On RRP Pro and Con

Thanks to a comment on the last post, I found The Fed working paper explaining Fed's thinking about overnight reverse repurchases, Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations by Josh Frost, Lorie Logan, Antoine Martin, Patrick McCabe, Fabio Natalucci, and Julie Remache.

(I should have found it on my own, as it's the top paper on the Fed's working paper list.) Cecchetti and Shoenholtz also comment here

My main question was just what "financial stability" concerns the Fed has with RRP, and this paper explains.

Background and recap

A quick recap and background, informed by comments and some helpful emails (thanks): Banks have about $3 Trillion reserves, corresponding to $3 Trillion of securities that the Fed bought. When it's time to raise rates, the Fed plans to just pay higher interest on these reserves. The Fed is worried banks will just say "thank you" and not raise deposit rates. So the Fed is effectively offering money market funds (etc) the opportunity also to invest in interest-paying reserves. If banks don't raise deposit rates, funds will, and try to attract bank deposits. The funds will also try to sell Treasuries, raising those rates.

In a reverse repo, the lender gives the Fed cash (reserves), and the Fed gives the lender securities as collateral. Why reverse repos? A correspondent explains, "The Federal Reserve Act allows the Fed to take deposits only from depository institutions and the U.S. government (including GSEs) and to pay interest only to depository institutions. It would take an act of Congress to allow the Fed to pay interest on accounts held by MMMFs. However, the law allows the Fed to engage in open market transactions in U.S. government securities ... with just about anyone."

Key points: The Fed is still controlling the size of the balance sheet. If the Fed really wanted an ironclad (rocket-powered?) liftoff tool, it would say "Bring us your Treasuries. We will give you interest-paying reserves in return." Then, if bond markets give the Fed $1 trillion of treasuries, the Fed creates an extra $1 trillion of reserves. (Yes, increasing the balance sheet is a tightening move. Welcome to our new world.) If you want to peg a price (interest rate), announcing "do what it takes" quantities is a good idea.  The Fed is not planning to do this. (Yet!)

The Fed is also contemplating caps on the size of the facility, rather than "full allotment." Full allotment is obviously more powerful. One wonders what happens if the Fed says 1%, Deposit rates go up 0.2%, treasury rates go up 0.2%, and the Fed hits the cap.

Important point: every dollar of new reverse-repo "deposits" at the Fed must come from one dollar less bank reserves at the Fed. The money market fund desiring to do an RRP must sell treasuries (or something else), get some reserves, give those reserves to the Fed. The only place those reserves can come from is a bank. So, on net, bank reserves go down $1, and money fund holdings of reserves go up by $1. It's a shift from left pocket to right pocket.

Moreover, the Fed is offering nothing that a money market fund backed by short-term Treasuries and agency securities can offer. The Fed is nothing but a money market fund backed by Treasury and agency securities!

With this background, I find it hard to understand how the ON RRP can have any "financial stability" problems. How can opening up a money market fund invested in Treasuries and Agency securities be dangerous?

The paper

The summary:

... an ON RRP facility could have repercussions for financial stability. These might include beneficial effects arising from the increased availability of safe, short-term assets to investors with cash management needs.

Yes!   Translation 1) Interest-paying narrow banking is great for stability.

However, there may be adverse effects stemming from the possibility that such a facility—particularly if it offers full allotment—could allow a very large, unexpected increase in ON RRP take-up that might enable disruptive flight-to-quality flows during periods of financial stress. In addition, very large usage of an ON RRP facility, particularly if it were permanently in place, would expand the Federal Reserve’s footprint in short-term funding markets and could alter the structure and functioning of those markets in ways that may be difficult to anticipate. Indeed, FOMC policymakers have expressed concerns about a sustained expansion of the Federal Reserve’s role in financial intermediation and the risk that ON RRPs might magnify strains in short-term funding markets during periods of financial stress (FOMC 2014a,b).

2) But maybe it would facilitate a flight to quality or run. 3) Banks won't like it if we take over their business.  4) Our bosses have already opined on this question, so don't expect us to take a strong stand.

The paper starts with point 3)

3.1. Potential effects of a very large ON RRP facility on financial intermediation 

By offering a new form of overnight risk-free investment, an ON RRP facility could attract cash from investors who otherwise might provide funding for private institutions and firms. That is, the facility could expand the Federal Reserve’s role in financial markets by offering investors a new tool to manage liquidity and thus could crowd out some private financing...

I think this is just wrong, and it reflects a classic confusion of the individual and the aggregate. As above, the Fed holds the same number of treasuries. For every dollar of reserves held by money market funds under RRP, banks must hold one dollar less.

Importantly, increased ON RRP take-up does not expand the size of the Federal Reserve’s balance sheet or the volume of private short-term funding required to finance that balance sheet. Instead, such an increase shifts the composition of the Federal Reserve’s liabilities from reserves held by banks to RRPs that can be held by a wider range of institutions. ...

This paragraph, following the last, seems to validate exactly my point.

..., a permanently expanded role for the Federal Reserve in short term funding markets could reshape the financial industry in ways that may be difficult to anticipate and that may prove to be undesirable. For example, a permanent or long-lasting facility that causes very significant crowding out of short-term financing could lead to atrophying of the private infrastructure that supports these markets. Partially in response to some of these concerns, the FOMC has made clear that an ON RRP facility is not intended to be permanent (FOMC 2014c).

These markets failed! The run on repo was central to the financial crisis! This is like the 19th century US deciding that we shouldn't issue Federal currency, as it will displace private banknotes.  The Fed seems to see no problem in displacing or regulating out of existence many other contracts and practices. From a bit later

a recent literature has emphasized the benefits of the public provision of safe short-term assets, such as ON RRPs, in enhancing financial stability by displacing private money-like assets that are prone to runs.

Yes!

Now, the central point 2) financial stability in a run.

3.2. Potential effects of an ON RRP facility on financial stability 

In principle, there are two distinct channels through which the establishment of an ON RRP facility could affect financial stability. First, the availability of an elastically supplied risk-free asset could influence the likelihood that money market investors would shift rapidly from providing private short-term funding to holding only very safe assets. That is, the facility could affect the chance of a widespread run. Second, an ON RRP facility could affect the dynamics and severity of such a shift, once it is under way.... The academic literature does not provide strong guidance regarding the effects of a new risk-free asset on the likelihood of sudden shifts toward safe assets. 

Again, I think this is  wrong, and confuses the individual with the aggregate. Sorry to be blunt. Investors wanting to run can, and did, hold bank accounts, cash, money market funds invested in Treasuries, or short-term treasuries. The aggregate amounts of these are not changing.

It is also quite a curious attitude that the Fed should limit the provision of money-like assets in a run, and insist that prices plummet instead. By and large the Fed does exactly the opposite. The Fed flooded the market with money in the crisis, as it is supposed to do and will do again. (As the paper explains nicely).

If the Fed does not buy assets, the private sector cannot in total sell them.

Mistaking individual flows for aggregate flows is one of the most basic (and easy) errors in thinking about financial markets. Daily, news outlets tell us that "investors fled from stocks to bonds" or vice versa. No they didn't. For every seller there is a buyer.

... once a run is underway, the availability of ON RRPs could allow greater flight-to-quality flows during a run and thus could exacerbate the run and its effects. These effects might be particularly significant with a full-allotment ON RRP facility, but they also could occur with facility that does not offer full allotment if its structure leaves the potential for a sudden and unexpected large increase in take-up.

But for every dollar of MMF take up, there must be a dollar less of bank take up. The paper says the same thing several times.

3.2.2. Effect on the dynamics and severity of a run (once it is underway) 

Absent an ON RRP facility, in the event of a widespread run from private short-term funding markets, the supply of safe assets, such as Treasury securities, would not expand automatically to accommodate increased demand. Hence, without ON RRPs, opportunities to run may be constrained by a limited supply of risk-free assets, and greater demand for those assets is likely to push up their prices and make running more costly.

By contrast, an ON RRP facility that elastically supplies a very safe asset and which has the potential to increase in size by very large amounts would provide no immediate mechanism to slow a run. Hence, some market observers have suggested that such a facility could exacerbate flight-to-quality flows and their repercussions (Wrightson ICAP 2014). 

But the RRP facility does not "elastically supply a safe asset," on net. The size of the balance sheet, and the total amount of reserves, remains fixed. (Except that the Fed will be dramatically expanding the balance sheet in any run anyway, buying up all sorts of dodgy debt, not forcing people to sit on such debt as this argument envisions.)

There is a bit of sense in this:

... Cash that, in the absence of ON RRPs, might have moved quickly to liquid deposits at banks could go instead into a risk-free ON RRP facility through, for example, government MMFs that invest in ON RRPs. The sources of flight-to-quality flows, such as prime MMFs, could experience larger outflows than in past episodes, and the availability of short-term funding for broker-dealer and nonfinancial firms through vehicles like repo and CP could decline more quickly.

It starts by repeating my puzzle. People who want to run, can run to bank accounts. So RRP makes no difference. But (not said), large investors can't get insured deposits. So maybe maybe, an investor holding a prime fund (invested in Lehman debt) would be more likely to run if funds that invested in RRP were available?

But... money market funds that invest in short term treasuries remain available. Treasuries themselves are available (we're talking large institutional investors here not mom and pop.)

Later,

all else equal, increased ON RRP usage implies reduced short-term financing for other borrowers. If, for example, MMFs quickly shift from investing in commercial paper or repo to holding ON RRPs, they would reduce the availability of short-term credit for private firms and institutions. More generally, in contrast to classic central bank liquidity provision, which creates reserves, increased ON RRP take-up diminishes reserves.

I still think this confuses individual portfolio shift for aggregates. For a fund to increase ON RRP, it has to get reserves from somewhere. If it sells an asset to another investor in exchange for the reserves, now that other investor holds the asset. 

We're going around in circles, so I'll stop here.

I heard one very good argument at lunch today: If there is a large RRP facility, and if many large money market funds are half invested in, say, Greek bank debt and half invested in RRP, then the Fed may feel that these funds are "too big to fail" because they're holding so much reserves, and feel the need to bail them out of their Greek debts. That, however, is a cynical colleague at lunch and not in this paper.

