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Release of the Kraken: A novel money multiplier equation's debut in 21st century banking

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  • Hanley, Brian P.
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    Abstract

    Historically, the banking multiplier has been in a range of 4 to 100, with 25% to 1% reserve ratios at most layers of the banking system encompassing the majority of its range in recent centuries. Here it is shown that multipliers over 1 000 can occur from a new mechanism in banking. This new multiplier uses a default insurance note to insure an outstanding loan in order to return the value of the insured amount into capital. The economic impact of this invention is calculably greater than the original invention of reserve banking. The consequence of this lending invention is to render the existing money multiplier equations of reserve banking obsolete where it occurs. The equations describing this new multiplier do not converge. Each set of parameters for reserve percentage, nesting depth, etc. creates a unique logarithmic curve rather than approaching a limit. Thus it is necessary to show the behavior of this new equation by numerical methods. Understanding this new multiplier and associated issues is necessary for economic analyses of the Global Financial Crisis. --

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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2012-3
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    File URL: http://econstor.eu/bitstream/10419/55264/1/684019345.pdf
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    Bibliographic Info

    Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

    Volume (Year): 6 (2012)
    Issue (Month): 3 ()
    Pages: 1-25

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    Handle: RePEc:zbw:ifweej:20123

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    Keywords: GFC; global financial crisis; CDS; credit default swaps; AIG; money multiplier; banking multiplier; synthetic capital; loan insurance;

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    1. Steve Ken, 2009. "Bailing out the Titanic with a Thimble," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 39(1), pages 3-24, March.
    2. Robert L. Hetzel, 1991. "Too big to fail : origins, consequences, and outlook," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-15.
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