drstrangelove wrote:Bank reserves escape into the economy through fractional reserve lending. increase bank reserves = increase credit = increase money supply. these are direct impacts, not inferred. to say otherwise is like arguing the gold standard had nothing to do with deflationary currency and price instability. they abolished fractional reserve lending ratios in march 2020, hence the expansion of the money supply since then, and the high levels of inflation in most areas of the economy due to credit.
Fractional reserve lending doesn't exist, it hasn't existed for 500 years. Bank reserves do not escape into the economy. Bank do not lend out any reserves (except to other banks), and reserves never leave the the Fed, where they are moved from account to account in settlement of payments. That's why bank reserves are more properly called "settlement balances" because they're used to settle payments (clear checks, etc.) among banks—
not to fund loans.
Increasing bank reserves does not increase credit issued by banks; this was plain when the Fed multiplied the amount of bank reserves and banks
didn't increase lending (rather, bank lending
decreased). Adding bank reserves doesn't increase the money supply. Loans and federal spending increase the money supply. Bank lending in the modern era was never reserve-constrained or deposit-constrained, because banks could always obtain, easily, any reserves required to match loans. Since 2008, the Fed pays banks interest on reserves, making holding 'excess' reserves more attractive. It had no effect of increasing bank lending.
In March 2020 the Fed ended minimum reserve requirements—
not fractional lending ratios, which didn't exist then, or now. It did not increase the issue of bank credit.
This faulty perception of the banking framework is the source of many confusions and misguided policies—and not least the myth of money as a private creation, which turns reality on its head and puts Big Finance in the driver's seat.
Here are some resources for better understanding the banking system:
https://www.forbes.com/sites/francescop ... 47264e2e69If You Don't Understand Banks, Don't Write About ThemFrances Coppola
“Money creation” by banks arises from two things:
- Double entry accounting
- The way we define and measure “money”
Under double entry accounting, creation of a new loan asset requires creation of an equivalent liability. This is the new deposit that is created with every loan. Thus, when BigBank lends $90 to a customer, it creates a new loan asset for $90 and a new deposit for $90. This deposit is created “from nothing” (ex nihilo).
The money created by central banks – currency (notes & coins) and bank reserves – is known as “base money.” Money created by the private sector and included in measures of the “money supply” is known as “broad money.”* Most of the money people use every day is broad money. When your employer pays your wages directly into your bank account, they are paying in broad money. When you pay your mortgage from your bank account, or use a credit card, you are using broad money. Unless you are a bank, the only base money you will ever use is banknotes and coins...
* (also called "bank money")
https://www.forbes.com/sites/francescop ... 9b49587d20Banks Don't Lend Out ReservesFrances Coppola
Firstly, here’s a short explanation of bank lending. Under normal circumstances, deposits and loans are more-or-less equal across the banking system as a whole. This is because when a bank creates a new loan, it also creates a new balancing deposit. It creates this "from thin air", not from existing money: banks do not "lend out" existing deposits, as is commonly thought. You can see this clearly on the chart. Until 2009, deposits and loans were roughly equal.
But since 2009 there has been a very evident change. There is a large and growing gap between loans and deposits. So what is causing this?
Firstly, banks, households and businesses have been deleveraging. That means they are paying off (or writing off) loans and not taking on any more. Damaged banks don't want to lend, damaged households don't want to borrow and fearful businesses don't want to invest. The combination of these three factors means that both the supply and the demand for loans are considerably below the levels prior to the financial crisis. This explains the evident fall in loan creation (red line) in 2009. Though the line is now rising. Seems banks are lending, actually, though not at the rate they were before the crisis....
https://research.stlouisfed.org/publica ... multiplier Econ Primer: September 2021
Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplierby Jane Ihrig, Gretchen C. Weinbach, and Scott A. Wolla
Many introductory economics classes include lessons on the important roles of banks and the Federal Reserve (Fed) in the U.S. financial system and how these two entities are linked.
While some textbooks provide sound descriptions of these topics, many miss some key aspects of how banks make decisions, inaccurately explain how the Fed implements monetary policy, and contain outdated descriptions of the linkage between banks and the Fed. This outdated link is often tied to the concept of the "money multiplier," which is anchored in an obsolete explanation of how the Fed operates and influences banks. We recommend that textbook authors and teachers eliminate the use of the money multiplier concept in explaining the linkage between banks and the Fed. Instead, we suggest that classroom materials emphasize a contemporary description of how the Fed operates, focusing on changes in interest rates, not monetary quantities, as the mechanism through which Federal Reserve policies are linked with the banking system and the rest of the economy.
In this article, we start with a description of the role of banks and the Fed in the financial system. From there we discuss some linkages between the two. We conclude with a summary of the key, current concepts most relevant for the classroom....
https://www.bankofengland.co.uk/-/media ... conomy.pdfMoney creation in the modern economyBy Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
Money creation in practice differs from some
popular misconceptions —
banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
[...]
The reality of how money is created today differs from the description found in some economics textbooks:
- Rather than banks receiving deposits when households save and then lending them out,
bank lending creates deposits.
- In normal times, the central bank does not fix the amount of money in circulation,
nor is central bank money 'multiplied up’ into more loans and deposits.
[...]
As a by-product of QE, new central bank reserves are created. But these are not an important part of the transmission mechanism. This article explains how, just as in normal times, these reserves cannot be multiplied into more loans and deposits and how these reserves do not represent ‘free money’ for banks.
https://www.bankofengland.co.uk/-/media ... idence.pdfBanks are not intermediaries of loanable funds — facts, theory and evidenceZoltan Jakab and Michael Kumhof
June 2019
Macroeconomics was initially only able to offer limited analytical support because banks, with few exceptions, had been ignored in theoretical and empirical work. This has now changed, with a new literature that has made many valuable contributions. However, the conceptual and modeling framework that is almost universally used in this literature is the intermediation of loanable funds (ILF) model, and a critical feature of this model is that it adopts a shortcut that describes banks as intermediaries of physical resources akin to warehouses. We will demonstrate below that this is indeed the only possible interpretation of the ILF model, and we will argue that this shortcut is unnecessary, and that it should be avoided because it is counterfactual, and unrealistic in its implications...
This paper explains a few things:
"Paying Interest on Reserve Balances: It's More Significant than You Think"
Scott Fullwiler
Abstract
It has long been recognized that uncompensated reserve balances act like a tax on banks and that banks as a result expend scarce resources to avoid holding them. The Fed itself has historically supported legislation to enable it to pay interest on reserve balances (e.g., Kohn 2003), as have economists (e.g., Goodfriend 2002), both for reasons of economic efficiency and to improve the implementation of monetary policy. The traditional argument against interest payment has been that it would reduce the Fed’s earnings that are subsequently turned over to the Treasury (Feinman 1993b; Abernathy 2003). The purpose of this paper is to demonstrate the implications of paying interest on reserve balances on the daily operations of both the Fed and the Treasury. While the arguments here - for different reasons - generally are in favor of enabling the Fed to pay interest on reserve balances, more important than the actual payment of such interest is the perspective gained when considering in detail the operations of both in an environment where reserve balances earn interest.
Two books:
1.
Money: The Unauthorized Biography by Felix Martin. You'll be really glad you read this book.
2.
The Nature of Money - by Geoffrey Ingham. Ingham has a short paper summarizing the book:
Ingham hits upon a crux of the issue:
If bank loans come from savings, where does the savings come from? If federal spending comes from taxes and bond sales, where did the money to pay taxes and buy bonds come from? In short,
where did all the money come from?Now we should ask
why would orthodox neoclassical economics ignore, obfuscate—or conceal—the source of money?