In response to these concerns, the Fed is planning to hobble the effort:

... the FOMC has already indicated in its Policy Normalization Principles and Plans that the facility will be phased out when it is no longer needed to help control the FFR, and its temporary nature should mitigate some concerns about impacts on short-term funding markets (FOMC 2014c). In addition, caps on ON RRP usage could be imposed to limit the Federal Reserve’s footprint in short-term funding markets or to contain potentially destabilizing inflows into the facility during periods of financial stress.

I am reminded of the wisdom shown in our foreign policy since the Johnson Administration, of announcing troop withdrawals and all the things we will not do, to allay political fears.

Last thoughts

On a long plane flight yesterday I watched Janet Yellen's testimony in the Senate Banking Committee. I was impressed by her masterful handling of the questions. And I gained a new appreciation of the political constraints the Fed is operating under here. Paying large interest on reserves and opening that up to Wall Street is going to be tough, no matter how great as a matter of economics. I understand the strong desire to label monetary policy "normal."

Here I think the Fed dug itself in a bit of a hole. By trumpeting how great QE was, and how much stimulation it did, the Fed now would find it very hard to say "we've been reading Cochrane (and many others) and the huge balance sheet is doing nothing at all stimulative and is kinda nice for financial stability. So we'll just leave it all outstanding and pay IOR, and call that 'normal'."

Another colleague's brilliant lunch insight. The Fed may have deliberately dug itself in a hole. By buying lots of long-term bonds, the Fed will take big mark to market losses if interest rates rise, and stop remitting money to the Treasury. This is a precommitment not to raise rates. So, a good answer to "how did QE 'work'" is not just by implicitly promising to keep rates low for a long time, but by making it very hard to raise rates!

Run Free Video

This is a talk I gave at the joint Mercatus/Cato "After Dodd-Frank" conference last spring.  It's based on Toward a Run-Free Financial System.

The First Seance from Glimpses of the Next State

I have mentioned in several blog articles Vice-Admiral W. Usborne Moore's books documenting the epoch of Spiritualism at the beginning of the 20th Century: Glimpses of the Next State (1911) and The Voices (1913).  The following passage from the earlier book provides an account of the first seance that he attended.  His circumstances in life allowed him to intensively study what he referred to as Spiritualists and spiritism, resulting with many unforgettable experiences.  The mediumship of Cecil Husk (1847-1920) is also a subject of the two preceding articles.

The first séance I attended was on November 16, 1904, in a private room—a studio in Acacia Gardens, St. John's Wood.  The medium was Cecil Husk, who is nearly blind.  I believe he can see pictures or writing put very close to his face, but for all the ordinary purposes of life he is helpless, and has to be attended out of doors by a member of his family.  The table on this occasion was circular, and between four and five feet in diameter.  There were twelve people sitting at it, including Mr. and Mrs. Husk and our host and hostess; there was also an organist at the organ, screened from view by a heavy curtain.  Among the guests was the materialization medium, F. Craddock.  I sat directly opposite Husk, with a lady on either side of me, both of whom are gifted with psychic powers.  On the table were two cards painted with luminous paint, and contained in aluminum frames with a handle of the same substance at the back, placed face downwards; a cardboard tube, and a light zither, which had two phosphorised spots on the bottom of the sounding-board.  This enabled us to see it when it was elevated above the table.

Husk went into trance.  The room was pitch-dark; the organist played a voluntary.  In a short time lights were seen moving about over the table.  I was only able to see one or two, but my psychic neighbours saw several; and the lady on my right asserted that she could see clouds very faintly illuminated.  Scent was detected around us.  Presently, an old, feeble voice, sounding from somewhere above and to the right of Husk, as I faced him, offered a Latin prayer, ending by the Benedicite.  This, I was told, was Cardinal Newman.  He went round the table blessing the sitters individually; and after one final collective blessing, we heard no more of him.  We then sang "Lead, kindly light" to the accompaniment of the organ.  Spirit voices, bass and tenor, joined in with great vigour from some feet above the medium's head and on both sides of it.  There was, I thought, three of these voices, and they were of very fine quality: the big room was filled with sound.  Then a control called "Uncle" made himself known by voice, going round and greeting each member of the circle.  He spoke in a natural voice, but as if he had a small stone in his mouth.

Suddenly, a loud bass voice, coming from above and to the left of Husk, called out: "God bless you all."  This was the chief control, "John King" whose name in earth-life was Henry Morgan, the famous buccaneer of the time of Charles II.  He greeted everybody in the circle by name except me; I had to be introduced. He told me later that he was three times Governor of Jamaica, and was knighted by Charles II.

John King's advent is always the prelude to the materialisations, but before they took place, the zither (usually known as "the fairy bells") was intelligently played by a spirit whose name, I afterwards learned, is Ebenezer.  It rose from the table and soared above the circle, performing all the time a definite tune.  Its movements could be watched by the phosphorescent spots on its under-side.  It rose to a height of many feet (I judged about ten) above the table, paused there a minute, then came down, and after two or three swirls over our heads, dashed on to the floor.  Apparently it went through the floor, for faint music could be heard underneath; after a short interval this became louder and louder, until a sudden change in the strength of the tune made us aware that it was again in the room.  After a few gyrations it was laid down gently on the table.

Materialisations occupied about three-quarters of an hour.  About fifteen spirits materialized.  Only the face and bust were visible.  These showed by one of the illuminated cards held to the side of the face by the right hand.  The women's faces were swathed in a sort of bandage below the nose.  One sitter, who could not recognize his relative, asked for this to be removed; the card was dropped, and presently the form reappeared without the bandage, when he identified his visitor.  This time the illuminated card was not held by the handle at the back, but by two small fingers which I saw clasping the side of it.  The faces were about two-thirds of life size [an impression].  Three came to me.  They presented themselves over the middle of the table about halfway between the medium and myself.  One saluted three times with his illuminated card.  I did not recognize it at first, but found out afterwards that it was Admiral T., an officer under whom I had served nineteen years before.  The first and third appearances were the same.  I could not identify them, and it was not until some months had elapsed that I discovered it was a stranger trying to influence me to bring him into touch with a member of my family.

A Hindu also appeared, either for me or my left-handed neighbour (Miss Bates).  He sank down through the table; I watched him disappear until only his head was visible; the illuminated card (or "slate," as it is often called) fell over it, and he was gone.

One of Handel's solos was sung in a deep bass voice of great compass and power; the low notes were such as I had never heard before. 

The last event of the materialisations was a series of wafts of air, lasting two or three minutes and closely resembling the effect of a punkah, also loud scratches on the table.  While these scratches were going on the voice of Uncle was heard warning the spirit not to make such a noise.  He was answered by a voice from the centre of the table calling "Chuprao, Chuprao!"  (shut up, shut up!).

Before he departed Uncle came round to each person in the circle, addressing them by name, to say "Good night."  The voice sounded to me as if coming from below my knees.  In all subsequent séances the voices have all appeared to come from one and a half to two feet above the table.  I cannot account for this; it may have something to do with the peculiar build and supports of the round table, which we never used afterwards.

During the evening, Craddock's guide "Sister Amy," was seen by clairvoyants standing behind him.  She had several conversations with her medium and his neighbours.  During the singing of "Abide with me," I heard a very audible "good night," and learned that it came from Amy, who was going away.  She was unable to hear the singing, and the abrupt interruption was quite unintentional.

When this séance was over I was much astonished.  I later attended some séances with Husk that were far more fruitful of phenomena and better in every way; but this was my first, and I felt great surprise that such manifestations should be neglected by scientific men, and that they were not better known to the public.  The singing, materialisations and direct voices all appeared to be quite genuine.  I was not particularly affected by the spiritualistic aspect of the séance, though I saw one or two touching incidents of meeting with departed friends; the thing that disturbed me was the apparent indifference of the outside body of thinking people.

 

Moore usually judged the mediums and psychics on the basis of what he personally witnessed in their presence but sometimes his opinions could be influenced by the testimonials of others.  Moore commented about Cecil Husk’s seances —

I have sat with him over forty times, and have only once suspected fraud.  On that occasion the conditions were bad, and I am by no means sure that my doubts were reasonable.  Even supposing my first ideas were correct, there were good reasons for attributing the trick I thought I had witnessed to unconscious fraud. 

Moore considered it possible for Husk to have a sitting when it might be necessary to "help out" the manifestations.  This possibility was feasible to Moore due to a denialist claim made nineteen years earlier that Husk had been "detected impersonating a spirit."  Moore wrote, "From my own personal knowledge or observation, I cannot say I have ever detected him; but I can conceive a séance where fraud and genuine phenomena both occur."

The predicament of Moore occasionally expressing harsh words for mediums whose seances he'd personally observed to present authentic phenomena reminds readers about the wall of disbelief that can intrude on the progress of an individual engaged in developing a perspective of 'unexplained phenomena.'  Moore learned about bewildering circumstances of mediumship.  It was believed that a perplexing phenomenon known as ‘transfiguration’ could occur during a trance and he commented that he disagreed with the "theory . . . that, when an astral figure is seized, the body of its medium may fly to it and coalesce, thus inducing the captor to believe that he originally laid hold of the medium himself . . ."  Nonetheless, although allegations of fraud were made about English medium Craddock, Moore recounted the incidents "indicative of supernormal knowledge, and the consequent reality of the existence of the familiar spirits, which, necessarily, would imply genuine mediumship on the part of Craddock." 

I have listened to these familiars through twenty-five séances, and I have not been able to detect a false note.  Each has his or her own idiosyncrasy of voice and manner.  Even if the voices of Graem and Red Crow could be assumed, it would be impossible to repeat constantly the voices and special modes of speech of Alder, Sister Amy, Joey Grimaldi, and, least of all, the French girl Cerise. 

Moore wrote that during a 1904 séance "a face showed to me which I did not know" —

I described it in my notes thus: "A firm and well-set face . . . the impression of a military man who had seen active service."  This same face appeared to me twice afterwards in another private room, when Husk was the medium; but I was never able to identify it.  On February 6, 1905, A. accompanied me to a séance in the same room as mentioned above (November 16).  The medium was Craddock.  A face resembling that of my puzzle appeared to me.  I could not identify it.  It then swept swiftly across to A., who instantly called "D.," the name of a messmate who had died in China.  The spirit tapped the slate three times and patted A. on the head.  D. has a thin face and light moustache; his gestures are those of a military man, bright and most active.  I do not see how Craddock could personate this face and figure.  He appeared subsequently at every séance attended by A. or myself, and has communicated through the table at Southsea, once giving an address we wanted, which turned out to be quite correct.

