Sunday, August 1, 2010

If William Shakespeare Ran the Fed

As I was studying for my epic economics final, I came across this lovely article "highlight" in my textbook. Naturally, I decided to transcribe it so all could bask in the glory. Enjoy.

"Suppose William Shakespeare gave up his job as a playwright to become the chair of the Federal Reserve System. In all likelihood, both the principles and practices of the FED and banking systems would be dramatically different.

Imagine Shakespeare writing his first position paper. His instruction to all banks would probably begin with: "Neither a borrower or a lender be, for loan oft loses both itself and friend and borrowing dulleth the edge of husbandry." Doesn't leave banks much room for creating loans, does it?

.....(blah blah blah, a bunch of math/formula stuff).....

With a reserve requirement of 100%, the bank has no excess reserves. It can make no loans. Without the ability to make loans on the strengths of its deposits, the banking system's money creation process grinds to a halt. And that's precisely what Shakespeare intended.

Shakespeare's 100% reserve requirement idea would probably not be the most ppular idea to hit the banking community....WHat would a Shakespere-run FED advise? Probably that would-be-borrowers should rely on their own savings, because using other people's money--borrowing from banks--"dulleth the edge of husbandry." Does such a FED option sound reasonable to you?

And even if most business people are prudent, regardless of whose money is involved, borrowing can end up being riskier than imagined. Shakespeare tells the story about Antonio, a Venetian merchant, who borrowed 3,000 ducats for 3 months from the moneylender Shylock. Unable to repay the loan because his own business ventures went awry--4 laden ships were lost at sea--Antonio would have forfeited his life were it not for a prejudicial court that, violating the spirit of the loan contract, ruled in his favor against Shylock....

...Shakespeare's FED presented the trade-off: monetary stability versus monetary creation--or in real terms, less GDP but less fluctuation in GDP."

The end.

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