From comments at The Center of the Universe
June 25th, 2012 at 10:18 am
“the fed allows it’s member banks- it’s designated agents- to ‘create’ reserve balances within the regulatory framework.
This framework includes reserve requirements as well as extensive regulation on what type of loans/assets are allowed and not allowed. So if a bank creates a loan/deposit/reserves it’s done so within the regulatory framework as a agent of government.”
- When you say the fed allows its member banks to ‘create’ reserve balances, do you mean the fed allows member banks to become ‘overdrawn’? Why do you put ‘create’ in speech marks?
Could you clarify specifically what you mean in detail when you say member banks ‘create’ reserve balances?
Warren Mosler Reply:
June 25th, 2012 at 10:52 am
Bank deposits are the accounting record of the liability associated with loans.
So when a bank lends you $100 they might at the same time enter the number ’100′ into your checking account.
But the loan didn’t do the entering of the 100 into your account per se. The 100 liability is the accounting record of the loan.
liabilities are accounting records off assets, etc.
When you account for something you don’t exactly ‘create’ it the way the word ‘create’ is generally understood-
making something out of something else, etc.
What I mean by allowing banks to create reserves is that regulation allows banks to make loans and corresponding deposits that it will accept for payment of taxes recognizing that they are allowing that bank to incur a reserve deficiency in the case of reserve requirements. Additionally, when the Fed ‘clears a check’ it’s allowing the possibility of the account debited to be overdrawn which is also the possibility of a loan from the Fed.