Joseph Grimaldi (Joey) called out "That is Captain D., (the name given by A.), and he has been impressing the Admiral to bring you, Mr. A." 

Moore’s supposition about the possibility that on certain occasions Craddock ‘personated’ the materialized Abdullah, "a Ghazi" (Moslem hero), was addressed in February 1906 by vocally manifesting Joey Grimaldi at a Craddock seance — this communicator described by Moore as "alleged to be the famous clown of the early part of last century."  Grimaldi was quoted by Moore: "It is not the medium, but his astral body, which we use to shape the form of the spirits."

In January 1909 during a seance with the Jonsons in Toledo, Ohio, Moore reported a new appearance of Abdullah.  "Then came an etherealisation of a man in silver robes . . . Grayfeather, who had not previously spoken much, said that this spirit had met me before on the other side of the 'great pond,' and that his name was Abdullah.  I presume this was the Abdullah of Craddock's band.  He salaamed several times, but did not speak."

'Joseph (Joey) Grimaldi' was one of the manifesting entities associated with medium Frederick Foster Craddock.

Liftoff Levers

I read the minutes of the January FOMC meeting. (I was preparing for an interview with WSJ's Mary Kissel) There is a lot more interesting here, and a lot more important, than just when will the Fed raise rates.

Mainstream media missed the interesting debate on "liftoff tools." Maybe the minute the Fed starts talking about "ON RRP" (overnight reverse repurchase agreements) people go to sleep.

Background

Here's the issue.  Can the Fed raise rates? In the old days there were $50 billion of reserves that did not pay interest. The Fed raised rates, so the story goes, by reducing the supply of reserves. Banks needed reserves in proportion to deposits, so they offered higher rates to borrow reserves.

Now, there are about $3 trillion of reserves, far more than banks need, and reserves pay interest. They are investments, equivalent to short-term Treasuries. If the Fed reduce their quantity by anything less than about $2,950 trillion, banks won't start paying or demanding higher interest.  And the Fed is not planning to reduce the supply of reserves at all. It's going to leave them outstanding and pay higher interest on reserves.

But why should that rise transfer to other rates? Suppose you decide that the minimum wage is too low, so you pay your gardener $50 per hour. Your gardener is happy. But that won't raise wages at McDonalds and Walmart to $50. This is what the Fed is worried about -- that it might end up paying interest to banks, but other interest rates don't follow.


In my analysis of this issue, it will work, gardener story aside ("Monetary Policy with Interest on Reserves." Ungated here). Banks should compete for deposits, driving up deposit rates. And deposits should compete with money market funds and Treasuries, driving up those rates. More deeply, central banks already seemed to raise rates more by "open mouth operations" than by actually buying and selling things. They say rates should go up 25 bp, rates rise. That experience is likely to continue.

But "compete" and "banks" don't necessarily sit well in the same sentence anymore, and just why open-mouth operations worked so well is a bit of a mystery. In the past there was some sort of credible threat to do something if rates did not go up.

So you can see why the Fed is worried. What if the Fed announces the long-awaited interest rate rise, the Fed starts paying banks 50 bp on reserves and.. nothing happens. Deposit rates stay at zero, treasury rates stay at zero. Congress notices "the Fed paying big banks billions of dollars to sit on money and not lend it out to needy businesses and households." Mostly foreign big banks by the way. Nightmare scenario for the Fed.

Enter ON RRP. It's a natural idea. If the Fed raises interest on reserves, and banks just eat the profits, then the Fed can counter by offering reserves to other investors. A money market fund, say, earning 0 on treasury bills, would jump at the chance to earn 50 bp on reserves. In turn, as more money funds do this, dumping treasuries, Treasury rates must rise. A rush of depositors to the money market funds forces banks to raise deposit rates and then lending rates.

This is, in a nutshell the ON RRP idea. I'm a big fan.  I think a large balance sheet open to all is a great thing for financial stability, opening up narrow banking. (More in "Toward a run free financial system.")

You can see why big banks might not be fans. If they can pay 0 for deposits and earn 50bp in reserves, why undermine the profits with competition?

You can also see from my story, that if the ON RRP facility is important for transmitting higher interest on reserves to other assets, the Fed might need to do a lot of it. A lot. We're trying to raise the interest on Treasuries, Agencies, commercial paper, etc. etc. etc. by having money market funds attempt to sell those and hold reserves. They might buy a lot of reserves before rates are equalized.

The total quantity of reserves need not change, and won't if the Fed does no open market operations. But the money market funds will get bank depositors to send them reserves, pay higher interest, and park those reserves at the Fed. Basically the ON RRP will facilitate a big shift of reserves and deposits to money market funds -- if the banks don't raise deposit rates pronto. But that shift could be huge. Did I mention that banks might not like this?

This is Big Stuff for monetary policy. Whether the overnight rate inches up 25 bp in summer or fall is angels dancing on heads of pins. The shift to an interest rate target on a huge balance sheet is a night and day change. And it had better work.

The FOMC minutes

With that background, maybe the whole section on "liftoff tools" makes more sense. So, the Fed opens up reserves to one and all, and stands ready to take trillions. What's the problem?

A couple of participants expressed continued concerns about the potential risks to financial stability associated with a large ON RRP facility and the possible effect of such a facility on patterns of financial intermediation.

I don't get this at all. I gather the story is something like, if interest paying reserves are available, then funds might in a new crisis want to dump all their assets and move to interest paying reserves. But they can just as well dump assets and buy cash or treasuries too. The existence of interest paying reserves open to non-bank institutions just makes very little difference.

It seems to me exactly the opposite. Every dollar invested in interest-paying reserves at the Fed is a dollar not invested in run-prone, financial-crisis-prone, overnight private lending, like the overnight paper Lehman was using at 30:1 leverage the night before it failed. More ON RRP means more financial stability.

If anyone knows a coherent explanation of how offering the most perfect narrow banking in the world (interest paying reserves backed by Treasuries) is bad for financial stability, I'd like to hear it. Are there speeches or papers by the "participants" I don't know about?

You can see the nervousness all over the discussion

Moreover, some participants were concerned that a decision to allow a temporary increase in the maximum size of the ON RRP facility could be viewed by market participants as a signal that a large ON RRP facility would be maintained for a longer period than those participants deemed appropriate.

OK, maybe as an emergency tool to help "liftoff," but they want a promise it ends soon.

While acknowledging these concerns, many participants believed that a temporarily elevated cap on the ON RRP operations at a time when the Committee saw conditions as appropriate to begin normalization would likely pose limited risks; another participant judged that an ON RRP program was, in any case, unlikely to materially increase the risks to financial stability. Some participants noted that a relatively high cap could be established and then reduced fairly soon after the initial policy firming if it was determined that it was not needed, and that such a reduction could help underscore the Committee's intent to use such a facility only to the extent necessary. A number of participants emphasized that the Committee should develop plans to ensure that such a facility is temporary and that it can be phased out once it is no longer needed to help control the federal funds rate.

You can see a big fundamental argument here, and the natural compromises such an argument leads to. OK, just this time. But promise it's limited. Impose a cap.

Alas, this is a lot like promising ahead of time that you won't send ground troops to a war.  Just what happens when, the Fed raises interest on reserves to 50 bp., deposits and treasuries don't budge overnight RRP demand hits the cap immediately. And now what, ladies and gentlemen? "Well, we wanted to raise rates, but we hit a self-imposed cap, so I guess that's it for now?"

You will not lower the oceans with an eyedropper. Pegging prices with a cap on quantities is a dangerous affair. Ask the Swiss National Bank.  If Mario Draghi had said "we'll do what it takes to save Greece and Italy, up to a cap" do you think it would have worked?

Here you see a huge divide, unlike anything involving the path of rates. (Members seem to pretty much agree on the rules of that game, just differing in their assessment of inflation vs. output dangers.)

The committee goes on to Term RRP, i.e. letting money market funds invest in interest-paying reserves but only for fixed time periods, like a CD.  I presume they hope that  might equalize rates without "financial stability concerns." But again, I can't figure out what these "financial stability" concerns are, so it's hard to evaluate. But you can see it again as a compromise.

Bottom line, if a bit repetitive. What are the "financial stability" concerns? Or are they really "bank profitability" concerns? Or are they "unwarranted Congressional attention" concerns? (If you think "the Fed is paying banks not to lend" is bad, wait until "the Fed is paying money market funds not to invest" hits the airwaves.)

A few other thoughts. 

Reading the report,  I was unaware how much foreign currency intervention the Fed does. I'm interested in knowledgeable commentary.

On the whole when-do-we-raise-rates thing, the Fed is clearly in a bit of a pickle.  We all know that stable expectations, transparency, etc. are good things, and that the Fed should not induce volatility by adding uncertainty about interest rate movements. So, Ben Bernanke started an admirable effort to give "forward guidance" about what the Fed would do. As the time to raise rates comes nearer, the Yellen Fed has sensibly wanted to telegraph "data-dependent" decisions. Even John Taylor would cheer at that, as "data dependent" is the heart of the Taylor Rule.

But the Fed also wanted to maintain its "flexibility." And without a Rule, "data dependent" looks to markets a lot like "whim-dependent." Without a rule, the "data" can be "we changed our mind."

So bit by bit, good intention by good intention, the Fed finds itself back in the corner that markets are parsing tiny differences in phrasing -- will She say that soon she might moderate "patience" to "tolerance?" FOMC members are arguing it out in speeches, and the Fed ends up creating more volatility than reducing it.

Source: Torsten Slok

I'm soon going to be nostalgic for the zero bound. It had a great advantage -- everyone knew exactly what interest rates were going to be!  The neo-Fisherite prediction of gently declining inflation was bearing out.

Mary Kissel asked me if I thought raising rates now is a good idea, so the Fed has some room to lower them later. I fumbled a bit, with an analogy that it's like wearing tight shoes because it feels good to take them off.

It's a good and deep question, asked by many, and I see that sort of opinion from many Fed-watchers: Raise now so we have room to stimulate if something goes wrong.

That view embodies a nonlinear or state-dependent idea of how monetary policy works. "Stimulus" is not just the level of the rate, but the rate relative to recent history. So, a zero rate in the crisis of 2018 is more effective if it has been preceded by tightening than if not. It's certainly possible, if rates push around some slow-moving state variable. If someone holds this view and can name the state variable I'd like to hear it.

