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That's not how it works. The 5% or 15% is the cost of risk over the risk free rate that they are getting it at. If there is sufficient interbank competition thi

That's not how it works. The 5% or 15% is the cost of risk over the risk free rate that they are getting it at. If there is sufficient interbank competition this is a market determined rate. A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers, they are not in a position to price granular risk, and that is the normal function of a working banking system.

pdonis 8y ago
> A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers No, a central bank injects the money via the banking system as a hidden subsidy to banks and other financial institutions. If a central bank really wanted to make printing money neutral (i.e., not picking any winners or losers), it would use newly printed money to increase every single person's dollar holdings by the same percentage.
- api 8y ago
  AFIAK that kind of "money from helicopters" approach is something I've heard discussed by progressive economists, but until quite recently it was not technically feasible to do this fairly. It would still be pretty hard to implement.
  - pishpash 8y ago
    The money from helicopters approach is better done on the fiscal side. Except the guy in the US who wanted to do it was cock-blocked by his opponents for 6 years and in the EU they are handcuffed by various laws. Still, by comparison of US vs. EU, even dumping the money into the banking system vs. austerity was the better way to go. The EU wasted 2-3 years.
  - pdonis 8y ago
    > It would still be pretty hard to implement. That's true. But it doesn't change the fact that any other way of printing money is playing favorites--some will be winners and others will be losers.
- pishpash 8y ago
  And how would the central bank discover the money in every single person's account? You do not have an account at the central bank, FYI. But yes, yours are essentially arguments for a national(ized) bank for depositors, with various issues that come with that.
  - pdonis 8y ago
    > yours are essentially arguments for a national(ized) bank for depositors Only if you think printing money whenever the central bank feels like it is a good idea and we just need to make sure they don't play favorites. But not if you think, as I do, that it would be better for the central bank not to monkey with the money supply at all.
    - pishpash 8y ago
      We've tried that in the late 19th century and it led to bank runs and financial panics every ten years, much worse than what we have now. I do agree, however, that we should benefit from having a more transparent and direct financial intermediation infrastructure that does not require systemically important nodes to rely on the central bank so much. Central banks would eventually generate too much moral hazard; we're not quite there yet but we're getting close.
      - pdonis 8y ago
        > We've tried that in the late 19th century and it led to bank runs and financial panics every ten years, much worse than what we have now. Tried what? Not monkeying with the money supply? Surely you jest. There was no Fed then, but the US Treasury started printing greenbacks (United States Notes) in 1862 and never stopped. As for since the Fed existed, the worst depression in history happened on its watch. And the reason for the lack of financial panics from the end of WW II into the 1970s was the US being the only economy that wasn't impoverished by the war, so it could basically dictate monetary policy to everyone (the Bretton Woods system). Once the rest of the world rebuilt, that policy fell apart and the financial panics started up again. The one big difference since the 1930s is deposit insurance: that is what prevented financial panics since then from turning into bank runs. That can seem like an improvement, but it just exchanges one failure mode for another: instead of bank runs forcing everybody to admit when a bubble has collapsed, now it can keep on until it's big enough to tank the world's entire economy when it collapses. Which is what happened in 2008. > Central banks would eventually generate too much moral hazard; we're not quite there yet but we're getting close. I don't share your optimism. I think we're there already and have been for quite a while.
dragonwriter 8y ago
> A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers The banks are no less arbitrary winners than anyone else.
- pishpash 8y ago
  But they are not "winners" in that they would have lent the money at even higher rates, if they did not obtain lower-cost funding themselves. The lending rate is subject to supply-demand competition. If there was less supply of capital then the lending rate would be higher since demand did not change. On the other hand, the banks did redeposit much of the money back with the Fed. If that were the argument then there could be a more fruitful discussion.
  - pdonis 8y ago
    > the banks did redeposit much of the money back with the Fed They didn't have to "redeposit" it. The money the Fed prints goes straight into the banks' accounts at the Fed when the Fed uses it to buy bonds from the banks. The reason all that money is still in those accounts is because the banks did nothing at all, instead of increasing their outstanding loans, which was what the Fed predicted they would do (and which was the reason for the QE in the first place).
    - pishpash 8y ago
      The "reason" for QE was not for the banks to lend out all of their new funds. That would have caused inflationary pressures immediately. They did lend a fraction. That it was not a bigger fraction should tell you something about the perceived risks and risk appetite at the time. Recall the opening complaint was that the banks made easy money by lending cheaply obtained funds. If they could do that then there should have been no excess reserves. Both cannot be true. As for QE, increasing lending from reserves didn't turn out to be the only or even main channel of effect. Driving down yields was the main channel. In that sense it was indirect and inefficient for the amount of reserves injected, but not ineffective. In the end the spreads collapsed and money filtered out (not only from banks but from every holder of capital) from less risky investments to more risky investments, increasing the supply of capital to everyone. If you had to complain, it was that money took the longest time to reach the riskiest borrowers and that we're all on the hook for being front-run on Fed news (Fed paid more than they should to buy those bonds) [1]. That was unfair, not the rates that borrowers had to pay. [1] On the other hand, by pre-announcing, they probably needed to buy fewer bonds over all as the market moved itself on the Fed's credibility.

