Monday, October 17, 2011

CNBC's Carney picks up on the Harvard International Review interview of Bill Mitchell

Very few people understand how the modern banking system really works.

They have in their heads a model they learned from text books in which banks take deposits from customers, then lend out those deposits as loans. In reality, banks fund their loans by borrowing in the interbank market.

Once a bank has agreed to make a loan, it then borrows the same amount of money in the interbank market at a slightly lower rate. The lending comes first, the borrowing to fund the loan comes afterwards. This is why so many loans are pegged to LIBOR : Banks charge borrowers rates that are set to levels at some point above what the banks themselves pay to borrow.

A very similar misconception applies when the government spends and borrows. People imagine that the government must first collect taxes or borrow money in order to have funds to spend. In reality, the government just spends what it wants, and then collects taxes in order to balance out the effect the spending has had on the money supply.

In short, banks lend first, fund later. Governments spend first, fund later.

There's a great discussion of this in the Harvard International Review's interview with Bill Mitchell, the research professor in economics and the director of the Centre of Full Employment and Equity at the University of Newcastle, Australia. Mitchell is one of the founders of a school of thought called "Modern Monetary Theory" (MMT).
Read the rest at CNBC, How the Banking System Really Works by John Carney

(h/t Scott Fullwiler)

Of course, Carney rather botches the job, but, hey, it's a start.


Matt Franko said...

You know Tom this coupled with my last post on the poor trading performance at Citi... makes the case that these people really dont know what they are doing.

Yet they purport to be 'qualified' at their jobs in managing investors and shareholders money/capital.

They really are not qualified.

Here Carney comes out with an article that says "Not many people (implied: 'on Wall St.') know how the banking system works"... well then what the F are these people doing managing other people's money???

This should expose them to huge investor lawsuits based on the fact that these people present themselves to investors as 'qualified'.

They obviously are NOT qualified. A case for a lawsuit can be made imo based on misrepresentation of their knowledge and abilities.


Chewitup said...

On a positive note, I can report that my daughter did an internship this summer with a global fixed income group and she reports that they are fully aware sovereign monetary operations. We went over MMT and she informed me their fund managers were in full agreement.
The Citi traders were likely lazy and just mimicked Gross' moves.

Matt Franko said...

Tom, He misses 'loans create deposits (reserves)'...

But again, this is galling to see this...

Carney is basically calling BS on "hobgoblins":

"and without illusionary risks of bond vigilantes and other such hobgoblins of so much economic thinking."

This is an outrage! Carney's employer there CNBC has that moron Santelli on 11 24/7 blasting on about how the govt is beholden the these same vigilantes and Bill Gross is on seems like daily with his uniformed commentary.... then they have Schiff/Pento/Kudlow/Rogers...

Hey, CNBC, want to impress me? Have Mike go on your channel at all times against any of these out of paradigm morons.

The nerve!

Matt Franko said...

I just cant get over this... this is unbelievable..

Carney here writes: "How the Banking System Really Works"

Who is he talking to?

And you have Warren Mosler on CNBC who explains it all and their on-air morons dimiss him and cut him off...

Hey Carney: Look inward there! This shouldnt be a blog, this should be an internal memo to your morons there and 99% of your moron guests!

Matt Franko said...

I got it Carney: Why dont you have a quiz for all of your moron guests and on-air people where they have to explain how the banking system REALLY works before they can show their moron faces on your shows?

See if Rick Santelli can pass the quiz. See if Ken Langone gets a passing grade, see if moron Bernie Marcus passes the quiz. Hey, see if Bill Gross or Mohammed Al-Arian can pass.

This is an outrage Tom!

Matt Franko said...

Carney: Yeah no big deal, put it in a blog.... no big deal that CNBC has been broadcasting BS and mis-information for years... no big deal, put out a blog that links to a Bill Mitchell interview...

Why don't you consider having Bill or any of the MMT thought leaders on as guests on a regular basis you moron!!! Or better yet give them a contract to put a course together for your staff there... Santelli has to take the course first.

Tom Hickey said...

Carney is better than Gasparino anyway.

Fox's Charlie Gasparino: Occupy Wall Street Is A "Marxist Epicenter" That's Becoming "Increasingly Violent"


Matt Franko said...

Tom they are trying to provide "balanced" reporting by having their own Italian moron to balance out Santelli at the CNBC....