Mary also asked if I thought the Fed was "politicized" when I opined they were worried about Congressional attention above and beyond economic issues. I fumbled a bit. A perfectly a-political agency would be nuts not to consider how its actions might or might not attract attention from Congress.  And that's how it should be in a democracy. Congress should pay more attention to many agencies, both sides respecting the trade of independence for limited powers. In this case, I agree that Congress may misunderstand perfectly good ideas -- paying interest on reserves, that the interest comes from Treasuries so is a wash to the taxpayer -- but that raises the onus on the Fed to explain these simple concepts so Congress and the rest of us understand what they're up to. Eschewing good economic policy because one worries Congress can't understand it is a bad way to run things.

A last thought: If the US's main economic problem, and financial markets' main shock,  is whether the overnight federal funds rates rises by 0.25 percentage point, in the context of a slowly improving real economy and very low inflation,  there to sit another 6 months to a year, this will be great news. The world is blowing up, Russia is invading Ukraine, Greece could go under, bond markets could go haywire. Look to the variance, not the mean. How the Fed will react to a big shock is far more important than what they will do in a perpetually quiet world. There will be more shocks!

Update: More (if you can stand it) in a second post, here.

Pennacchi on Narrow Banking

I stumbled across this nice article, "Narrow Banking" by George Pennacchi. The first part has a informative capsule history of U.S. banking.

George defines a spectrum of "narrow" banks. For example he includes prime money market funds -- borrow money, promise fixed value instant withdrawal, buy Greek bank commercial paper. But that is "narrower" than traditional lending, as the assets are short term and usually marketable.

Some interesting tidbits:

Prior to the twentieth century, British and American commercial banks lent almost exclusively for short maturities. Primarily, loans financed working capital and provided trade credit for borrowers who were expected to obtain cash for repayment in the near future

Therefore,

... the typical structure of these early banks contrasts with the modern view of banks, according to which the received wisdom is that “[t]he principal function of a bank is that of maturity transformation---coming from the fact that lenders prefer deposits to be of a shorter maturity than borrowers, who typically require loans for longer periods” (Noeth & Sengupta 2011, p.8)....maturity transformation was often considered a violation of prudent banking.

On the nature of assets:

Following the US Civil War, many banks ... invested in commercial paper... With the establishment of the Federal Reserve System in 1913, commercial paper became especially desired because it was eligible collateral for borrowing from the Fed’s Discount Window. According to Foulke (1931), prior to the 1930s, banks and trust companies held more than 99% of commercial paper....In contrast, banks today hold very little commercial paper

so "bank" then = "prime money market fund" today -- but, after 1913, with discount window liquidity support. Some disintermediation makes a lot of sense. In 1830, you could not hope to sell commerical paper in 10 milliseconds on an electronic exchange, so the "liquidity creation" by banks was more necessary.  The struggles the SEC is having with prime funds today has deep roots.

Credit lines:

One credit service of banks that is ubiquitous today but was completely absent from banks in the nineteenth and early-twentieth centuries was the loan commitment. In recent years, more than 70% of business lending was from loan-commitment drawdowns.

This was an especially interesting issue in the crisis. Chari,  Christiano, and Kehoe noticed bank lending going up in fall 2008. Lending freeze, what lending freeze?  Scharfstein and Ivashina argued increased lending was mostly companies grabbing cash promised under existing lines of credit.

Prior to the 1930s, banks often had long-term relationships with particular borrowers: Banks would lend repeatedly for short terms to the same borrower....During the financial panic period of 1857--1858, the [Black River] Bank’s number of borrowers declined by nearly 75%,..early banks made virtually no formal loan commitments.

so rolling over loans without commitment is a way to preserve the option not to lend in a crisis. Perhaps Fed liquidity support is what changed rolling over to promising to do so.

Narrow deposit creation and the viability of equity-backed banking:

...[the] Louisiana Banking Act of 1842. ...required a bank to hold specie (gold) and bills of exchange and promissory notes maturing in 90 days or less in amounts at least equal to its deposits and notes issued. Moreover, the ratio of specie to the total of deposits plus notes had to be at least one-third. The bank could make loans with maturities greater than 90 days, such as mortgages, and hold real estate and other fixed assets but they must be funded with equity capital, not deposits or notes.

Hammond (1957, p.683) states, “The available evidence is that the system operated with distinguished success…Although the banks of New Orleans were well known throughout the country for their strength and integrity, the law governing them was not generally emulated.” Sumner (1896, pp. 387, 389) is more enthusiastic, calling the act “the most remarkable law to regulate banks, which was produced in this period, in any State…"

We seem doomed to constantly reinvent the steam engine, then to forget how it worked.

In summary, prior to the early-twentieth century, many US banks functioned similarly to narrow banks by holding primarily short-maturity assets to match their short maturity liabilities. Despite the several episodes of banking panics, it may be argued that panics occurred primarily at banks that deviated from the narrow-banking ideal. 

A new kind of moral hazard:

A more important response to the 1907 panic was the establishment in 1913 of a government lender of last resort and central bank in the form of the Federal Reserve System. Access to the Fed’s Discount Window made it less costly for banks to hold longer-term and more illiquid loans. Indeed, Friedman & Schwartz (1963) argue that the Fed’s existence changed banks’ behavior in ways that led to more bank failures during the early 1930s. Banks shifted to higher credit-risk loans and felt less need to lend to each other during times of stress because that was now considered the Fed’s responsibility (which the Fed failed to perform adequately).

...bank capital-asset ratios were trending downward since the 1840s (when they were over 50%), but the decline accelerated following the founding of the Fed and the FDIC. The capital ratio then stabilized in the range of 6%–8% starting in the early 1940s

and half of that at the start of the financial crisis in 2007.

As with other proposed bank reforms, recommendations for narrow banks appear most frequently following major financial crises. With the exception of the Louisiana Banking Act of 1842, and possibly the U.S. Postal Savings System, proposals involving narrow banks have not been implemented.

Well, not yet!

The rest of the paper has a nice summary of narrow banking proposals, and theoretical analysis.

'John King' in the Books of W. Usborne Moore

Henry Morgan materialization at Charles Williams seance (The Voice Box photo)

This article is about seance manifestations of the visitor from the ascended realm known as 'John King' as chronicled in W. Usborne Moore’s books.  Passages from Glimpses of the Next State (1911) describe incidents at seances conducted by the nearly blind medium Cecil Husk.  The book is subtitled "The Education of an Agnostic." 

In the Introduction, Moore wrote: "The principal control or familiar spirit of Husk is the famous buccaneer of the time of Charles II, Sir Henry Morgan, who now calls himself 'John King.'  Often have I heard his stentorian voice and seen him materialize above the medium's head and dematerialize through the table."  Moore presented a description of Husk's seances:

The séances were held in the dark.  When a spirit materialised it showed itself by aid of an illuminated slate, prepared and lying on the table.  Sometimes they spoke while in sight, but more often in the dark after they had dropped the slate; when in sight, the lips could be seen to move.  Except in the case of John King, who was life-size, the faces and busts were about two-thirds of life-size.  The singing was remarkable; the voices would join with us, and also execute solos.  I have heard as many as eight different male voices, from tenor to deep bass, singing at different times during one séance; and, at different séances, I have heard twelve languages heard in the direct voice.

Here are some anecdotes of 'John King'/'Henry Morgan' from the book, providing an account of  Vice-Admiral Moore's "investigations into spiritism."

. . . I saw John King several times plainly.  He materialized the face and bust life-size and came to me four times; once two feet above my head.  It was a strong face and very dark.  I estimate the distance from the place where he materialised above my head to Husk's body in the chair in the circle to be four feet across the table.

　

John King took great pains to dematerialize deliberately.  I saw his head enter the table.

　

. . . John King remembers every sitter who has ever sat with his medium.

The descriptions of observing more than forty of Husk's seances result with Moore attempting to articulate his bewilderment concerning the strange appearance of many of the materialisations.  He reported: 

The materialisations which represent the sitters' friends are less than life-size.

. . . how is it the lips are seen to move when they speak?  And, if dummies, they would appear more natural.  I have seen faces even half life-size—for they vary very much—but none that I can remember which looked fresh and of good colour, such as you would expect of a face intended to simulate that of a human being.  There was a parchment appearance about all that came to me, and there is an undefinable look of Husk in some.  This "Husky" appearance is just what we ought to expect, unless we are to suppose that the medium through whom they manifest has imparted nothing of his individuality to the form and face.

In comparison: Helen Duncan (in a trance state) with a materialization of her 'guide' Peggy also ectoplasmically veiled.  An observer with no knowledge of the Helen Duncan case (nor of extensively documented seance phenomena during the epoch of Spiritualism) may not realize that photographs such as this one were taken under controlled conditions and that Helen had no memory of what occurred while she was in a trance.  Helen Duncan's daughter Gena Brealey is the author with Kay Hunter of the biography The Two Worlds of Helen Duncan (1985).

W. Usborne Moore referred to the phenomena of the 'simulacrum.'  Commenting about the American mediums, the Jonsons, Moore wrote:

Materialisation of spirits is only of scientific interest; this phenomena brings home, as nothing else will, the power of invisible beings around us, but the simulacrum is seldom perfect.

It is the "direct voice" that takes the first place in spirit manifestation.  Nothing brings the truth of spiritism so home to one as conversation with those who have passed on . . .

Examples of Direct Voice recordings may be heard without charge at The Leslie Flint Educational Trust.  The following excerpts are from The Voices (1913) by Vice-Admiral W. Usborne Moore, who explained in a Preface the purpose of his sequel to Glimpses of the Next State.

The object of the work is to present to those who have neither the leisure, the opportunity, nor the means to investigate for themselves, a compact story of the exhibition of what is called the "direct voice" through the mediumship of Mrs. Etta Wriedt, of Detroit, Michigan, U.S.A., when she visited England in the spring and summer of 1912 and 1913 at my invitation.

In the book's Introduction, Moore reflected about Mrs. Wriedt's "mysterious gift" that manifested during seances:

It is indeed difficult to know what her personality has to do with the phenomena, for she never goes into the trance condition, and talks naturally throughout.  What we do know is that we cannot hear a whisper when she is out of the house, but that, if she is in the room, we can distinguish voices in full light or in darkness; if in the latter, they speak louder, longer, clearer, and, in every way, more satisfactorily than in light.

