008 12:40 PM #1
Rainmaker
97,703
Mark Eibner
Metro Brokers Realty Oasis-BrokerIPTV - Parker, CO
CRS, ePro,GRI

Richard- the Fed is a scam, kill the Fed,  Based on fractional reserve central banking a whole hell of a lot more than 20K is lost...the Debt as Money scam is coming to an end.  No real Money was LOST and the bank acquired an hard asset.   Take an afternoon and be educated.  Your statements are only partially true, but based on a foundation of decent....it's wrong.

http://www.realestatezealot.com/blog/2008/10/greenspan.html

 

 

Oct 25, 2008 12:59 PM #2
Rainmaker
207,718
Richard Smith
Chattanooga, TN
FHA VA Rural Development in TN GA

Richard,

Thanks for the comment. I am far from informed in these issues, and any research that is evident has only left me with more questions.

Richard

Oct 25, 2008 07:30 PM #3
Rainmaker
207,718
Richard Smith
Chattanooga, TN
FHA VA Rural Development in TN GA

Mark,

Thanks for the comment. I watched the video on the blog post you linked.

I also watched the following video from Paul Grignon, listed with several others on You Tube.

http://video.google.com/videosearch?client=firefox-a&rls=org.mozilla:en-US:official&channel=s&hl=en&q=Federal%20Reserve%20Act%20of%201913&um=1&ie=UTF-8&sa=N&tab=wv#q=money%20as%20debt&hl=en&emb=0

Very interesting. This crisis has me studying the workings of money, the Reserve, and the economy. The Internet is a helpful source.

Following the idea of fractional banking - the loss of $20,000 in my example has actually lost the bank $200,000 of lending power, which in this economic theory is actually a loss of $200,000 of real money. The lose of debt equals the loss of money.

Is that the point you are putting forward? Am I understanding this correctly?

Then is the tightening of credit markets is a loss of money supply and creation?

It is a lot to take in.

From Wikipedia

The process of fractional-reserve banking has a cumulative effect of money creation by banks.[4] In short, there are two types of money in a fractional-reserve banking system:[6][7][8]

  1. central bank money (physical currency such as paper, coin, and central bank deposits)
  2. commercial bank money (money created through loans) - sometimes referred to as checkbook money[9]

When a loan is funded with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.

From the Federal Reserve website

For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to "create" money

Richard

 

Oct 25, 2008 07:39 PM #4
Rainmaker
207,718
Richard Smith
Chattanooga, TN
FHA VA Rural Development in TN GA

Mark,

Looking at the Reserve's figures - the total reserves in the banking system has grown in the last year from $42b to $328b. The excess reserves have grown from $1.7b to $281b.

This is surely from the Fed Reserve cash infusions.

Why is this money sitting in the federal reserve accounts?

BTW - Required reserves are listed currently as $46b. Non borrowed reserves over the last year have dropped from $41b to a negative $362b - meaning that in the banking system all the reserves are borrowed from the Federal Reserve. The total borrowings from the Federal Reserve are $691b.

Do not know what all these figures mean, but it seems that there is a fundamental change taking place - a massive effort to sustain the fractional Federal Reserve banking system with Federal Reserve borrowing.

Replacing deposits with borrowings. Are the lost deposits from actual bank losses? And without the Reserve infusions the banks would be totally without reserves?

I wish this was clearer to me.

Richard

Oct 25, 2008 08:59 PM #5
Rainer
23,426
Rick Fitzgerald
AAM Capital - Chattanooga, TN
The MultiFamily Expert

The Federal Reserve has more conspiracies than Kennedy. I'd like to see someone we can trust make a documentary about it.

In your case about the home. Someone profited from the $100,000 sale and then deposited that back into a bank or buried it but it's not gone.

Good post.

Oct 26, 2008 12:01 AM #6
Rainer
23,426
Rick Fitzgerald
AAM Capital - Chattanooga, TN
The MultiFamily Expert

"After months of hearings, debates, votes and amendments, the proposed legislation, with 30 sections, was enacted as the Federal Reserve Act. The House, on December 22, 1913, agreed to the conference report on the Federal Reserve Act by a vote of 298 yeas to 60 nays with 76 not voting. The Senate, on December 23, 1913, agreed to it by a vote of 43 yeas to 25 nays with 27 not voting. The record shows that there were no Democrats voting "nay" in the Senate and only two in the House. The record also shows that almost all of those not voting on the bill had previously declared their intentions and were paired with members of opposite intentions (See v. 51 Cong. Record, pages 1464, 1487-88)."

Wikipedia

Oct 26, 2008 12:32 AM #7
Rainmaker
200,255
William Collins
ERA Queen City Realty - Scotch Plains, NJ
Director of Property Management

Richard,

Thanks for the post. As always thought provoking with interesting commentary.

Oct 26, 2008 03:40 AM #8
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Rainmaker
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Richard Smith

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