Iraq agrees to destroy missiles

[KrazyHorse]

Actually, Spiffor, if I had a choice, I would declare war on France, Germany , Austria and Belgium. Never have I had such anger for other countries as I do for these countries. Saddam is a small menance compared to Chirac and crew.

This is going to go onto my notepad along with your comments on interest rates.

[DuncanK]

frogger!

[Ned]

Originally posted by Frogger

Actually, Spiffor, if I had a choice, I would declare war on France, Germany , Austria and Belgium. Never have I had such anger for other countries as I do for these countries. Saddam is a small menance compared to Chirac and crew.

This is going to go onto my notepad along with your comments on interest rates.

Yeah, go ahead frogger. It took awhile, but the Fed finally did lower interest rates. But, but they time they did it, it was too late.

The last time I checked, several months ago now, corporate debt still was falling even though interest rates were a 40-year lows. This indicates that interest real rates still were too high.

[KrazyHorse]

To 0%? News to me, sweetie...

[DuncanK]

I don't think Ned is out of line for accusing Greenspan of being too tight money.

[Ned]

Originally posted by Frogger
To 0%? News to me, sweetie...

As I said, the way to do this is to pay interest on the reserves. Nominal rates can stay where they are.

[KrazyHorse]

Neither do I. Actually I have no opinion on the matter. If only he'd limited himself to wishing the interest rates below half a percent. Or 0.1%. Or 0.01%. Or anything greater than 0%...

[KrazyHorse]

As I said, the way to do this is to pay interest on the reserves. Nominal rates can stay where they are.

?

Pay interest on what reserves?

[DuncanK]

Banks have to keep reserve cash. Ten percent of their outstanding loans.

Now Ned, what are you on about?

[KrazyHorse]

Have the fed pay interest to the banks or have the banks pay interest to the fed?

One would actually tighten credit, the other would rightfully be decried as extortion.

[DuncanK]

sorry, i made a mistake the reserve requirement is a % of deposits not loans.

[DuncanK]

Ned, are you talking about changing the reserve requirement?

[Ned]

Frogger, members of the Fed have to keep a certain percentage of their short-term deposits on reserve at the Fed. I believe it is 10%. At the end of the day, members who are short borrow from those who have excess reserves. The interest rate they borrow at is the Federal Funds rate, which is now, I believe, 1.25 %. This is the rate the Fed effectively set when they set the discount rate. This rate also effectively sets all other short-term loan rates, such as the prime rate.

For practical reasons, one cannot lower the Federal Funds nominal rates to zero or below. But if the Fed were to now begin paying interest on its reserve deposits, for example, 1%, the effective nominal Federal Funds rate would now be .25. But, by paying interest on the reserves, reserves would grow by at least rate of interest. The growth in reserves has a strong multiplier effect that will cause a growth in the money supply and thereby cause a reduction in real interest rates even while nominal rates remained unchanged. This is important because we are in a situation like Japan where nominal interest rates are very low, but real rates remain high due to deflation.

[DuncanK]

Ned,

You want to pay banks to keep excess reserves? Do you see any problem there? Is that going to increase the money supply?

[KrazyHorse]

For practical reasons, one cannot lower the Federal Funds nominal rates to zero or below. But if the Fed were to now begin paying interest on its reserve deposits, for example, 1%, the effective nominal Federal Funds rate would now be .25. But, by paying interest on the reserves, reserves would grow by at least rate of interest. The growth in reserves has a strong multiplier effect that will cause a growth in the money supply and thereby cause a reduction in real interest rates even while nominal rates remained unchanged. This is important because we are in a situation like Japan where nominal interest rates are very low, but real rates remain high due to deflation.

Your plan would decrease the credit supply. Think it through please. Banks now have an incentive to keep more money locked up.