A 'control' or 'spirit guide' of Mrs. Wriedt was Dr. John Sharp.  Moore reported:

Mrs. Wriedt is controlled by Dr. John Sharp, who was born in Glasgow in the eighteenth century, lived all his life in the United States as an apothecary farmer, and died in Evansville, Indiana.  He states that he was taken over to America by his parents when he was two months old.  I have never known him say an unkind word, nor express any feeling but benevolence and desire to assist all who seek the help of his medium.  He frequently straightens out obscure messages, and invariably endeavours to manage the sittings to the best advantage of those present.  Very often he talks what, in a mortal, I should call nonsense; but I think he is limited in expression—in some curious way—by the absence of any sort of culture in his medium.

John King (Sir Henry Morgan), the control of Cecil Husk [and Williams, as Moore specified in another chapter], the blind medium, frequently managed Mrs. Wriedt's séances in England.  It was explained that he was better acquainted with English people that Dr. Sharp, who, however, was always in the background.

Other 'controls' or 'guides' familiar to Moore manifested in Mrs. Wriedt's seances.

Grayfeather, a North American Indian medicine chief when in life, the control of J. B. Jonson, the materialization medium of Toledo, Ohio, U.S.A., visited me several times at Cambridge House, and often came to the circles; he seldom manifested when I was absent.

Mimi and Blossom were casual visitors.  The former we know nothing about.  Blossom states that in life she belonged to the Seminole tribe of Indians, who lived in the Everglades, South Florida, and that she died as a child.  It is as a noisy, fractious, but extremely witty child that she now manifests.  Her talk. engaging manner, and lively repartee always created a diversion, causing much laughter, which benefitted conditions.

Now and then Dr. Sharp, John King, Grayfeather, and Blossom all manifested at the same circle.

Here are some further excerpts involving 'John King'/'Henry Morgan' from The Voices.

[June 1, 1912]  John King manifested, speaking very loudly, and held a conversation of several minutes with General Phelps, of not particular interest to the reader.  I remarked that his voice was unusually loud this morning, when he said: "Three men against one woman; more men, more power; more women, more fine vibration; clearer and more distinct voices through the female organism."  He then handed me the trumpet, which I stood up on the floor.

　

[from a letter by Alfred E. Turner] . . . John King and others gave me some very strong advice, which cast serious reflections upon one I thoroughly believed in an trusted.  They were most urgent and emphatic, which was all the more strange because up to then he had spoken in other terms of the person in question.  What he impressed upon me at this séance has turned out to be absolutely true.   Had I followed his counsels, I should have been saved from infinite trouble and disillusion later.

　

[from the narrative of a Dutch lady provided to E. Findlay Smith; June 10, 1913]  John King gave us a long address on the non-existence of evil spirits.

　

[from the narrative of Lieutenant Basil Hall, Inspector of Lifeboats; July 1, 1913]  John King, I may say, appeared to be present during the whole sitting, and occasionally interpolated remarks, sometimes commenting on or explaining those of the other voices.

Presently, the voice of John King explaining that every seven years a man’s mind and body are renewed, and changes take place in him.

　

[from a friend in the military; May 10, 1913]  John King spoke loudly through the trumpet, and came repeatedly during the sitting to explain what the other voices could not make intelligible.  He told us his name had been Henry Morgan when on this sphere; that he had been at one time Governor of Jamaica, and that he could speak more clearly than other spirits because he had been practising for two hundred years.

　

[from the narrative of Miss Edith K. Harper, the late Mr. W. T. Stead’s private secretary; May 13, 1914]  At this sitting also John King manifested most wonderfully, blowing some bugle calls for us through the trumpet, saying that was how he used to call his men together, in the old buccaneering days, one most terrific blast illustrating his signal to fight.  John King manifested at all our sittings, and gave us many particulars in regard to his earth life, in Jamaica.

In the "Conclusions" chapter of The Voices, W. Usborne Moore summarized his perspective of Direct Voice mediumship.

The direct voice is the highest spiritistic phenomenon yet discovered, and when it can be obtained without the use of a trumpet, and without the medium hearing what is said, we have reached the most advanced stage of manifestation.  Nothing that I have investigated is equal in delicacy, or conviction, to the still small voice which I, alone, can hear.  It is objective; there is no clairaudience about it, but it is rare.  In the narratives, it will be noticed that M.E., Mrs. Findlay Smith, Mrs. Richards, and a few others have attained his plane of investigation besides myself.  On at least fifty occasions I have enjoyed this privilege.  I have been spoken to for long periods—from twenty to forty minutes—without Mrs. Wriedt hearing a single word.

A subject which is little understood is the importance of the mental attitude of the sitters.  If they are hostile to the psychic, it is needless to say that nothing occurs.  But this is not usually the case; people do not pay to sit with a medium in whom they do not believe.  Suppose they thoroughly trust the psychic, there may yet be failure.  Their minds may be upset by some circumstance that has nothing to do with the séance; they may be angry with someone they have met two hours before; they may be ill, or think they are.  Any jar will upset them.  The only chance of success is when medium and sitters are in pleasant humour and have emptied their minds of everything, even of those whom they desire to see or to hear.

Two voices have been frequently heard by me and others talking simultaneously to two sitters in the circles about matters entirely unknown to the psychic or to each other; occasionally three; and at very rare intervals, four—one using the trumpet and two or three without.  The medium, when talking, is often interrupted by a voice, and for a second or two both have been heard to speak together.  A voice has been heard to sing and another to speak simultaneously.  Certain privileged sitters have heard the voices in full light with the medium eight feet from them; I have heard it when she was eighteen feet from me, in full electric light.  Some of us have heard it when the French windows were open; and one gentleman has heard it in the dark when the woman was downstairs in the drawing-room.

I do not deny that experienced spirits like Dr. Sharp and John King can read the minds of the sitters . . .

It is my conviction that spiritism is a Divine institution permitted by the Almighty to meet the growing materialism of the age, and that sooner or later the Church will have to come into line with it. 

 

Regulation and competition

From taxis to banks, regulation is quickly captured to stifle competition. Only it's usually polite not to say it out loud. Today's WSJ has a lovely little piece, Regulation is Good for Goldman confirming the former and violating the latter pattern.

the Goldman Sachs CEO explained how higher regulatory costs are crushing the competition.

“More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history,” said Mr. Blankfein. “This is an expensive business to be in, if you don’t have the market share in scale...

he said his bank is “prepared to have this relationship with our regulators”—and the regulators are prepared to have a deep relationship with Goldman—“for a long time.”

.. it is unusual to see a financial CEO like Mr. Blankfein state the effect so candidly. Goldman can afford to hire battalions of lawyers and lobbyists to commune with regulators... As ever, powerful government mainly helps the powerful.

I have met several people who started financial companies in the pre-Dodd-Frank era. They all say there is no way they could start their businesses now. Working out of the garage, you can't afford a multi-million dollar compliance department.

Run-Free Funds Expand

Louise Bowman at Euromoney reports

Fidelity Investments has announced plans to convert up to $125 billion-worth of prime US money market funds (MMFs) into government-only funds –

Meaning, funds that invest only in government securities.

...a move that is a direct consequence of the new SEC regulations covering this business that were announced in July.

...From October next year, MMFs must hold at least 99.5% of total portfolio assets in cash or government securities and repos collateralized by such instruments to be exempt from new regulations imposing fees and gates on such funds in times of stress. The rules are designed to slow deposit runs and reduce systemic risk

In case you missed it, in the financial crisis the Reserve Fund, which held a lot of Lehman debt, suffered a run, and too big to fail quickly expanded to money market funds.

What are they invested in now?

Of the $125 billion in the three Fidelity funds, only 22% is currently invested in government fund-eligible assets, according to BAML. That means $97 billion (78%) now invested in CDs, CP, non-government repo and other instruments will need to be rolled into government holdings. Of this, $9 billion is bank CP, $2 billion non-financial CP and $15 billion non-government repo....less than 10% of the $97 billion in short-term unsecured bank paper held by the three Fidelity funds marked for conversion was issued by US institutions.

This is, in my view, great news. Money market funds were promising complete safety -- you can take your money out at any time -- and lending it, unsecured and uninsured, to banks. Not just too big to fail American banks, but (say) Greek banks.

I thought this would be more of a challenge. You can always promise greater yields during good times and hope for a bailout in bad. Or, each investor hopes to get out ahead of the others. Apparently not,

"Many investors have told us that they want access to money market mutual funds with a stable NAV that will not be subject to liquidity fees or redemption gates," stated Fidelity when news of the conversion became public. 

Though to some extent that's because the temptation is low right now.

With credit spreads on non-government funds as low as they are, the returns are simply not attractive enough versus government funds ... 

Louise worries that this spread will rise.  

The expectation is that...unsecured funding costs for the banks will rise. This has particularly serious implications for non-US banks, as they are far greater users of this market than their US counterparts, which have ready access to cheap deposits.

It will. It should. But paragraph 1 should inform paragraph 2. A higher rate will induce people to take the risk and hold commercial paper directly, or suffer the indignities of the fees and gates in return for higher yields. Supply does equal demand!

Like the other Squam Lakers, I think that floating values are a better solution for non-government funds. But I like emergence of run-free, treasury-backed money market funds!

(This is "narrow banking" but I try not to use that word. The point is not to "narrow" banking. Using that word reinforced the fallacy that the size of credit creation must contract. The point is that risky investments should have floating-value or run-free liabilities, and fixed-value liabilities should be backed by government securities. For more, "Toward a run-free financial system")

WIlliamson on Fisher, Phillips and Fjords

Steve Williamson has an excellent blog post "Pining for the Fjords" Point 1, the Phillips curve is dead, UK version. (And, too many are cheering, "Long live the Phillips curve!"). Point 2, Steve seems to have signed on to the new-Fisher view that a zero rate fixed for a long time, with apparently credible fiscal policy, will drag inflation slowly down, not up.

Point 1: The Phillips curve in the UK.

Source: Steve Williamson

Steve:

 ...from peak unemployment during the recession, the unemployment rate drops about 2 1/2 points, while the inflation rate drops about 3 points... Presumably utilization has been rising in the U.K., but inflation is dropping like a rock.

See his post for early and late samples, core inflation, etc.

The Phillips curve is not resting, sleeping, or pining for the fjords. It is dead, deceased, passed away. It has bought the farm. Rest in peace.

