Clint Ballinger — Modern Monetary Theory & Full Reserve Banking: Connected by Fiat

The fourth of a series of posts on MMT, ‘The Chicago Plan Revisited’, and related issues...

There are actually two concerns most advocates of Full Reserves have:

1. Solvency – there are few solvency issues with full reserves; not surprisingly a major concern in the 1930s for Simons, Fisher, The Chicago Plan etc.

2. (Endogenous) money creation

The second is much the more important, but the two are often confusingly conflated.
Partly this is because the significance of the fact that the loanable funds model is wrong and there is no money multiplier is not always fully appreciated by Full Reservers.
Banks do not make loans based on reserves or loanable funds but based on demand, perceived profitability, and the capital they hold. The government covers reserve requirements later. Raising reserve requirements can raise costs but does not stop money creation. Even the focus on sight deposits (i.e., PositiveMoney) misses the point – not only do reserve requirements not stop money creation, neither does stopping lending based on sight deposits. Banks loans pull money from the central bank, with the limit being the ratio of capital to risk-weighted assets.

So, unless Full Reservers are only worried about bank solvency, which is doubtful, they are really addressing concerns that have their root in endogenous money.

Clint Ballinger
Modern Monetary Theory & Full Reserve Banking: Connected by Fiat

On re-hypothecation and shadow banking

Interesting article on financing credit creation through re-pledging loan collateral aka re-hypothecation. Banks generally finance loans by obtaining deposits to obtain needed reserves for their reserve account at the central bank since it is the least expensive financing. "Shadow banking" uses re-pledging of collateral, called "re-hypothecation." Since the financial crisis, shadow banking and re-hypothecation are  being explored key factors, the significance of which has previously not only gone largely unrecognized but also has been unsupervised and unregulated. Now experts are beginning to look into this.

Read it at Vox.eu
The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh, Senior Economist at the IMF, and Peter Stella, Director of Stellar Consulting LLC

For background, see The Financial Time | FT Alphaville
When safe assets return
by Cardiff Garcia

Does the shadow banking system’s relationship to monetary policy have any implication for the Smithian/neo-Wicksellian view, which awaits the natural rate of interest imminently rising to and exceeding the federal funds rate? Is there an equivalent for the shadow banking system — perhaps something related to collateral haircuts? What about the NGDP guys? The MMTers? The John Carney?

MMR's Mike Sankowski comments.