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RE: [RT] Fw: 11/08 11:44P (BN) BARRON'S: Economic Beat



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Bottomline: the 
over-regulated, non-competitive banks have us by the 
balls.
<FONT color=#0000ff 
size=2> 
They're trading, 
not lending.
<FONT color=#0000ff 
size=2> 
Next to all of 
the dumb banking regulations, maybe a smart one would be to limit trading for 
their own account to a fixed fraction of their loan 
portfolios.
No new loans; no 
additional trading.
Now why didn't 
someone in Washington think about that ?
Answer: no one in 
Washington is THINKING, they're too busy playing POLITICS.
Even Bush spent 
an ENORMOUS amount of time recently stumping for GOP 
candidates.
<FONT color=#0000ff 
size=2> 
<BLOCKQUOTE 
style="PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #0000ff 2px solid">
  <FONT face=Tahoma 
  size=2>-----Original Message-----From: profitok 
  [mailto:profitok@xxxxxxxxxxxxx]Sent: Saturday, November 09, 2002 
  6:16 PMTo: realtraders@xxxxxxxxxxxxxxxCc: 
  wheelsinthesky@xxxxxxxxxxxxxxxSubject: [RT] Fw: 11/08 11:44P (BN) 
  BARRON'S: Economic Beat
   
  
   
  Sent: Friday, November 08, 2002 11:55 PM
  Subject: 11/08 11:44P (BN) BARRON'S: Economic Beat
  
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">11/08 
  11:44P (BN) BARRON'S: Economic Beat
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Story 
  7626 (I/REA, I/TEL, G/FED, G/USG, P/1115, N/BRN, N/DJN, 
  N/DJWI...)
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Al's Investments Or Malinvestments? 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  By Gene Epstein 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Libertarian Rep. Ron Paul of Texas, 
  who happens to know more economics than 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">most 
  economists, tells the story of an encounter with Alan Greenspan that is 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">filled 
  with irony. 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Paul asked the Fed chairman to sign 
  his copy of an essay called "Gold and 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Economic 
  Freedom," which Greenspan wrote for the July 1966 issue of 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">philosopher 
  Ayn Rand's periodical, "The Objectivist." Beginning with the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">feisty 
  words, "An almost hysterical antagonism toward the gold standard . . . 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">unites 
  statists of all persuasions," the article goes on to express antagonism 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">toward 
  the Federal Reserve, which in the author's opinion helps foster credit 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">bubbles 
  via the creation of cheap money. By contrast, argues the 40-year-old 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">enfant 
  terrible, the far more preferable system of "fully free banking . . . 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">and 
  [a] fully consistent gold standard" would prevent bubbles from occurring. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  While Greenspan obligingly signed his 
  name to the radical document, Ron Paul 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">asked, 
  "Would you like to add a disclaimer?" 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  To which affable Al responded, "No, I 
  reread this article recently -- and I 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">wouldn't 
  change a single word." (Paul recalls that this exchange probably 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">occurred 
  early last year.) 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  So maybe Greenspan should call his 
  memoirs, "A Subversive in Washington: How 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">I Kept 
  My Mouth Shut, While Enjoying Every Minute." 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Nary a scintilla of the idea that 
  cheap money can foster credit bubbles 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">crept 
  into Wednesday's Federal Open Market Committee announcement that the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">targeted 
  interest rate on federal funds was being cut by another half 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">percentage 
  point, to 1.25%. The last time money came that cheap was in 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">February 
  1955, when the fed-funds rate averaged 1.29%. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  But since prices were weakening in 
  early 1955 and are rising today, the real 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">-- 
  i.e., inflation-adjusted -- fed-funds rate is far lower than it was then. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">In 
  February 1955, the consumer-price index was 0.7% below February 1954, which 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">meant 
  a real fed-funds rate of nearly 2.0%; while based on the most recent 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">figure, 
  the CPI is now 1.5% higher than a year ago, which puts real fed funds 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">at 
  negative 0.25%. (A negative reading of as much as 2.0% on real fed funds 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">was 
  not uncommon in the inflationary years of the late 1970s.) 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  The FOMC announcement pointed to the 
  same "heightened geopolitical risks" 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">from 
  September's statement as a principal reason why the "economy [is] 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">work[ing] 
  its way through this current soft spot." The only surprise in the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">statement 
  was the shift to neutral in the usual "balance of risks" between the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Scylla 
  of higher inflation vs. the Charybdis of slower economic growth. After 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">many 
  months of fearing the latter more than the former, the now places even 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">odds 
  on both, a gesture which put the markets on notice that the economy's 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">soft 
  spot has to soften up a lot more before another rate cut will be 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">considered. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  To use the popular metaphor, chairman 
  Greenspan decided to buy an extra 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">"insurance 
  policy" on the economic expansion, one that will pay even if those 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">heightened 
  geopolitical risks morph into a geopolitical war with Iraq. (The 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">odds 
  of war may have been boosted last Tuesday by the Republicans' triumph at 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  polls.) But the author of "Gold and Economic Freedom" must know that what 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">he's 
  really doing is better described as shooting another dose of uppers into 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  economic corpus, in the hope that the drug will energize the patient 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">without 
  bringing on the kind of sustained mania that leads to a crash. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  The economic bust will happen sooner 
  or later, of course, but later looks 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">more 
  likely than sooner. Despite the easy credit, most of the malinvestment 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">that 
  built up in the boom of the 'Nineties is probably no longer with us. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">True, 
  the shakeout in the telecom industry is barely in mid-passage, and 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">cheaper 
  money can only delay the process by which resources tied up in that 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">sector 
  can be freed up for more productive use. 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  But no recovery from a bust is ever 
  accompanied by a thorough-enough 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">cleansing 
  of unsustainable projects from the previous boom. The telecom 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">industry 
  may be plagued with overcapacity for years. But at least no one is 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">proposing 
  to reliquify the dot-coms; the Nasdaq is still more than 70% down 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">from 
  its high; and capital investment by the telecoms has collapsed. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Cheap money is also turbocharging the 
  housing market. But the commonly cited 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">price 
  bubble in housing is still more myth than reality, leaving aside the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">question 
  of bubble conditions in local areas. For one thing, a good part of 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  price rise can be accounted for by the garden-variety factor of rising 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">real 
  wages and salaries. The tendency to compare today with the late 1970s, 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">when 
  prices were rising by about as much, just doesn't hold up, mainly because 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">this 
  key component of income was barely increasing during that period. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Of course, rising home prices are also 
  explained by low mortgage interest 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">rates. 
  So let's say the interest rate on 30-year mortgages, currently around 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">6.25%, 
  jumps two full percentage points, to 8.25%. That would reduce the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">volume 
  of home sales by about 10%. Compare that, for the likely price effect, 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">with 
  the 50% plunge in sales during early 1980s, which was enough to stop the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">median 
  price from rising further, but not enough to make it fall. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  And on the supply side, we can hardly 
  talk of huge unsold inventories. There 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">is 
  currently a four-months' supply of unsold homes, close to the record low 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">touched 
  in 1999, and about half as great as in 1979. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes"> 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  -- Thursday, the open market trading 
  desk at the New York Fed initiated the 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">new 
  target of 1.25% on federal funds -- a highly imperfect process, given the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">wide 
  fluctuations around the targeted rate. 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  The fed-funds rate refers to the 
  interest rate one bank charges another for 