 Or, borrowing another picture from Steve,

Steve continues

The Bank Rate has been set at 0.5% since March 2009. Here's the latest inflation projection from the Bank: (Inflation returns to 2% now that unemployment has decreased.) So, like Simon, the Bank seems not to have learned that the parrot is dead. In spite of a long period in which inflation is falling while the economy is recovering, they're projecting that inflation will come back to the 2% target.

The best part, which you might miss at the bottom of his post

...20 years of zero-lower-bound experience in Japan and recent experience around the world tell us that sticking at the zero lower bound does not eventually produce more inflation - it just produces low inflation.

Florence Marryat's Account of John and Katie King

In this article I am considering another firsthand testimonial about the visitors from the ascended realm known as 'John King' and 'Katie King' with passages from the books of Florence Marryat (Mrs. Ross-Church, Mrs. Frances Lean, 1837-1899).   There Is No Death (1891) is described by Marryat as "an account of the wonderful experiences I have passed through in my investigation of the science of Spiritualism."  The author mentions being the daughter of Captain Marryat and having seven children and four servants.  Marryat also wrote about her experiences and beliefs relating to Spiritualism in The Spirit World (1894), which includes commentary about 'principal control' and 'spirit' 'John King'/'Sir Henry De Morgan.'

Sir Henry was a buccaneer, or pirate, who lived during the reign of Charles the First, and through part of that of Cromwell.  He was a bold sea-rover; and, after an exciting career, was executed for treason, on the high seas.  But, whatever he may have been whilst on earth, he appears to have entirely expiated his sins now, and to have become one of the best and kindest of spirits, always working for the good of others.  I have known him through Williams, and Herne, and Eglinton, and Husk, and always the same in voice and feature and general kind-heartedness.  I derived great pleasure, a short time back, by receiving, through the goodness of M. James Tissot, the French artist, a lovely engraving of his picture, entitled "L' Apparition Mediumistique" [or Médiumnique]."  The painting represents M. Tissot's first wife, supported by John King, as he prefers to be called.  M. Tissot sat with William Eglinton, when on a visit to London, and was so charmed by the appearance of his first wife, to whom he was tenderly attached, that he invited Mr. Eglinton over to Paris, and, whilst there, he painted, from their materialized forms, the portraits of both Madame Tissot and John King.  The oil painting was, I understand, exhibited in the Paris Salon, and a favored few of M. Tissot's friends have received an engraving of it.  I am proud to number myself amongst them, and the engraving has a double value for me, not only as a memento of the giver, but because the portrait of John King is exactly as he has appeared to me, through each one of the mediums I have named.  It represents him as an exceedingly handsome man, of about forty, with high-bred Jewish features, and a most benevolent cast of countenance.  He appears as though supporting Madame Tissot, or encouraging her to come forward.  Both hold a spirit light, of the size and shape of an egg, in their hands, and, whilst the young woman is looking up shyly, John King glances down with a sort of patronizing, or paternal, air upon her.  I prize this engraving more than any other spiritualistic memento I possess.  John King told me that I could have no idea of the large number of spirits it took in order to make one seance a success.  "I have, at this moment," he said, "a band, or cordon of spirits surrounding this house, of perhaps a quarter of a mile in width, and, beyond them, I have stationed my out-posts and pickets to give the alarm, if necessary."  ''The alarm for what, John?" I asked.  "In case any malevolent spirits should try to approach the circle!  They would do so, soon enough, if they had the opportunity.  Perhaps it will astonish you to hear that there is more opposition in the spheres against Spiritualism than there is on this plane.  Many spirits consider that I, and others like me, are wrong to visit this earth after we have left it.  They say we cannot do so without carrying back a taint of mortality when we return, to the detriment of those who dwell in the spheres."

This was an entirely new idea to me, but I saw the force of it, from my own small experience.  The other world is very much like this one.  Men do not immediately part with their prejudices there, any more than with their follies and vices.  If Jones was a liar whilst upon earth, don't swallow everything he may tell you, when he returns here; for, rest assured that, by the time his spirit has been thoroughly purged of its worldly wickedness, it will have soared too high to return, except as a preacher, to his fellow-men.  But, for my own part, I should be dubious of believing him to the end of time.  So be wary.  See all you can, and hear all you can, and weigh the proofs of sincerity in a nicely adjusted balance.  But if your spirituality is in yourself; if you are sincere and circumspect, Jones (and such as Jones) will not come near you; or if your acquaintances leave them behind them (as mine did), they will cleave to you only so long as you encourage them to do so.  I got rid, during my earliest experiences, of a very unpleasant spirit who used to annoy us with his language and sentiment, by simply leaving the table whenever he appeared.  He used to attempt to disguise himself by assuming false names, and pretending to be extremely pious, but we always found him out in the end and instantly broke up the seance.  When he found we were in earnest and kept to our word, he took himself off, and, for years, I have heard nothing of him.  Treat all careless, "larking" and low-minded spirits in the same fashion, and they will not trouble you long.  But the surest remedy is to see that no careless, or ungodly, person joins your circle.  Keep your seance room free from all bad, earthly influences, and the spiritual ones will not come near you.

"L’Apparition Médiumnique" (1885) by James Tissot.

Marryat wrote about the mediumship of Cecil Husk (1847-1920) in Chapter IX of The Spirit World, including the following excerpts.
 

I found him a superior man in many respects.  He, like his sister, was a professional singer for some years, until his failing sight compelled him to give up appearing in public.  He is now so blind that, although he can distinguish forms on entering a room, he cannot recognize them until they speak to him.  Some of the opposers of Spiritualism were good enough to spread a report that Mr. Husk's blindness was assumed, for the purpose of better hoaxing his clients.  Upon this, Baroness Wauchtermeister took him to the elder Crichett, now deceased, who pronounced a cure impossible.  I consider Mr. Husk's blindness, however unfortunate for himself, a great factor in his mediumship. Any one who knows how difficult it is to "make up" properly for the stage, even with the advantage of a couple of lights, will understand how utterly impossible it would bo for a man to assume a dozen different characters, when shut up in the dark, or even in the light, when he is, unhappily, blind.  Yet, Cecil Husk's would-be detractors have insisted that, when in perfect darkness, it is quite easy for him to transform his face, from a young man's to that of an old one, or from a girl's to that of a woman; and to appear in the light, without a smudge on his face or beard, or wig awry.  When I hear people argue like that, it makes me sick to think how full the world we live in is of fools, who insist upon condemning things of which they are utterly incompetent of judging.  People, sometimes, think me disagreeable, because I refuse to give them introductions to mediums of my acquaintance, or give them their names and addresses.  A few months ago, I introduced a gentleman, of whom I entertained the highest opinion, to Mr. Husk, and, so far, my introduction was justified.  But this gentleman, in his turn, sent a couple of friends of his to Mr. Husk, who were accepted in the same good faith as he had been. These two men (for I cannot call them gentlemen) were admitted to a seance with Mr. Husk, on the same understanding as their introducer had been, i.e., that they would observe all the conditions imposed on the sitters by the controls, one of which is, as the merest tyro [novice] knows, not to strike a light whilst the manifestations are going on.  These men, however (contrary to all the rules of honor and good faith), exhibited an electric light, whilst the spirits were manifesting, and denounced the whole proceedings as fraud, because no spirits were to be seen, and the white drapery, according to their account (and I, for one, could never take the testimony of men who could commit such a breach of trust, without a very large pinch of salt), was all over the table, and Mr. Husk's head and shoulders.  Now, had these men been clairvoyant, and able to see in the dark, they would have seen that, when the spirit heads appeared over the surface of the table, they proceeded out of Mr. Husk's chest, or breast, and were linked to him.   They are partly formed out of his brain, partly from the forces contributed by the sitters.  If, when the light was flashed upon them, they had not immediately rushed back into the medium, his life would probably have paid the forfeit of the outrage committed on him by these men.  As the spirit particles mingled again with the medium's particles, the drapery (which, in dematerialization, always disappears after the form) would, naturally, be left on the table, or the medium's body.  When the full form dematerializes in sight, and goes down through the floor, the drapery, invariably, is left behind for a few seconds, till it follows suit.  I have seen it done over and over again, and know it to be a fact.  But this is the way most people go about investigating Spiritualism.  They go to discover, not a great truth, but a great fraud, and so they never discover anything, because it is too wonderful for them to grasp all at once, and they do not allow themselves to go any further.  If they only injured themselves, however, it would little signify; but the harm is, that they injure the medium.  What has been the effect of the outrage I have related upon Mr. Husk?  He had a paralytic stroke after it.  When he was waked up from his trance in that sudden way, he was paralyzed with terror, and ran about like a mad creature.  The upshot was, he was very ill for some time afterwards, and the doctor, who attended him, can bear testimony to the severe shock he received.  For months he has been unable to sit, except with friends, and all because two ignoramuses were dishonorable enough to break faith with him, and think themselves wiser than every one who had pursued the path before them.  Is it to be wondered at, after such an experience, if mediums decline to sit with people of whose good faith they are not perfectly assured?  It reminds me of Florence Cook, and Mr. Volckman, and the night I and Lady Caithness spent by her bedside, whilst two doctors were in attendance, and the medium in convulsions.  But I am not aware if Mr. Volckman ever confessed that he was wrong, in having grasped the spirit form in his arms, and thrown the medium into fits.  The men I have been writing of, and the gentleman who introduced them to Cecil Husk, went about declaring they had detected him in trickery, and made many others, doubtless, believe they were correct.  Let my testimony weigh against theirs in the scale of evidence.  Since I first sat with Mr. Husk, two years ago, I have been a very frequent visitor of his, and under trying circumstances; for, almost every friend to whom I have mentioned his name, has insisted on my being present at the first interview, when one's eyes and ears, as a rule, are all alert to discover the why, and the wherefore, of everything.  I have become well acquainted, therefore, with his controls, and their method of working.  John King is the principal control of his seance room, and the others are all under his orders.

