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.
As I mentioned in the other thread, I think MMT and MMR should get on the shadow banking train and throw their two cents in. I think they can be particularly strong on the operational end, comparing it to commercial banking, and fill in that gap where others aren't or can't. (That said, I haven't read this article yet, will in the morning.) It does seem pretty important from a policy perspective.
ReplyDeleteMostly because these groups get normal banking right whereas many others don't, so I am a little skeptical when reading their analyses.
ReplyDeleteThe private creation of money should be banned. Milton Freidman said so, as did Abraham Lincoln, Irving Fisher, and James Tobin. Is that enough brain power for you?
ReplyDeletePrivate money creation causes the following problems.
1. The creation of “savings” from thin air leads to an artificially low rate of interest as compared to where lenders have to abstain from consumption in order to provide the funds for investment.
2. Under a pure private money creation regime (i.e. under fractional reserve) the entire money supply can vanish given a collapse of the private banking system (which helps explain why governments don’t dare let large banks go bust, and hence provide banks with massive subsidies in the form of the TBTF subsidy. In contrast, under full reserve, the money supply cannot vanish, thus full reserve is more stable.
3. Where do you think the money to fund the house price bubble that preceded the crunch came from? Yep: it came from private bank money creation. I.e. private money creation is destabilising.
Ralph Musgrave,
ReplyDeleteWarren Mosler's proposals for reforming the banking sector would deal with many of the problems you mention.
Plus, if the government were to deficit spend without issuing bonds, and run large deficits as MMTers recommend, the banking system would be getting close to full reserve anyway. $15 trillion of reserves.
at least this senior economist at the IMF Manmodahn Singh is aware of MMT.
ReplyDeleteoh no sorry it's the FT journalist
ReplyDelete