5 ms·

Creating bank reserves absolutely creates money. Bank reserves are the fulcrum around which bank leverage ratios operate. Yes, they can margin treasuries to bor

by darawk 6y ago

Creating bank reserves absolutely creates money. Bank reserves are the fulcrum around which bank leverage ratios operate. Yes, they can margin treasuries to borrow reserves from other banks, and in that sense, they are fungible. But the total amount of bank reserves in the system at any one time is still what bounds the total amount of money creation that can happen via leverage. Increasing the absolute amount of bank reserves increases the money supply, by a factor roughly equal to the current reserve requirement ratio (up to demand for credit, etc, etc.).

RobertoG 6y ago
New money, enters the economy by two ways: banks lean to households/business or government direct spending. New reserves in the system doesn't create money. The quantity of reserves in the system limit the quantity of money that the private banks can lend to the real economy (actually, not really, but that's another discussion), but the existence of reserves doesn't make the bank to lean. For the banks to lean, it's necessary that there is demand for credit first. Because there is not demand for credit, never mind the number of reserves in the system. The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly.
- Qasaur 6y ago
  >The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. Sounds very political for a supposedly independent central banking system! This system is a disgrace and is governed by unelected technocrats who are able to yield a crazy amount of power over the economy without ever being subject to inquiries from the public, all in the interest of experimenting on the population with highly questionable economic models. In my opinion we would never have been in this situation in the first place were it not for the artificial credit growth and consequent boom caused by central bankers.
  - throw0101a 6y ago
    >> The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. > Sounds very political for a supposedly independent central banking system! The phraseology makes it sound political, but it is not political. Basically when a central bank cuts its rate down to 0.25%, 0%, or even negative (e.g., Switzerland), it's a signal that the central bank has done all it can do to get the economy going. (There are some other mechanism employed in recent years as well ("quantitative easing"), but the message is the same: we are at the limits of monetary policy.) After that it is up to governments, if they so choose, to also do fiscal policy initiatives, e.g., Keynesian economics: create economic demand through public spending (since private business spending/demand is in the toilet). Of course government are free not to do anything at all, which would generally entail lower economic growth and higher employment. But central banks have a mandate to make sure the economy is in a certain middle-ground: not too hot to induce a lot of inflation, and not too cold to have a lot of people out of work.† Everyone agrees to these goals ahead of time: > The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. * https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm https://www.federalreserve.gov/faqs/what-economic-goals-does... The "unelected technocrats" are doing what they were hired to do. They each have a fixed term (though renewable), and if they don't do what they're supposed to they are replaced. They did not sneak into these positions: they were told to work towards certain goals, and they are using the tools at their disposal. They are no different than the Board of a corporation hired by the shareholders of the company: it's just that the "shareholders" are elected representatives (Congress, parliaments, etc). If the Board is not doing a satisfactory job it can be sacked with cause if necessary. † Sometimes you actually have both: see "stagflation".
    - RobertoG 6y ago
      >>"[..] which would generally entail lower economic growth and higher employment." I suppose you mean "unemployment".
- throw0101a 6y ago
  > Because there is not demand for credit, never mind the number of reserves in the system. Generally correct, but it should be noted that if a bank has a lot of reserves, and the over-night lending market is cheap, that means the bank has access to 'cheap money' on the 'wholesale' end of things. So if a retail bank can get 'cash' cheaply, it can lower its interest rates to its 'retail' customers (mortgages, business loans, etc). If a bank wants (say) at least a 2% spread between its wholesale source of money/reserves and what it gives out to the real economy, then the Fed raising liquidity such that the over-night rates go from (e.g.) 2% to 0.5%, that means banks can drop their public facing rates as well. Someone who was not considering borrowing money at 4% may change their mind at 2.5%.
  - RobertoG 6y ago
    >>"Someone who was not considering borrowing money at 4% may change their mind at 2.5%." We agree: when the interest rate arrive down to zero there is nothing more than the central bank can do to stimulate the economy. They could add infinite reserves to the economy and nothing would happen, because, obviously, the private sector is not interested in investment. Monetary policy is a blunt instrument.
- darawk 6y ago
  Of course the existence of reserves doesn't force a bank to lend. It increases their capacity to lend, which, assuming there is sufficient demand for credit, increases the money supply.
  - RobertoG 6y ago
    So you agree that creating reserves is not necessarily inflationary. Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. Central Banks have to choose, or they control the quantity or reserves or they control the interest rate. They target the later. The quantity is kind of irrelevant.
    - darawk 6y ago
      > So you agree that creating reserves is not necessarily inflationary. Not necessarily, no. But in practice they create inflationary pressure. > Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. This is exactly what my original post said. Of course they search for reserves in the inter-bank lending market. But the more reserves there are in that market, the cheaper they are to borrow, which reduces the rate that banks have to charge to earn their spread, which increases demand for credit, which increases the money supply.
  - jganetsk 6y ago
    Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...
- deleted 6y ago
  [deleted]
- jganetsk 6y ago
  Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...
neilwilson 6y ago
Reserves have nothing to do with the amount of bank lending. Only the price of such lending. https://onlinelibrary.wiley.com/doi/abs/10.1111/pbaf.12249 https://onlinelibrary.wiley.com/doi/abs/10.1111/pbaf.12249
- api 6y ago
  Doesn't reducing the price of lending tend to lead to more lending?
  - erichocean 6y ago
    We must protect the Federal Reserve from rhetorical attacks by HN commenters. The best way to do this is to muddy the waters as much as possible as to what is going on. Literal FUD.
  - throw0101a 6y ago
    > Doesn't reducing the price of lending tend to lead to more lending? Theoretically, yes. If loans are 2% instead of 4% then that may induce people to take one up to do some kind of economic activity (start business, renovate house, buy a new car, etc). But it is not guarantee: people may feel too financial vulnerable to take risks with borrowed money. This is where the limits of monetary policy are run it. There are points where the government starts spending on various projects: if a contractor is hired to build a bridge, and it will take "x" years, then all of its employees may feel more confident and do more spending because for the next "x" years they're set. Their money then goes into other people's pockets, into other people's pockets, etc. Public/government spending to kickstart demand is what Keynesian economics basically is.
    - darawk 6y ago
      Sure, there are limits. But fundamentally, holding all else constant, increasing bank reserves decreases the cost of lending, which increases the quantity of lending, which increases the money supply.
      - 6y ago