In 1892, I sat, with about a dozen friends, at twelve sittings, with Mr. Husk.  They were held every Thursday, under very strict conditions, and all the sitters were men and women of education and social position.  The seances were cabinet ones, i.e., the medium went into a cabinet formed of a dark curtain drawn across one corner of the room, with a chair placed inside it, and the materializations were all fully formed.  As soon as ever Mr. Husk had taken his seat within the cabinet, you would hear the subordinate controls talking together, on all sorts of subjects; but, directly John King arrived, a dead silence ensued.  These subordinate controls consist of five men, who call themselves by the names of "Uncle," "Christopher," "Ebenezer," "Tom Hall," and, last, though not least, except in size, my dear old friend, "Joey," who used to manifest through William Eglinton in the olden days, and who followed me to the New World, and showed himself there.  These controls are employed in gathering the materials with which John King works, so that there may be no delay when he arrives.  As soon as that happens, you may hear him issuing his commands to one and another, such as: "Make those passes more to the right"; or, "Keep his head up"; or, "Two of you raise his shoulders, so as to place him in a more upright position"; and the other spirits' answers: "All right, John"; or, "I've done it, John," etc., etc.  To me, it is one of the most curious things, on these occasions, to hear the conversations between the spirits themselves, each one having such a distinctive voice of his own, that, after a short acquaintance with them, it would be as impossible to mistake them as it would be the voices of your different friends.  I have questioned John King as particularly as I can, without monopolizing too much of his time, as to the manner in which materialized forms are produced, and his answer was much as follows: "When the controls have collected the matter with which I work—some from everybody in the circle, but mostly from the medium’s brain—I mould with it a plastic mask, somewhat like warm wax in feel, but transparent as gelatine, into the rough likeness of a face.  You will understand that there is always a crowd of spirits ready here to show themselves to their friends—a great many more than we can allow to appear.  They are built up in their spirit forms, but would be quite invisible to the majority of sitters, unless covered with my transparent mask; without it, also, they would be unable to retain their shape or likeness, when exposed to the outer air.  I, therefore, place this plastic substance over the spirit features, and mould it to them.  If the spirits will have the patience to stand still, I can, generally, make an excellent likeness of what they were in earth-life, but most of them are in such haste to manifest that they render my task very difficult.  That is why, very often, a spirit appears to his friends and they cannot recognize any likeness.  He has not given me sufficient time to mould the mask to his features."


One very interesting apparition, which took place during these sittings, must not be omitted.  There was, at that time, a certain house, in Hammersmith, which had been badly haunted for years past; so badly, indeed, that the mistress of it, a single lady, could not persuade any servant to stay with her during the night, when the haunted spirit, an old man, used to enter her bedroom, and shake her in her bed, exclaiming: "Get out of my house.  Get out of my house!"  She must have been a plucky old lady, for she used to reply: "It is my house, not yours," and go quietly to sleep again.  Some of our circle, however, having heard of this spirit, and obtained the permission of the mistress of the house to hold a seance there with Mr. Husk, had assembled, the week before, and interviewed the ghost, who had abused them all roundly, in turn.  They had, however, extracted his history, and the reason of the purgatory he was undergoing, from him.  He said that, one hundred and fifty years before that time, he had occupied the house, with his only child, a daughter; that this daughter had been led astray, and that when she became a mother, he was so enraged, that he had put the poor, little baby on the fire and burned it to death, and the sight had so maddened the unfortunate young mother, that she had rushed upstairs and flung herself from the roof of the house, being smashed to pieces on the stones beneath.  The Thursday after this sitting had been held in the haunted house, at Hammersmith, John King informed us that this pleasant old gentleman had followed his medium home, and he had great difficulty in preventing his being annoyed by him in the intervening time; that the murderer's spirit was in the cabinet at that moment, and most anxious to manifest itself; but John would not allow him to do so, without the permission of the circle, as he was earth-bound and low, and not likely to do us any good.  But, on the other hand, if we consented to interview him, we should be helping him to rise and break the chains that held him to this world.  Of course, we all gave a hearty consent; I, for one, being most anxious to see what the old wretch was like.  In a few minutes, therefore, he appeared.  I do not think I ever saw a viler countenance.  I can only compare it to that of a decomposed "Fagin."  His eyes were small, and sunken in his head, beneath the most formidable shaggy eyebrows.  His nose like an eagle's beak; his lips protruding, sensual, and of a blue tint; his hair, matted and filthy; his nails like claws, and his hands covered with hair.  He was either deformed, or crouched, as he walked slowly round the circle, muttering to himself, in a whining voice: "Lord, how long, how long?  Will this torture never end?  Why can't I die? Why can't I die?"  This was another case, where the spirit was so human, that it could not realize it had passed out of the body.  Most of the circle shrunk from this dreadful spirit with aversion; and, indeed, he looked quite ready to murder some one else.  As he neared my side, rubbing his hairy hands together, and muttering to himself, I leaned forward, and said with one of my sweetest smiles: "My friend, don't you know that you have passed over?  You are not in the body at present.  You died years ago." He turned his lascivious, vicious face towards mine, glared at me for a moment, and then hissed out: "Damn you.  I didn't."  Which courteous return for my civil piece of information shut me up altogether.

 
Consistent blog readers will notice that the interaction of seance sitters with 'John King' and 'Katie King' presents parallels with occurrences in other chronicled cases of transcendental communication.  The preceding anecdote may remind readers of the 'Mission work' of Edward C. Randall and medium Emily S. French.  In the annals of Instrumental Transcommunication, there are the 'Technician' and 'Swejen Salter.'  Some of the quoted statements of 'John King' are obviously metaphorical and altogether the case is one where evolution and redemption are aspects of progress in the afterlife.  The extreme violence in the Earth life of 'Henry Morgan' prior to expanded spiritual awareness in the afterlife makes him a precursor figure to the contemporary Ramtha channeled through JZ Knight. 

The following passage is Chapter XVI from There Is No Death.   William Crookes is referred to as 'Alfred Crookes' throughout the book. 

 

CHAPTER XVI.

THE MEDIUMSHIP OF FLORENCE COOK.

In writing of my own mediumship, or the mediumship of any other person, I wish it particularly to be understood that I do not intend my narrative to be, by any means, an account of all séances held under that control (for were I to include everything that I have seen and heard during my researches into Spiritualism, this volume would swell to unconscionable dimensions), but only of certain events which I believe to be remarkable, and not enjoyed by every one in like measure.  Most people have read of the ordinary phenomena that take place at such meetings.  My readers, therefore, will find no description here of marvels which—whether true or false—can be accounted for upon natural grounds.  Miss Florence Cook, now Mrs. Elgie Corner, is one of the media who have been most talked of and written about.  Mr. Alfred Crookes took an immense interest in her, and published a long account of his investigation of Spiritualism under her mediumship.  Mr. Henry Dunphy, of the Morning Post, wrote a series of papers for London Society (of which magazine I was then the editor), describing her powers, and the proof she gave of them.  The first time I ever met Florence Cook was in his private house, when my little daughter appeared through her (vide " The Story of my Spirit Child").  On that occasion, as we were sitting at supper after the séance—a party of perhaps thirty people—the whole dinner-table, with everything upon it, rose bodily in the air to a level with our knees, and the dishes and glasses swayed about in a perilous manner, without, however, coming to any permanent harm.  I was so much astonished at, and interested by, what I saw that evening, that I became most anxious to make the personal acquaintance of Miss Cook.  She was the medium for the celebrated spirit, "Katie King," of whom so much has been believed and disbelieved, and the séances she gave at her parents' house in Hackney for the purpose of seeing this figure alone used to be crowded by the cleverest and most scientific men of the day, Sergeants Cox and Ballantyne, Mr. S. C. Hall, Mr. Alfred Crookes, and many others, being on terms of the greatest intimacy with her.  Mr. William Harrison, of the Spiritualist paper, was the one to procure me an introduction to the family and an entrance to the séances, for which I shall always feel grateful to him.

For the benefit of the uninitiated, let me begin by telling who "Katie King" was supposed to be.  Her account of herself was that her name was "Annie Owens Morgan"; that she was the daughter of Sir Henry Morgan, a famous buccaneer who lived about the time of the Commonwealth, and suffered death upon the high seas, being, in fact, a pirate; that she herself was about twelve years old when Charles the First was beheaded; that she married and had two little children; that she committed more crimes than we should like to hear of, having murdered men with her own hands, but yet died quite young, at about two or three and twenty.  To all questions concerning the reason of her reappearance on earth, she returned but one answer, That it was part of the work given her to do to convince the world of the truth of Spiritualism.  This was the information I received from her own lips.  She had appeared to the Cooks some years before I saw her, and had become so much one of the family as to walk about the house at all times without alarming the inmates.  She often materialized and got into bed with her medium at night, much to Florrie's annoyance; and after Miss Cook's marriage to Captain Corner, he told me himself that he used to feel at first as if he had married two women, and was not quite sure which was his wife of the two.

