THE FEDERAL RESERVE AND EUROSYSTEM´S BALANCE SHEET POLICIES DURING THE FINANCIAL CRISIS: A COMPARATIVE ANALYSIS

The balance sheet developments of the Federal Reserve System have received increased attention during recent events. The Fed has expanded its balance sheet and also changed its composition in order to support the financial system. As a consequence the average quality of the assets have, on average, deteriorated. In a similar way, the ECB has recently implemented novel balance sheet policies. In this article we compare the balance sheet policies of these two central banks. We assess the differences in policy strategies and deduct consequences concerning the quality of the respective currencies, as well as future directions of monetary policy.Central Bank Balance Sheets, Quality of Money, Balance Sheet Analysis, Monetary Policy, Subprime Crisis

A Critique of the Pure Natural Law Approach to Loan Maturity Mismatching and Fractional Reserve Banking

This article addresses the debate on fractional reserve banking and maturity mismatching. Block and Barnett (2011) as well as Evans (2014) have regarded the distinction between loans and deposits as unclear, especially regarding the contracts’ maturities. Davidson (2015) applying the a priori Title Transfer Theory cannot solve the continuum conundrumsatisfactorily. We show how a free legal system by rule finding judges can settle the continuum problem and other problemsrelating to banking contracts in practice. The very same rule finding offers a new solution in the case of on-demanddeposits with a withdrawal notice. The ethics of loan and deposit contracts can only by fully understood and sortedout by adhering to legal logic, proceedings, and general legal principles

Water Conflicts in Central Asia: Some Recommendations on the Non-Conflictual Use of Water

Central Asian states, where freshwater is a strategic resource, are oriented towards regional conflict rather than cooperation. First, the article analyses the role of the unequal distribution of freshwater that has been generating conflicts in Central Asia in the post-Soviet period. Next, these conflicts are examined. Finally, we provide some recommendations on the non-conflictual use of water

The Federal Reserve System and Eurosystem's Balance Sheet Policies During the Financial Crisis: A Comparative Analysis

The balance sheet developments of the Federal Reserve System have received increased attention during recent events. The Fed has expanded its balance sheet and also changed its composition in order to support the financial system. As a consequence the average quality of the assets have, on average, deteriorated. In a similar way, the ECB has recently implemented novel balance sheet policies. In this article we compare the balance sheet policies of these two central banks. We assess the differences in policy strategies and deduct consequences concerning the quality of the respective currencies, as well as future directions of monetary policy

The Legitimacy of Loan Maturity Mismatching: A Risky, But Not Fraudulent, Undertaking

Barnett and Block (2008) attack the heart of modern banking by claiming that the practice of borrowing short and lending long is illicit. While their claim of illegitimacy concerning fractional reserve banking can be defended, their justification lacks substance. Their claim is herein strengthened by a legal analysis of deposits and loans based on Huerta de Soto (2006). A combined legal and economic analysis shows that while lending deposits can be regarded as illicit, the maturity mismatching of loans is legitimate contrary to Barnett and Block's claim. No over-issuance of property rights is involved with this practice once the distinction between present and future goods is taken into account. However, while the practice is not illicit per se, it is greatly assisted and developed through the presence of a fractional reserve banking system, and can sometimes breed detrimental effects

The Legitimacy of Loan Maturity Mismatching: A Risky, But Not Fraudulent, Undertaking

Barnett and Block (2008) attack the heart of modern banking by claiming that the practice of borrowing short and lending long is illicit. While their claim of illegitimacy concerning fractional reserve banking can be defended, their justification lacks substance. Their claim is herein strengthened by a legal analysis of deposits and loans based on Huerta de Soto (2006). A combined legal and economic analysis shows that while lending deposits can be regarded as illicit, the maturity mismatching of loans is legitimate contrary to Barnett and Block's claim. No over-issuance of property rights is involved with this practice once the distinction between present and future goods is taken into account. However, while the practice is not illicit per se, it is greatly assisted and developed through the presence of a fractional reserve banking system, and can sometimes breed detrimental effects

The Term Structure of Savings, the Yield Curve, and Maturity Mismatching

Recognizing different types of savings allows for a more fruitful analysis of the business cycle. Sustainable investment activities must be financed by an equivalent amount of savings, both in length of availability and quantity. Upward sloping yield curves are a feature of the unhampered loanable funds market. Interest rates differ along this curve depending on the investment community’s demand for funds. While free market maturity mismatching can be successful and advance intermediation, the existence of either a central bank or a fractional reserve banking system skew the yield curve, resulting in malinvestment fueled boom-bust cycles. Credit expansion alone fails to explain the full extent of these cycles. Additional causes of the business cycle are found via excessive maturity mistmatched borrowing driven by three banking sector interventions: credit expansion, the provision of a lender of last resort, and government bailout guarantees

The Continuing Continuum Problem and Future Goods

Barnett and Block (2011) argue that one cannot distinguish between deposits and loans due to the continuum problem of maturities and because future goods do not exist – both essential characteristics that distinguish deposit from loan contracts. In a similar way but leading to opposite conclusions, Bagus and Howden (forthcoming) maintains that both maturity mismatching and fractional reserve banking are ethically justified as deposit and loan contracts are equivalent. We argue herein that the economic and legal differences between genuine deposit and loan contracts are clear. This implies different legal obligations for deposit and loan contracts, a necessary step in assessing the ethics of both fractional reserve banking and maturity mismatching. While the former is economically, legally, and perhaps most importantly ethically problematic, there are no such troubles with the latter

The Economic and Legal Significance of “Full” Deposit Availability

Bank deposits have two characteristics: they are available on demand and at par value. Deposit redemptions face, at least given current technology, a lag between when they are requested and when they are delivered. This fact leads some to argue that as a deposit is not fully available, all deposits are, in fact, loans and that the legal obligation of the bank changes. We argue that this lag does not nullify the original economic intent of the deposit, and hence, does not alter the legal obligations that a depository faces. Deposits must be held safely to ensure that the depositor´s money will be available when an unforeseen event occurs

Central Bank Insolvency: Causes, Effects and Remedies

This article analyzes the possibility and consequences of central bank insolvency. Sovereign insolvency may indirectly cause or aggravate problems leading to central bank insolvency. Sovereigns have a bailout guarantee, either implicitly via loans from major central banks or the IMF, or explicitly, as is the case in the Eurozone via the European Stability Mechanism. Exchange rate stability through these bail-out guarantees allows for a greater amount of foreign-denominated debt accumulation than otherwise would prove prudent, or profitable. In the event of a crisis, the currency mismatch may be problematic for a central bank trying to support its banking system. Lacking the ability to supply foreign currency in the absence of an international bailout, central banks may face insolvency as they try to support an economy indebted in foreign currency