pdonis 8y ago

> A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers No, a central bank injects the money via the banking system as a hidden subsidy to banks and other financial institutions. If a central bank really wanted to make printing money neutral (i.e., not picking any winners or losers), it would use newly printed money to increase every single person's dollar holdings by the same percentage.

api 8y ago
AFIAK that kind of "money from helicopters" approach is something I've heard discussed by progressive economists, but until quite recently it was not technically feasible to do this fairly. It would still be pretty hard to implement.
- pishpash 8y ago
  The money from helicopters approach is better done on the fiscal side. Except the guy in the US who wanted to do it was cock-blocked by his opponents for 6 years and in the EU they are handcuffed by various laws. Still, by comparison of US vs. EU, even dumping the money into the banking system vs. austerity was the better way to go. The EU wasted 2-3 years.
- pdonis 8y ago
  > It would still be pretty hard to implement. That's true. But it doesn't change the fact that any other way of printing money is playing favorites--some will be winners and others will be losers.
pishpash 8y ago
And how would the central bank discover the money in every single person's account? You do not have an account at the central bank, FYI. But yes, yours are essentially arguments for a national(ized) bank for depositors, with various issues that come with that.
- pdonis 8y ago
  > yours are essentially arguments for a national(ized) bank for depositors Only if you think printing money whenever the central bank feels like it is a good idea and we just need to make sure they don't play favorites. But not if you think, as I do, that it would be better for the central bank not to monkey with the money supply at all.
  - pishpash 8y ago
    We've tried that in the late 19th century and it led to bank runs and financial panics every ten years, much worse than what we have now. I do agree, however, that we should benefit from having a more transparent and direct financial intermediation infrastructure that does not require systemically important nodes to rely on the central bank so much. Central banks would eventually generate too much moral hazard; we're not quite there yet but we're getting close.
    - pdonis 8y ago
      > We've tried that in the late 19th century and it led to bank runs and financial panics every ten years, much worse than what we have now. Tried what? Not monkeying with the money supply? Surely you jest. There was no Fed then, but the US Treasury started printing greenbacks (United States Notes) in 1862 and never stopped. As for since the Fed existed, the worst depression in history happened on its watch. And the reason for the lack of financial panics from the end of WW II into the 1970s was the US being the only economy that wasn't impoverished by the war, so it could basically dictate monetary policy to everyone (the Bretton Woods system). Once the rest of the world rebuilt, that policy fell apart and the financial panics started up again. The one big difference since the 1930s is deposit insurance: that is what prevented financial panics since then from turning into bank runs. That can seem like an improvement, but it just exchanges one failure mode for another: instead of bank runs forcing everybody to admit when a bubble has collapsed, now it can keep on until it's big enough to tank the world's entire economy when it collapses. Which is what happened in 2008. > Central banks would eventually generate too much moral hazard; we're not quite there yet but we're getting close. I don't share your optimism. I think we're there already and have been for quite a while.

dragonwriter 8y ago

> A central bank injects the money via the banking system because they cannot give it to arbitrary winners and losers The banks are no less arbitrary winners than anyone else.

pishpash 8y ago
But they are not "winners" in that they would have lent the money at even higher rates, if they did not obtain lower-cost funding themselves. The lending rate is subject to supply-demand competition. If there was less supply of capital then the lending rate would be higher since demand did not change. On the other hand, the banks did redeposit much of the money back with the Fed. If that were the argument then there could be a more fruitful discussion.
- pdonis 8y ago
  > the banks did redeposit much of the money back with the Fed They didn't have to "redeposit" it. The money the Fed prints goes straight into the banks' accounts at the Fed when the Fed uses it to buy bonds from the banks. The reason all that money is still in those accounts is because the banks did nothing at all, instead of increasing their outstanding loans, which was what the Fed predicted they would do (and which was the reason for the QE in the first place).
  - pishpash 8y ago
    The "reason" for QE was not for the banks to lend out all of their new funds. That would have caused inflationary pressures immediately. They did lend a fraction. That it was not a bigger fraction should tell you something about the perceived risks and risk appetite at the time. Recall the opening complaint was that the banks made easy money by lending cheaply obtained funds. If they could do that then there should have been no excess reserves. Both cannot be true. As for QE, increasing lending from reserves didn't turn out to be the only or even main channel of effect. Driving down yields was the main channel. In that sense it was indirect and inefficient for the amount of reserves injected, but not ineffective. In the end the spreads collapsed and money filtered out (not only from banks but from every holder of capital) from less risky investments to more risky investments, increasing the supply of capital to everyone. If you had to complain, it was that money took the longest time to reach the riskiest borrowers and that we're all on the hook for being front-run on Fed news (Fed paid more than they should to buy those bonds) [1]. That was unfair, not the rates that borrowers had to pay. [1] On the other hand, by pre-announcing, they probably needed to buy fewer bonds over all as the market moved itself on the Fed's credibility.