This overly simplistic analysis misses the mark there is more to it than this Accounting:
This is why understanding accounting is so important. If I’m a bank with $100 in assets, $90 in deposit liabilities, and $10 equity (residual), my total equity capital as % of assets = $10 / $100 = 10%. If reserves and deposits both ⬇️ by $10, now equity capital = $10 / $90 = 11% https://t.co/eKQKyCWWbW
— Applied MMT Podcast 🎙️ (@AppliedMMT) August 10, 2023
The MMT people say this here which implies a Depository will always have the reserve balances to settle a withdrawal.. (btw while at the same time saying “reserves don’t matter” so which is it?). (btw They also say “loans create deposits” while implying here that a deposit liability creates a reserve asset, so again which is it?)
The Fed reduced its own RRR from a former ≈10% of deposit liabilities (btw a policy MMT people criticized) to the current 0% back in 2020 so now what is supposed to happen if the Depository doesn’t have the reserve balances to settle large depositor withdrawals?
As happened back in March, Depositories have to sell other forms of regulatory required govt issued financial assets now at severe losses… due to same incompetent Fed psycho’s unprecedented risk free rate increases to reduce their figure of speech “inflation!” … which can lead to a total loss of the Depository’s equity… and the Depository has to be closed with uninsured deposits at risk of total loss for the unsuspecting innocent depositors…
So there’s a lot more to it..
3 comments:
"The MMT people say this here which implies a Depository will always have the reserve balances to settle a withdrawal."
If a Treasury is sold a bank deposit is destroyed somewhere, which is matched with a reserve somewhere - which is then similarly destroyed. The bank either has it, or it borrows it - with the backstop being the 'lender of last resort' at the Fed.
Assets are never sold at a loss. At worst they are repo'ed.
Treasury only sells bonds to the extent that they have already added extra reserves to the system.
If a bank is prevented from obtaining liquidity, because the central bank is being foolish, then the payment will never happen in the first place, and the payment system starts to fail. Which then causes the central bank to back off and start supplying liquidity again - to protect the integrity of the denomination payment system
That's all standard MMT stuff.
"If a bank is prevented from obtaining liquidity, because the central bank is being foolish, then the payment will never happen in the first place, and the payment system starts to fail."
I think that's the key line here. Kind of what Matt and Mike were talking about in 2019 when the Fed allowed system reserves to drop below 1.3T which was below the 10% system wide RRR needed. Nothing really happened in the grand scheme of things but on a lessor grand scale there was a minor panic. So it's not like some end of world thing but "because the central bank is being foolish" can cause problems.
"Which then causes the central bank to back off and start supplying liquidity again - to protect the integrity of the denomination payment system"
The failure of Silicon Valley Bank makes it clear that the claim above doesn't match with the real world.
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