[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]
Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.
Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.
So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.
So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.
And then we can get to the role of the Fed’s banking activities.
