Banking 13: Open Market Operations

Tools of the Central Bank to increase the money supply.

Category:

Education

Tags:

• Open
• market
• reserve
• requirement
• money
• supply
• m0
• m1

[dadac123]

thank you,Sal! You made this complex problem so much more easier!

I found I never understood the open market operation before, but after hearing your explanation, the concept become clear in my mind.

And I just can't believe you did it in such a short time video!

I've followed your courses about the banking, and in 2 hours with your classes, I've learned so much, even better than my whole semester in school!

So much thanks that I wanna say to you!

[WilliamNaville]

@SimonEissen The whole FED is a stupid idea...banks that have a central reserve are less applicabel to their mistakes,that plus that they have Insurance means they can go all out and spend all your money...If everybank had there own reserve (wich is not 10%,more like 30%) then you will never get a bank run...meaning banks cant invest more money ...but fuck that

[SimonEissen]

@WilliamNaville

The alternative to a private banking system is one totally controlled by the government. If you live in a country that has no private banking, that gives the government enormous monopoly power and control over the economy. Since there is no way to have government without politics, then you are the ones who are f***d.

[SimonEissen]

@WilliamNaville It does not appear you followed the lesson very closely. The 'Fed' is not a 'private bank', it is owned by the citizens of the US. There are no shares in the Fed traded anywhere. It is autonomous to a degree so that it can stay independent of politics but it is still firmly in the public not the private sector. You do see shares of banks like Citibank, Bank of America and JPMorgan traded and they can be purchased by anyone who has the money, subject to anti-trust laws.

[WilliamNaville]

Lol americans are held hostage by a private bank...you guys are so fucked

[specificquestion]

How 100$ deposited increases the reserve of the nationalized bank?

[SimonEissen]

@SimonEissen I left out that the amount the bank has on deposit with the Fed is also part of it's assets. And banks don't hold on to 'collateral' but will 'liquidate' (sell) it as quickly as they can. Collateral could be a repossessed auto, boat or even a house. Banks want assets that produce income without having to get into another line of business like managing rental property or auto brokerage.

[SimonEissen]

@SimonEissen I see that I didn't answer your whole question. Foreigners, including China, buy US treasuries with dollars. China and other countries that have a trade balance surplus with the US end up with dollars in their banks. Those dollars could be used to buy US made goods and services or to buy our IOU's (treasury notes). Either way, the dollars get transferred from the foreign banks back to the US. Eventually, the treasury note is redeemed with interest so the dollars go out again.

[SimonEissen]

@SimonEissen So to answer your question. The Fed sells treasuries to the Bank of China or whoever that it has 'bought' from the Treasury or from whoever has sold them a treasury bond or note (treasuries get traded up until they mature, they are a commodity). The Bank of China doesn't nor any other bank 'buy' a Treasury bond or note directly from the Treasury. That's the Fed's job as the banker for the Treasury.

[SimonEissen]

@SimonEissen Member banks maintain a 'reserve' account with the Fed that is a % of it's demand deposits and limits how much the bank may have out in loans. The Fed can boost the bank's reserves by 'buying' US treasuries. By increasing the reserve deposits the Fed can increase the lending capacity of it's member banks. That is how money gets 'created' by the Treasury with the Fed. But money is also 'created' any time a bank increases the amount of loans it has out. Money is 'based' on credit.