Monday, June 25, 2012

Warren Mosler on "deposits create reserves"

From comments at The Center of the Universe
Y Reply:
June 25th, 2012 at 10:18 am
Warren,
“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?
thanks!
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.

4 comments:

Bob said...

I have a question for Jamie Dimon,
Name your hard asset collateral for the trillions in speculative trades and loans you make, do you have any REAL ASSETS TO BACK UP THESE levered loans, or are you saying any arbitrary item such as a piece of cheese is our collateral, pure fantasy the banks are broke, bankrupt and should have been allowed to fail, instead of dumping off the losses on to the american people who will now have to WAIT FOR IT, suffer austerity to pay for the sheeples extragent wastefull lifed styles, Of cours the 1 percenters tried to stop this excessive wasteful lifestyle , I think I am gonna throw up in my mouth!

Tom Hickey said...

JPM Chase has assets of $2T. A few billion is peanuts to them. But that is not the point.

y said...

Bob has been watching Keiser Report. Max argues that a lot of big bank assets are just rehypothecated rehypothecations. Apparently the UK has no legal limits on rehypothecation. True or false would you say?

Tom Hickey said...

"Bob has been watching Keiser Report. Max argues that a lot of big bank assets are just rehypothecated rehypothecations. Apparently the UK has no legal limits on rehypothecation. True or false would you say?"

UK law is very liberal toward the City, since finance is the major industry and actually supports the Brit economy. It's caveat emptor there.