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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.

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.

Suggested Citation

  • Hanley, Brian P., 2012. "Release of the Kraken: A novel money multiplier equation's debut in 21st century banking," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-25.
    • Handle: RePEc:zbw:ifweej:20123
    DOI: 10.5018/economics-ejournal.ja.2012-3
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    References listed on IDEAS

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    1. Robert L. Hetzel, 1991. "Too big to fail : origins, consequences, and outlook," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Nov), pages 3-15.
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    Citations

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    Cited by:

    1. Brian P. Hanley, 2020. "Cancellation of principal in banking: Four radical ideas emerge from deep examination of double entry bookkeeping in banking," Papers 2010.10703, arXiv.org, revised Oct 2024.
    2. Brian P. Hanley, 2018. "The Impact of LIBOR Linked Borrowing to Cover Venture Bank Investment Loans Creates a New Systemic Risk," Papers 1809.01987, arXiv.org, revised Dec 2019.
    3. Brian P. Hanley, 2017. "Equity Default Clawback Swaps to Implement Venture Banking," Papers 1707.08078, arXiv.org, revised Nov 2020.
    4. Brian P. Hanley, 2017. "The perverse incentive for insurance instruments that are derivatives: solving the jackpot problem with a clawback lien for default insurance notes," Papers 1711.02600, arXiv.org, revised Dec 2019.

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    More about this item

    Keywords

    GFC; global financial crisis; CDS; credit default swaps; AIG; money multiplier; banking multiplier; synthetic capital; loan insurance;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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