Bankrupt you Bernanke III

[flow5]

Money grew at less than a 2 percent rate in the decade ending in 1964. In the nine subsequent years the money supply grew at a rate in excess of 6.5 percent.

The excessive growth in money stemmed from using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating & executing monetary policy. Net changes in Reserve Bank credit (since the Accord) were determined by the policy actions of the Federal Reserve. But William McChesney Martin, Jr. changed his policy: from using a “net free” or “net borrowed” reserve approach (after 13 years), to the Federal Funds "Bracket Racket" c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of using this reserve balance approach as a guide to monetary operations.

In 1965, the operations at the FRB-NY's "trading desk" began to accommodate the commercial bankers. That's when OMOs began to be dictated by the federal funds "bracket racket" (i.e., using interest rates as the monetary transmission mechanism).

The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand increased. Since the member banks had no excess reserves of significance, the banks had to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion.

If they used the Fed Funds bracket (which was typical), the rate was bid up & the Fed responded by putting though buy orders, reserves were increased, & soon a multiple volume of money was created on the basis of any given increase in legal reserves.

This combined with the rapidly increasing transaction velocity of demand deposits (due to financial innovations), resulted in a further upward pressure on prices. This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70's

I.e., Keynes's liquidity preference curve is a false doctrine. Interest is the price of loan-funds & not the price of money. The price of money is represented by the various price indices.

The money supply (& commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru "floors", "ceilings", "corridors", "brackets", or the remuneration rate on excess reserve balances, etc).

[flow5]

J.M.Keynes stated: "as the inflation process proceeds...the process of wealth getting degenerates into a gamble and a lottery"

I.e., the housing bubble, & bubble finance, were the symptoms - not the cause (e.g., cumulative originations of subprime, Alt-A, & second-lien mortgages grew by $4 trillion during 2004-2006).