  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  overnight loan of immediately available money held at the Federal Reserve. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Aside 
  from vault cash, federal funds are the only kind of coin-of-the-realm 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">deemed 
  acceptable as reserves against a bank's checkable deposits. And as the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">textbooks 
  will tell you, the reserve ratio sets the stage for the featured 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">role 
  played by the money multiplier in the money-creation drama. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  But that script gets the story all 
  wrong. There just ain't no money 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">multiplier 
  -- not now, and almost certainly never ever. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  When I first penned this heresy in 
  this space on Oct. 21, I left all kinds 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">of 
  wrong impressions. Am I saying that the money supply never grows, or worse, 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">that 
  the sine qua non of money growth is not the central bank? Hardly. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">According 
  to the MM-version of the way things work, the central bank first 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">pumps 
  $1 billion into the banking system through the purchase of $1 billion 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">worth 
  of Treasury securities. And then, given the current reserve requirement 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">of 
  10%, $10 billion worth of money is eventually created; the first bank lends 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">out 
  90% of that $10 billion, which ends up in second bank, which lends 90% of 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">that 
  90%, which ends up in a third bank, and so on. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  But this little fairy-tale puts the 
  reserve requirement cart before the 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">money-creation 
  horse. The banks are the ones that first create the money, 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">mainly 
  by issuing lines of credit in the form of checkable deposits to their 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">borrowing 
  customers. And only then does the Trading Desk underwrite those 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">commitments 
  by pumping fed funds into the system. The money supply expands as 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  banks' demand for fed funds naturally increases. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  If the central bank did pump that 
  extra $1 billion of fed funds into a 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">bank's 
  account, the rules under the lagged reserve system would forbid that 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">bank 
  from using any part of it as reserves against future deposits. Any 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">deposits 
  created right now will require reserve balances about a month from 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">now. 
  And since reserves earn no interest, no bank will squirrel those funds 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">away 
  to meet future reserve requirements. 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  For example, right now the banks must 
  maintain adequate reserves against 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">deposits 
  held in the two-week "computation period" ended October 14. This 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">current 
  "maintenance period" began October 31 and will end November 13. And 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">you 
  can rest assured the Trading Desk will issue adequate fed funds to cover 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">those 
  commitments, while trying to keep the overnight borrowing rate at 1 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">1/4%. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  The lagged reserve method makes it 
  virtually impossible for the money 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">multiplier 
  to operate. And now comes the killer point: In February 1984, the 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Federal 
  Reserve replaced lagged accounting with a version of concurrent 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">accounting, 
  which was again replaced with lagged accounting July 1998. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Under that system, each maintenance 
  period would begin just two days after 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  computation period. And early on, at least, the Fed actually tried to make 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">the 
  money multiplier work. But the experiment failed for a simple reason. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  Banks had their own timetable for 
  making loans to customers, and a sudden 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">injection 
  of fed funds was not enough make them change course. 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  --- 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  E-mail: gene.epstein@xxxxxxxxxxx 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  --- 
  
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  For Barron's subscription information 
  call 1-800-BARRONS ext. 685 or inquire 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">online 
  at http://www.barronsmag.com/reader.html. 
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  (END) DOW JONES NEWS<SPAN 
  style="mso-spacerun: yes">  
  11-08-02
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt"><SPAN 
  style="mso-spacerun: yes">  11:44 
  PM
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">Additional 
  Codes ( N/CBK, N/DJPF, N/DJSS, N/DJWB, N/ECO, N/EDC, 
  N/EMJ,
  <FONT face=Arial color=black 
  size=2><SPAN 
  style="FONT-SIZE: 10pt; FONT-FAMILY: Arial; mso-bidi-font-size: 12.0pt">N/FIN, 
  N/STK, M/FIN, M/NND, M/TPX, R/NME, R/US, 
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