What do you all think of the explanation of bank lending in this article?
http://bilbo.economicoutlook.net/blog/?p=14620
Looks like he is confused, or tries to create confusion.
E.g., calling a loan "bank liability" is strange at the least.
Add a bunch of strawmen. E.g., "First, banks do not lend reserves!" - duh, who argues otherwise?
Then again: "Does the bank’s reserve fall as a consequence? Not necessarily because it depends on other transactions." A strawman AND a contradiction to the previous statement. If the bank does not lend reserves, of course they NEVER fall as a result of a loan issued. The reserves just sit there, that's why they have this name. Maybe he meant something like "the part of the reserves available for lending fell", but that would be an abuse of terminology, IMHO.
In other words, I am not convinced he knows what he's talking about.
Search for MMT (aka 'banking is just electronic ledger/accounting!') here -- there have been many discussions about it, IIRC, also with the author of that article himself.
We should ban financial speculation on food prices
lol
Freedom of markets is positively correlated with the degree of evolution in any society...
Well I've read at least some of the MMT threads on this forum but I didn't find that issue discussed. Essentially they are arguing that credit creation is dependent on banks making loans from which they hope to derive a profit, rather than from the theoretical money supply, e.g. as it exists in reserves. If the above is true, then all the QEs are completely irrelevant, since inflation is limited by the extent of profitable loans, rather than a specific quantity of money, and therefore that this limit would be the same with or without QE.
The outcome would be the same though - a situation of ever-increasing inflation, far above what a free market in money would allow for.
Besides, what determines a loan's profitability? Interest rates which the Fed and other central banks charge, interbank lending rates and risk adjustments, which when the government insures you from losses is not very expensive at all.
If reserves don't matter, how is it determined who could lend how much (of what?) to whom? Here, I just became a "bank" and I lent you $1,000,000. Happy?
It's all just a bunch of electronic ledgers, or if it isn't then it should be. I think this about sums up the jist of MMT. It's probably one of the stupidest "theories" ever produced by a human mind.
I don't quite get it either. I don't think, for one, that central bank reserve requirements are imaginary. Whilst central banks stand ready to provide "liquidity" if banks run dry on cash, they're expected to have a minimal amount to ensure they can meet day to day redemptions as well as any emergency redemptions.
What I think he is saying:
If there is no law requiring a minimum reserve, which is apparently the case in some parts of the world, then banks can write checks [and hand them over to all comers as a loan] that have no backing whatsoever. Obviously the amount of reserves does not limit the amount of money lent, because why should it?
In the US there is a law requiring banks not to write checks more then tem times the amount of cash they have in reserve, so it looks like the amount in reserve does influence the amount of checks that can be written that have no backing. And that's the mainstream point of view, he is saying.
But there is a loophole to this law, he claims. If the bank feels like writing a fat check to someone who wants to borrow money from them, but they don't have the reserves to allow this under the law, they have an easy out. They just go to the central bank and ask for cash after the fact.
In story form:
Teller: Jones wants to borrow 10 million bucks, boss.
Manager: Cut him a check.
Teller: But we only have five bucks cash in the vault, boss, and you said I could buy some pizza with it.
Manager: Don't worry about it.
Teller: But it's illegal. I am not allowed to write lend 10 million dollars unless we have a million bucks in cash in our vaults, which we don't.
Manager: No problem.
The manager picks up the phone, calls up Ben Bernanke, and says he needs a million bucks cash, ASAP.
Ben: No problem. I'll have to charge you a bit of interest of course.
Manager: That's OK, Good ole Jones is paying us a higher interest rate, so we'll all profit.
Bottom line, if what he says is true, that Bernanke is free with the moolah like that, then the whole article is spot on.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Even if the reserves can be grown at will by just calling Ben, this does not change the fact that lending is limited by reserves divided by the cash reserve ratio.
To provide an analogy - even if you can print money at will, this does not change the fact the amount you can purchase is limited by the amount of your money (divided by prices).