The order of these séances was always the same.  Miss Cook retired to a back room, divided from the audience by a thin damask curtain, and presently the form of "Katie King" would appear dressed in white, and walk out amongst the sitters in gaslight, and talk like one of themselves.  Florence Cook (as I mentioned before) is a very small, slight brunette, with dark eyes and dark curly hair and a delicate aquiline nose.  Sometimes "Katie" resembled her exactly; at others, she was totally different.  Sometimes, too, she measured the same height as her medium; at others, she was much taller.  I have a large photograph of "Katie" taken under limelight.  In it she appears as the double of Florrie Cook, yet Florrie was looking on whilst the picture was taken.  I have sat for her several times with Mr. Crookes, and seen the tests applied which are mentioned in his book on the subject.  I have seen Florrie's dark curls nailed down to the floor, outside the curtain, in view of the audience, whilst "Katie" walked about and talked with us.  I have seen Florrie placed on the scale of a weighing machine constructed by Mr. Crookes for the purpose, behind the curtain, whilst the balance remained in sight.  I have seen under these circumstances that the medium weighed eight stone in a normal condition, and that as soon as the materialized form was fully developed, the balance ran up to four stone.  Moreover, I have seen both Florrie and "Katie" together on several occasions, so I can have no doubt on the subject that they were two separate creatures.  Still, I can quite understand how difficult it must have been for strangers to compare the strong likeness that existed between the medium and the spirit, without suspecting they were one and the same person.  One evening "Katie" walked out and perched herself upon my knee.  I could feel she was a much plumper and heavier woman than Miss Cook, but she wonderfully resembled her in features, and I told her so.  "Katie" did not seem to consider it a compliment.  She shrugged her shoulders, made a grimace, and said, "I know I am; I can't help it, but I was much prettier than that in earth life.  You shall see, some day—you shall see."  After she had finally retired that evening, she put her head out at the curtain again and said, with the strong lisp she always had, "I want Mrs. Ross-Church."  I rose and went to her, when she pulled me inside the curtain, when I found it was so thin that the gas shining through it from the outer room made everything in the inner quite visible.  "Katie" pulled my dress impatiently and said, "Sit down on the ground," which I did.  She then seated herself in my lap, saying, "And now, dear, we'll have a good 'confab,' like women do on earth."  Florence Cook, meanwhile, was lying on a mattress on the ground close to us, wrapped in a deep trance.  "Katie" seemed very anxious I should ascertain beyond doubt that it was Florrie.  "Touch her," she said, "take her hand, pull her curls.  Do you see that it is Florrie lying there?"  When I assured her I was quite satisfied there was no doubt of it, the spirit said, "Then look round this way, and see what I was like in earth life."  I turned to the form in my arms, and what was my amazement to see a woman fair as the day, with large grey or blue eyes, a white skin, and a profusion of golden red hair.  "Katie" enjoyed my surprise, and asked me, "Ain't I prettier than Florrie now?"  She then rose and procured a pair of scissors from the table, and cut off a lock of her own hair and a lock of the medium's, and gave them to me.  I have them safe to this day.  One is almost black, soft and silky; the other a coarse golden red.  After she had made me this present, "Katie" said, "Go back now, but don't tell the others tonight, or they'll all want to see me."  On another very warm evening she sat on my lap amongst the audience, and I felt perspiration on her arm.  This surprised me; and I asked her if, for the time being, she had the veins, nerves, and secretions of a human being; if blood ran through her body, and she had a heart and lungs.  Her answer was, "I have everything that Florrie has."  On that occasion also she called me after her into the back room, and, dropping her white garment, stood perfectly naked before me.  "Now," she said "you can see that I am a woman."  Which indeed she was, and a most beautifully-made woman too; and I examined her well, whilst Miss Cook lay beside us on the floor.  Instead of dismissing me this time, "Katie" told me to sit down by the medium, and, having brought me a candle and matches, said I was to strike a light as soon as she gave three knocks, as Florrie would be hysterical on awaking, and need my assistance.  She then knelt down and kissed me, and I saw she was still naked.  "Where is your dress, Katie?" I asked.  "Oh that's gone," she said; "I've sent it on before me."  As she spoke thus, kneeling beside me, she rapped three times on the floor.  I struck the match almost simultaneously with the signal; but as it flared up, "Katie King" was gone like a flash of lightning, and Miss Cook, as she had predicted, awoke with a burst of frightened tears, and had to be soothed into tranquillity again.  On another occasion "Katie King" was asked at the beginning of the séance, by one of the company, to say why she could not appear in the light of more than one gasburner.  The question seemed to irritate her, and she replied, "I have told you all, several times before, that I can't stay under a searching light.  I don't know why; but I can't, and if you want to prove the truth of what I say, turn up all the gas and see what will happen to me.  Only remember, it you do there will be no séance tonight, because I shan't be able to come back again, and you must take your choice."

Upon this assertion it was put to the vote if the trial should be made or not, and all present (Mr. S. C. Hall was one of the party) decided we would prefer to witness the effect of a full glare of gas upon the materialized form than to have the usual sitting, as it would settle the vexed question of the necessity of gloom (if not darkness) for a materializing séance for ever.  We accordingly told "Katie" of our choice, and she consented to stand the test, though she said afterwards we had put her to much pain.  She took up her station against the drawing-room wall, with her arms extended as if she were crucified.  Then three gas-burners were turned on to their full extent in a room about sixteen feet square.  The effect upon "Katie King" was marvellous.  She looked like herself for the space of a second only, then she began gradually to melt away.  I can compare the dematerialization of her form to nothing but a wax doll melting before a hot fire.  First, the features became blurred and indistinct; they seemed to run into each other.  The eyes sunk in the sockets, the nose disappeared, the frontal bone fell in.  Next the limbs appeared to give way under her, and she sank lower and lower on the carpet like a crumbling edifice.  At last there was nothing but her head left above the ground—then a heap of white drapery only, which disappeared with a whisk, as if a hand had pulled it after her—and we were left staring by the light of three gas-burners at the spot on which "Katie King" had stood.

She was always attired in white drapery, but it varied in quality.  Sometimes it looked like long cloth; at others like mull muslin or jaconet; oftenest it was a species of thick cotton net.  The sitters were much given to asking "Katie" for a piece of her dress to keep as a souvenir of their visit; and when they received it, would seal it up carefully in an envelope and convey it home; and were much surprised on examining their treasure to find it had totally disappeared.

"Katie" used to say that nothing material about her could be made to last without taking away some of the medium's vitality, and weakening her in consequence.  One evening, when she was cutting off pieces of her dress rather lavishly, I remarked that it would require a great deal of mending.  She answered, "I'll show you how we mend dresses in the Spirit World."  She then doubled up the front breadth of her garment a dozen times, and cut two or three round holes in it.  I am sure when she let it fall again there must have been thirty or forty holes, and "Katie" said, "Isn't that a nice cullender?"

She then commenced, whilst we stood close to her, to shake her skirt gently about, and in a minute it was as perfect as before, without a hole to be seen.  When we expressed our astonishment, she told me to take the scissors and cut off her hair.  She had a profusion of ringlets falling to her waist that night.  I obeyed religiously, hacking the hair wherever I could, whilst she kept on saying, "Cut more! cut more! not for yourself, you know, because you can't take it away."

So I cut off curl after curl, and as fast as they fell to the ground, the hair grew again upon her head.  When I had finished, "Katie" asked me to examine her hair, to see if I could detect any place where I had used the scissors, and I did so without any effect.  Neither was the severed hair to be found.  It had vanished out of sight.  "Katie" was photographed many times, by limelight, by Mr. Alfred Crookes, but her portraits are all too much like her medium to be of any value in establishing her claim to a separate identity.  She had always stated she should not appear on this earth after the month of May, 1874; and accordingly, on the 21st, she assembled her friends to say "Good-bye " to them, and I was one of the number. "Katie" had asked Miss Cook to provide her with a large basket of flowers and ribbons, and she sat on the floor and made up a bouquet for each of her friends to keep in remembrance of her.

Mine, which consists of lilies of the valley and pink geranium, looks almost as fresh to-day, nearly seventeen years after, as it did when she gave it to me.  It was accompanied by the following words, which "Katie" wrote on a sheet of paper in my presence:—

"From Annie Owen de Morgan (alias 'Katie') to her friend Florence Marryat Ross-Church.  With love.  Pensez a moi.

''May 21st, 1874."

The farewell scene was as pathetic as if we had been parting with a dear companion by death.  "Katie" herself did not seem to know how to go.  She returned again and again to have a last look, especially at Mr. Alfred Crookes, who was as attached to her as she was to him.  Her prediction has been fulfilled, and from that day, Florence Cook never saw her again nor heard anything about her.  Her place was shortly filled by another influence, who called herself "Marie," and who danced and sung in a truly professional style, and certainly as Miss Cook never either danced or sung.  I should not have mentioned the appearance of this spirit, whom I only saw once or twice, excepting for the following reason.  On one occasion Miss Cook (then Mrs. Corner) was giving a public séance at the rooms of the National British Association of Spiritualists, at which a certain Sir George Sitwell, a very young man, was present, and at which he declared that the medium cheated, and that the spirit "Marie" was herself, dressed up to deceive the audience.  Letters appeared in the newspapers about it, and the whole press came down upon Spiritualists, and declared them all to be either knaves or fools.  These notices were published on the morning of a day on which Miss Cook was engaged to give another public séance, at which I was present.  She was naturally very much cut up about them.  Her reputation was at stake; her honor had been called into question, and being a proud girl, she resented it bitterly.  Her present audience was chiefly composed of friends; but, before commencing, she put it to us whether, whilst under such a stigma, she had better not sit at all.  We, who had all tested her and believed in her, were unanimous in repudiating the vile charges brought against her, and in begging the séance should proceed.  Florrie refused, however, to sit unless some one remained in the cabinet with her, and she chose me for the purpose.  I was therefore tied to her securely with a stout rope, and we remained thus fastened together for the whole of the evening.  Under which conditions "Marie" appeared, and sung and danced outside the cabinet, just as she had done to Sir George Sitwell whilst her medium remained tied to me.  So much for men who decide a matter before they have sifted it to the bottom.  Mrs. Elgie Corner has long since given up mediumship either private or public, and lives deep down in the heart of Wales, where the babble and scandal of the city affect her no longer.  But she told me, only last year, that she would not pass through the suffering she had endured on account of Spiritualism again for all the good this world could give her. 

This is one of the photos of the materialized 'Katie King' taken by William Crookes.
 

 

In a previous chapter of There Is No Death "The Mediumship of Miss Showers," Marryat explained about what had been a source of confusion for many researchers of Spiritualism.

 

. . . on several occasions, when the materialized spirit has been violently seized and held apart from the medium, it has been found to have become, or been changed into the medium, and always with injury to the latter—as in the case of Florence Cook being seized by Mr. Volckman and Sir George Sitwell.  Mr. Volckman concluded because when he seized the spirit "Katie King," he found he was holding Florence Cook, that the latter must have impersonated the former; yet I shall tell you in its proper place how I have sat in the same room with "Katie King," whilst Miss Cook lay in a trance between us.  The medium nearly lost her life on the occasion alluded to, from the sudden disturbance of the mysterious link that bound her to the spirit.  I have had it from the lips of the Countess of Caithness, who was one of the sitters, and stayed with Miss Cook till she was better, that she was in convulsions the whole night after, and that it was some time before they believed she would recover.  If a medium could simulate a materialized spirit, it is hardly likely that she would (or could) simulate convulsions with a medical man standing by her bedside.  "You see," said Miss Showers' "Florence," whilst pointing out to me the decreased size of her medium under trance, "that ‘Rosie' is half her usual size and weight.  I have borrowed the other half from her, which, combined with contributions from the sitters, goes to make up the body in which I shew myself to you.  If you seize and hold me tight, you are holding her, i.e., half of her, and you increase the action of the vital half to such a degree that, if the two halves did not reunite, you would kill her.  You see that I can detach certain particles from her organism for my own use, and when I dematerialize, I restore these particles to her, and she becomes once more her normal size.  You only hurry the reunion by violently detaining me, so as to injure her.  But you might drive her mad, or kill her in the attempt, because the particles of brain, or body, might become injured by such a violent collision.  If you believe I can take them from her (as you see I do) in order to render my invisible body visible to you, why can't you believe I can make them fly together again on the approach of danger.  And granted the one power, I see no difficulty in acknowledging the other."