[A-List] Technical question (Regulation Q interest rate)

[xxxx]

thanks henry.. I extensively used this article in my dissertation. it
provides a very useful information on the historical background of the
crisis...

----- Original Message ----- 
From: "Henry C.K. Liu" <hliu at mindspring.com>
To: "The A-List" <a-list at lists.econ.utah.edu>
Sent: Wednesday, March 31, 2004 7:27 PM
Subject: Re: [A-List] Technical question (Regulation Q interest rate)


> In 1966, for the first time, commercial banks experienced
> a period when the Federal Reserve actively
> used Regulation Q ceiling rates on time deposits as
> a means to restrict the banks’ ability to extend credit.
> Since that time commercial banks have actively
> sought new methods, such as Eurodollar borrowings,
> to obviate the constraint of Q ceilings.
>
>
http://research.stlouisfed.org/publications/review/69/09/Historical_Sep1969.pdf
>
> xxxx wrote:
>
> >yes there was. it was called "a credit crunch of 1966"---the first
> >instability of the postwar era, which included a run off on municipal
bond
> >market..
> >
> >a mild one though....
> >
> >----- Original Message ----- 
> >From: "Henry C.K. Liu" <hliu at mindspring.com>
> >To: "The A-List" <a-list at lists.econ.utah.edu>
> >Sent: Wednesday, March 31, 2004 6:49 PM
> >Subject: Re: [A-List] Technical question (Regulation Q interest rate)
> >
> >
> >
> >
> >>Do you mean the 1987 crisis? I am not aware there was a 1966 crisis.
> >>
> >>The Fed's legislative victory was delivered on the back of a larger
> >>
> >>
> >issue -
> >
> >
> >>the deregulation of finance. In companion legislation, Congress repealed
> >>virtually all of the remaining government limits on interest rates and
> >>regulation on lending that had existed since the New Deal, much as the
> >>enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 in
effect
> >>repealed the Glass-Steagall Act, the long-standing prohibitions on the
> >>mixing of banking with securities or insurance businesses, and thus
> >>permitting "broad banking". The price of money was free at last to seek
> >>
> >>
> >its
> >
> >
> >>"natural" equilibrium in the market place.
> >>
> >>The prime rate rose above 15 percent in early 1980 when the deregulation
> >>legislation reached its final stage. The Democratic Congress voted
> >>overwhelmingly for a package that condemned borrowers to high cost and
> >>favored lenders with high returns, by arguing that the benefit of high
> >>interest on pension accounts justified the high cost of mortgage
payments.
> >>In other words, as Pogo the cartoon character said: "The enemies, they
are
> >>us." The populist Regulation Q, which regulated for several decades
limits
> >>and ceilings on bank and savings-and-loan (S&L) interest, was phased
out.
> >>Banks were allowed to pay interest on checking account - the NOW
accounts,
> >>to lure depositors back from the money markets. S&Ls' traditional
> >>interest-rate advantage was removed, to provide a "level playing field",
> >>forcing them to take the same risk as commercial banks to survive.
> >>
> >>
> >Congress
> >
> >
> >>also lifted restrictions on S&Ls' commercial lending, instead of the
> >>traditional home mortgages, which promptly got the whole industry into
> >>trouble that would soon required an unprecedented government bailout of
> >>depositors with tax money. But the developers who made billions were
> >>
> >>
> >allowed
> >
> >
> >>to keep their profits. State usury laws were unilaterally suspended by
an
> >>act of Congress in a flagrant intrusion on state rights.
> >>
> >>The political coalition of converging powerful interests was evident.
> >>Virulent high inflation had damaged the holders of financial wealth,
> >>including small savers, created by a period of benign low inflation
> >>
> >>
> >earlier,
> >
> >
> >>so that even progressives felt something has to be done to protect the
> >>middle class. The solution was to export inflation to low-labor-cost
areas
> >>around the world, taming domestic inflation with the export of jobs and
> >>
> >>
> >the
> >
> >
> >>domestic inflation devil - US wages. Neo-liberalism was born with the
twin
> >>midwives of sound money and free financial markets, disguising economic
> >>neo-imperialism as market fundamentalism.
> >>
> >>
> >>BANKING BUNKUM
> >>Part 3b: More on the US experience
> >>By Henry C K Liu
> >>Asia Times, November 27 2002
> >>
> >>http://www.atimes.com/atimes/Global_Economy/DK27Dj01.html
> >>
> >>
> >>xxxx wrote:
> >>
> >>
> >>
> >>>Martin Wolfson argues that the 1966 crisis happened because of the
Fed's
> >>>"refusal to raise Regulation Q interest rate ceiling on large
negotiable
> >>>certificates of deposits" Is this refusal a sign of "tight" or "easy"
> >>>monetary policy?
> >>>
> >>>Regulation Q is a limit on time deposits to prevent the growth of money
> >>>supply. So if the Fed did not increase the Q ceiling, it means that
> >>>
> >>>
> >monetary
> >
> >
> >>>policy was not tight. Correct or wrong?
> >>>
> >>>but why do keynesians say that the crisis happened becase of tight
> >>>
> >>>
> >monetary
> >
> >
> >>>policy. do they mean "high interest rates" or "low regulation q
ceiling"?
> >>>
> >>>Any direct response on this is greatly appreciated
> >>>
> >>>3 monetary tools durin a crisis:
> >>>
> >>>1) regulation q ceiling
> >>>2) reserve requirements
> >>>3) discount rate
> >>>
> >>>
> >>>
> >>>******************************************************
> >>>xxxx A. xxxx
> >>>Doctoral Candidate
> >>>Department of Political Science
> >>>Nelson A. Rockefeller College of Public Affairs and Policy
> >>>University at Albany, S.U.N.Y.
> >>>135 Western Avenue, Milne Hall
> >>>Albany, NY 12222
> >>>xxxx at verizon.net
> >>>******************************************************
> >>>"They always say that time changes things, but you actually
> >>>have to change them yourself." -- Andy Warhol
> >>>******************************************************
> >>>
> >>>
> >>>
> >>>
> >>>
> >>>
> >>>
> >>
> >>
> >>
> >
> >
> >
> >
> >
>
>
>
>