Payday for Banks
A horrifying component of the ongoing financial and banking industry scandal – and I call a scandal, not a meltdown or crisis – involves the fact that the Federal Reserve stopped tracking M3 in 2006.
What is M3?
Let us explore, for a moment, the Wikipedia entry on Money Supply.
- M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency.[6]
- M1: Physical currency circulating in the economy + demand deposits (i.e. checking account deposits). This is a measure used by economists trying to quantify the amount of money in circulation. M1 is a very liquid measure of the money supply, as it only contains cash and assets that can also be used for payments.[7]
- M2: M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists also use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 contains cash and assets that can quickly be converted to currency.[8] M2 is a key economic indicator used to forecast inflation.[9]
- M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money commonly used and is used by economists to estimate the entire supply of money within an economy.
My econometrically-challenged mind likes to think of M3 as big money. Really big money. A very smart man who I happen to be married to explained it as such. Imagine having a dollar. You deposit that dollar in a bank. The bank lends out that dollar along with a credit of dollars above and beyond that dollar, because, hey, they’re a bank! They’re good for it. So your dollar + X dollars is loaned to a person or institution who has to pay it back over time. Unless they’re in a sub-prime mortgage and can’t handle the payments. Or for one of hundreds of other reasons. So when that loan comes due, oh noes!, the bank can’t get paid.
But here’s the thing. The bank is really only out the dollar that they have to pay you back. That other money- those X dollars – was just extended credit. Or M3. So boo-hoo, banks are losing money that they never had. At least that’s the way I see it. And my reward for responsible spending and aggressive saving will be watching my past and future tax dollars go to reward these banks with a $700B+ payday. Fantastic.
Although the Fed seems to have started to track M3 again as of August 2008, that doesn’t mean they have any idea how much of those funds are out there. $700B might be way too much, or not even close to enough.
And hearing that some of this payday will go to the pockets of foreign banks and foreign investors makes me vomit a little in my throat.