Matt Franko said...

If they were true 'reporters' or 'journalists' they would be looking at the Paulson Hedge Funds.

CNBC has been reporting under the radar that one of his "hedge" funds (keyword here being 'hedge') was down over 30% this year (probably billions I'd have to imagine) and he was a UST debt doomsday trader....

This is a potential scandal if it can be shown his investment decisions were based on a faulty understanding of the operations of the US Treasury and the related banking/dealer system; a potential feeding frenzy for malpractice lawyers... but then again he could just claim he got all of his information from the morons at the CNBC!

Matt Franko said...


It's like instead of the CNBC channel they are running "The Dental Channel".

Every morning you get up and turn it on you see: Their first guest blah blah on about how flossing is not necessary... then next hour they have on the author of the new book "Teeth brushing is a Waste of Time".... this goes on for years... then everybody across the country's teeth are falling out...

then one day they post up an obscure blog that links to an interview with a representative of an unknown organization called the ADA, a researcher who has been advising that people practice dental hygiene and preventive care for decades...

Then on TV they bring on their next host who is from the American Replacement Teeth Manufacturers Association who presents their new report against flouride in the water....

These CNBC people have a lot of nerve...

Chewitup said...

I agree with you. But I think CNBC has been unwatchable and irrelevant for quite a few years now. FoxBusiness is only watchable if Mike is on. The Rueters pieces I see on occasion are good. It is safe to say that television is no longer a reliable sourse of information.

WillORNG said...

Bizarrely Russia Today gives MMT people like Mike more air time, admittedly to flat earth mediaevalist blood letting Aust/e/rian political economics too...

John Carney said...

My blog isn't obscure!

Just kidding.

One question: What do you think I botched Mike?

Clonal said...

John Quiggins had two good posts today

Money for nothing?

Whenever I write anything about public expenditure and taxation, I’m likely to get someone commenting that Modern Monetary Theory has shown that a government with its own currency does not need taxation to finance public expenditure. I’ve tried a couple of responses to this, but now I think I can explain better why this argument is
(a) wrong in terms of (what I understand to be) the central claims of MMT
(b) regressive in terms of taxation policy
(c) politically pernicious


Tea Party didn’t mind bailing out Wall Street, only Main Street

My Fin column from last week is over the fold. It’s mainly about the Occupy Wall Street protests, but in this post I want to stress a misleading comparison with the Tea Party. It’s often suggested that the Tea Party arose in response to the bailout of Wall Street, and until I checked, I had somewhat accepted this claim, even if it was obvious that the protest served the interest of its supposed targets.
In reality, though, there is no truth at all to this claim. To quote from the article

Tom Hickey said...

John, thanks for stopping by. I wrote that rather than Mike, although he may have something to say, too.

First, let me say that proponents of MMT including myself are gratified that you have taken an interest in it and wrote very positively about it. I hope you will spend more time looking into it.

Bill's summary in the Harvard International Review is excellent but it is only a thumbnail sketch. There is a lot available by MMT economists both in papers and in their blogs.

Why I said you botched it was because I don't think you did all that good a job in summarizing the key points that Bill was making. "Botched" is a strong word and it was meant in the sense that most people fresh to MMT present their understanding in terms of knowledge gained from a single presentation like Bill's. It is difficult to understand the MMT view from such exposure.

You did OK in reporting on your take away from Bill's piece, and I don't think that you misrepresented what he said. That is a huge advance over many others, and I commend you for it.

You also pointed out what you saw might be a difficult in an approach based on fiscal policy. MMT admits that fiscal policy is based on political decisions, with all that implies.

On the other hand, you said, "In reality, banks fund their loans by borrowing in the interbank market. Once a bank has agreed to make a loan, it then borrows the same amount of money in the interbank market at a slightly lower rate." That is not what happens all the time in bank lending. The reality is that banks lend against capital based on customer demand for loans and creditworthiness. Then they arrange for reserves afterward, not always by borrowing in the interbank market. The important point here is 1) banks don't lend reserves or against reserves, and 2) reserves come after lending decisions rather than shaping them beforehand. This means that the money multiplier is simply wrong, as recent BIS papers have pointed out too.

(continued below)

Tom Hickey said...

