This is false for a fixed regulatory capital and when subjected to time domain analysis:
Banks do not lend out reserves and a particular bank’s ability to expand its balance sheet by lending is not constrained by the quantity of reserves it holds or any fractional reserve requirements that might be imposed by the central bank.— Nathan Becker (@netbacker) July 14, 2018
Not taking issue with netbacker but perhaps the one who put this idea in his head...
10 comments:
I finally unfollowed him yesterday. He constantly shitposts MMT but gets the facts wrong. *slaps forehead* If he's going to troll all the time as a self appointed expert on mmt, at least make some attempt to understand. I have no idea who Nathan is in RL, but he deserves some flaming, I don't do the tribal loyalty thing. An MMT moron is still a moron and there are growing numbers of MMT morons. Last week there were some others...
Banks do have reserve requirements that must be met periodically. Like the end of the day -- they can not repeatedly run overdrafts at their Fed account without triggering regulatory scrutiny of the institution. Some of the MMT narrative is so easily debunked by taking 10 minutes to actually read the Fed's website. Go start signing up for a Fed account, fill out the paperwork for your company. Read the docs. In the real world when a bank makes a loan the reserves don't just stay in the same bank. Regulators do impose strict rules on the liability side of a bank balance sheet as well as the asset side. In practice, banks are capital constrained as well as reserve constrained. Remember when Mosler owned the bank in Florida, how he used to howl and gripe about how the regulators **shouldn't** worry about liability side...and focus on the asset side. Capital constraint narrative is always true in a pure MMT system but we don't have a pure mmt system.
Not taking issue with netbacker but perhaps the one who put this idea in his head...
He is citing the general case, which is correct.
One also has to check the institutional arrangement that may modify the general case so that the general case doesn't apply quite as stated but rather in terms of a special case.
But the principle that bank loans create deposits is correct, and so is the claim that banks don't lend out either deposits or reserves.
Bank reserves do affect lending through the leverage ratio, but that is a special case under the general case.
MMT functionally describes how the system functions as it exists. As it exists isn't the special case. It's the base case. The special case is to optimize the system, get rid of the reserve requirement and focus solely on capital constraint: asset quality, end interbank lending and borrowly solely from the Fed. That is a *prescriptive fantasy* Just like the JG.
Virtually every banking system in the world has reserve requirements, leverage and capital requirements. In theory small banks in the US don't, but their non-deposit funding is heavily regulated and constrained to effectively limit it anyhow.
The way I understand it is this.
"Base case" is generally used wrt recursion.
"General case" is generally used wrt theories, as in "general theory of.…"
MMT economists use "general case" and "special case" in their work, at least in what I am familiar with.
Actually, I am just parroting what they have said about the issues recently under discussion here at MNE. I think I have got it right but stand to be corrected if not.
My bad. General it is.
Well conditions were created that caused what is termed the GFC that can only be understood outside of the General case then...
Virtually every banking system in the world has reserve requirements
In fact, Canada, the UK, New Zealand, Australia, Sweden and Hong Kong have no reserve requirements.
See here: https://en.wikipedia.org/wiki/Reserve_requirement#Countries_without_reserve_requirements
Anyway, as Lavoie and Seccareccia put it, "even when there were reserve requirements, reserves were being provided on demand [by the Bank of Canada] in day-to-day operations as a way to stabilize interest rates at the level targeted by monetary authorities." ("Macroeconomics", First Canadian Edition, 2010, page xxiii)
If a country doesn't have a reserves system it uses what might be called a Government Securities Based Settlement System. Brian Romanchuk explains this in his book "Understanding Government Finance." He describes a reserves system as an optional bolt-on facility.
Well conditions were created that caused what is termed the GFC that can only be understood outside of the General case then...
Often so. MMT economists have pointed out that a lot of the issues stem from imposition of special conditions voluntarily (politically) that are not necessary operationally in terms of the general case monetary system in place. This may be unique to countries or mandated by international institutions like the BIS, or treaty, like the EZ.
So all specific cases need to be looked at individually.
Here is an additional reference:
https://www.federalreserve.gov/SECRS/2007/August/20070809/R-1238/R-1238_21_1.pdf
"For various reasons some of
these banks are not bound by the minimum capital requirements of Basel I, in the sense 2
that they would not reduce their capital if the supervisors reduced the minimum capital
requirements. Other banks are bound by the leverage ratio, rather than the risk-based
capital requirements of Basel I. The leverage ratio is a minimum ratio of Tier 1 capital to a measure of total assets.
2 For this evidence, from the Fourth Quantitative Impact Study, see the statement of Powell (2005).
So if the CB were to rapidly increase Reserve Assets by extreme amounts in the system, the banks would quickly be in violation of the target regulatory leverage ratio and would become "reserve constrained" and prevented from establishing other risk assets until either Reserves Assets were reduced or additional regulatory capital could be raised by the institution to bring the ratio back into compliance levels..
... but imo the credit system would largely shut down until either of those response actions took place and it would be due to a radical increase in Reserves..
Post a Comment