I spent a boring TV evening previewing this Paper (pdf) by Jim Cao and Gerhard Illing. Their basic point is that private banks will engage in less liquid investments, when and if they acquire some form of guarantee (implicit or explicit) that central banks will maintain liquidity; the Process inciting greater illiquidity during Times of heavy illiquidity. They obviously do not state what I believe: private banks adopt high Profits profiles under such guarantees, and they themselves incite the stressed high illiquidity risk. It is indication of private bank desires that central banks face repetitively echoed demands for reductions in the intra-bank funds rate to sustain their high Profits Investment posture. This pattern of Funds distribution ensures no idle Bank deposits.
The folly of this posture presumes no needed aggregation of Capital to propel the economy, as Bank Deposits do not expand rapidly; the entire Banking system relying upon imaginary Reserves existent in a central bank. It is at this point where central bank lending policy devolves into a simple expansion of Inflation. There has been no real aggregation of Capital in the form of stored Bank reserves. Central banks, past the point of stored Bank Reserves, might as well be printing Money. Raising of central bank lending rates will provide no impediment to Inflation as long as stored Bank Reserves do not expand. Here is where We find Ourselves today!
I am no Expert in This, or any other area, but I know that when a House is on fire, you don’t douse it with Gasoline. I believe the Banking sector is a special sector, and exterior Rules should be implemented. My Favorite is a legal inhibition of any form of Bonuses being paid for subscription of loans, the logical replacement being Bonuses based only upon subscripted loans which meet their Contractual obligations yearly. This turns the subscription of loans unprofitable if they are unstable. Another idea would be to insist that Twenty percent of all growth of Deposits of any type must be held as Reserves for one calender year past deposit. Some might not understand these Suggestions, but both are directed to the construction of stored Reserves. lgl