You also say, "People imagine that the government must first collect taxes or borrow money in order to have funds to spend. In reality, the government just spends what it wants, and then collects taxes in order to balance out the effect the spending has had on the money supply." This is true, but I didn't thing it was the best way to put it because it obscures the all important point that the federal government in the US in the currency issuer and households, firms, and US states are currency users. The currency issuer is not constrained operationally whereas currency users are revenue constrained.

This is enormously important in the context of current debates, which are based on the erroneous analogy between the federal government's budget and debt, and household, firm, and state budgets and debts. The only constraint on the federal government's spending in the availability of real resources. If the federal government injects more spending power into the economy than business is capable of meeting, then inflation will result. With a large output gap and millions of unemployed, that possibility is not immediate, as many fear.

I would have preferred to the see the discussion go down that path. Maybe you will consider this for another column.

I strongly recommend that you read Warren Mosler's The Seven Deadly Innocent Frauds of Economic Policy, which lays out the myths that stand in the way of formulating effective policy, i.e., one that achieves full employment at full utilization along with price stability. Follow that up with his paper Soft Currency Economics. Warren wrote this based on his experience as a fixed income fund manager. It launched MMT when economists Randy Wray and Bill Mitchell joined him in unpacking the implications of that initial article and relating it to Wynne Godley's sectoral balance approach (used by Jan Haztius, for example), Abba Lerner's functional finance, Minsky's financial instability hypothesis, etc., in order to build a macro theory.

But Warren is a chiefly a financial expert and he takes that approach rather than getting into the academic side of it. Warren is also a great resource personally and I am quite certain that we would be very open to talking to you about MMT, answering any questions, etc. His blog also gives a daily update on his insight into the financial picture. It's great free advice.

Maybe you would then consider writing a post or two from a more well rounded perspective.

Tom Hickey said...

Thanks for the links, Clonal. Just perusing the first, there are some interesting comments — Steve Randy Waldman, JKH, come to bat for MMT for example.

Matt Franko said...


Your blog is obscure relative to the TV broadcast....

With what knowledge you exhibit here, how can you tolerate Santelli and his rants knocking on US Treasury Securities? Bill Gross tweeting: "Who is going to buy them now?" Outrageous! (I know, I know 'he pays the bills, dont tell me....') Jim Rogers recommending selling USTs since the 1990's and coming on saying 'sell bonds'? Schiff?

With what knowledge you exhibit here, how can CNBC people just sit there when politicians come on and say moron things like: "We're out of money"... How?

You're words here: "Governments spend first, fund later." Since you realize this, how can you let these morons both at CNBC and guests get away with statements that then question the "credit" of the US govt? How? How does that work there? When you yourself here admit that the govt spends first?

I know you work around Wall St. where there seems to be no honor, but consider there are young people and our seniors who watch your channel and deserve the truth and accuracy in reporting and analysis. These people are not sophisticated and RELY on your channel for this information...

If you want a good show to put on in the evenings/nite, get with Mike and put together a show that focuses on hard core economics and economic policy debate.... it will NOT be boring, but be forewarned that a lot of reputations will fall... A LOT!

Matt Franko said...


Your words: "Very few people understand how the modern banking system really works."

True enough!

Your words: "In short, banks lend first, fund later. "

In MMT, this is described as "loans create deposits" and then the corresponding reserve balances in the banking system.

So it follows from your own logic here that if people dont realize that 'loans create deposits', then in your words: "they don't know how the banking system really works". OK?

Well by your own definition, and go back and check his speeches and Congressonal testimony pre QE1 (MBS purchases): BEN BERNANKE 'DIDN'T KNOW HOW THE BANKING SYSTEM REALLY WORKS'. I dare you to report that Mr CNBC blogger.

And Larry Kudlow, Santelli, same thing. NO ONE in Congress knows how the banking system really works (again your words here).

I'll bet you a dollar that JAMIE DIMON, the head of JPM, if you could sit him down and ask him a few questions, does not know how the the banking system really works (your words again).

Here is your question for Dimon (or better yet, WARREN BUFFET! same thing)

John Carney: You know Mr. Dimon/Buffet, the Fed has created a lot of reserves in the system in response to the current lackluster economy, yet bank lending/credit has not picked up at all. What is it going to take for the banks to actually start lending out those reserves and help the economy recover?

I GUARANTY you Carney, their response will NOT be: "That's not how the banking system really works John"... Checkmate!