by darawk 6y ago

RobertoG 6y ago

New money, enters the economy by two ways: banks lean to households/business or government direct spending. New reserves in the system doesn't create money. The quantity of reserves in the system limit the quantity of money that the private banks can lend to the real economy (actually, not really, but that's another discussion), but the existence of reserves doesn't make the bank to lean. For the banks to lean, it's necessary that there is demand for credit first. Because there is not demand for credit, never mind the number of reserves in the system. The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly.

Qasaur 6y ago
>The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. Sounds very political for a supposedly independent central banking system! This system is a disgrace and is governed by unelected technocrats who are able to yield a crazy amount of power over the economy without ever being subject to inquiries from the public, all in the interest of experimenting on the population with highly questionable economic models. In my opinion we would never have been in this situation in the first place were it not for the artificial credit growth and consequent boom caused by central bankers.
- throw0101a 6y ago
  >> The central bank have not power to stimulate the economy in this situation, that's the reason central bankers are pushing the governments to spend directly. > Sounds very political for a supposedly independent central banking system! The phraseology makes it sound political, but it is not political. Basically when a central bank cuts its rate down to 0.25%, 0%, or even negative (e.g., Switzerland), it's a signal that the central bank has done all it can do to get the economy going. (There are some other mechanism employed in recent years as well ("quantitative easing"), but the message is the same: we are at the limits of monetary policy.) After that it is up to governments, if they so choose, to also do fiscal policy initiatives, e.g., Keynesian economics: create economic demand through public spending (since private business spending/demand is in the toilet). Of course government are free not to do anything at all, which would generally entail lower economic growth and higher employment. But central banks have a mandate to make sure the economy is in a certain middle-ground: not too hot to induce a lot of inflation, and not too cold to have a lot of people out of work.† Everyone agrees to these goals ahead of time: > The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. * https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm https://www.federalreserve.gov/faqs/what-economic-goals-does... The "unelected technocrats" are doing what they were hired to do. They each have a fixed term (though renewable), and if they don't do what they're supposed to they are replaced. They did not sneak into these positions: they were told to work towards certain goals, and they are using the tools at their disposal. They are no different than the Board of a corporation hired by the shareholders of the company: it's just that the "shareholders" are elected representatives (Congress, parliaments, etc). If the Board is not doing a satisfactory job it can be sacked with cause if necessary. † Sometimes you actually have both: see "stagflation".
  - RobertoG 6y ago
    >>"[..] which would generally entail lower economic growth and higher employment." I suppose you mean "unemployment".
throw0101a 6y ago
> Because there is not demand for credit, never mind the number of reserves in the system. Generally correct, but it should be noted that if a bank has a lot of reserves, and the over-night lending market is cheap, that means the bank has access to 'cheap money' on the 'wholesale' end of things. So if a retail bank can get 'cash' cheaply, it can lower its interest rates to its 'retail' customers (mortgages, business loans, etc). If a bank wants (say) at least a 2% spread between its wholesale source of money/reserves and what it gives out to the real economy, then the Fed raising liquidity such that the over-night rates go from (e.g.) 2% to 0.5%, that means banks can drop their public facing rates as well. Someone who was not considering borrowing money at 4% may change their mind at 2.5%.
- RobertoG 6y ago
  >>"Someone who was not considering borrowing money at 4% may change their mind at 2.5%." We agree: when the interest rate arrive down to zero there is nothing more than the central bank can do to stimulate the economy. They could add infinite reserves to the economy and nothing would happen, because, obviously, the private sector is not interested in investment. Monetary policy is a blunt instrument.
darawk 6y ago
Of course the existence of reserves doesn't force a bank to lend. It increases their capacity to lend, which, assuming there is sufficient demand for credit, increases the money supply.
- RobertoG 6y ago
  So you agree that creating reserves is not necessarily inflationary. Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. Central Banks have to choose, or they control the quantity or reserves or they control the interest rate. They target the later. The quantity is kind of irrelevant.
  - darawk 6y ago
    > So you agree that creating reserves is not necessarily inflationary. Not necessarily, no. But in practice they create inflationary pressure. > Also, a bank is not limited by reserves to lend. In fact, in practice, banks first lend and then search for the reserves in the inter-bank market. Those demand-offer dynamics between banks determine the interest rate. If the Central Bank doesn't want to loss control of the interest rate, it has to increase reserves in the system when there is demand. This is exactly what my original post said. Of course they search for reserves in the inter-bank lending market. But the more reserves there are in that market, the cheaper they are to borrow, which reduces the rate that banks have to charge to earn their spread, which increases demand for credit, which increases the money supply.
- jganetsk 6y ago
  Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...
deleted 6y ago
[deleted]
jganetsk 6y ago
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves By Standard and Poor's https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...

neilwilson 6y ago

Reserves have nothing to do with the amount of bank lending. Only the price of such lending. https://onlinelibrary.wiley.com/doi/abs/10.1111/pbaf.12249 https://onlinelibrary.wiley.com/doi/abs/10.1111/pbaf.12249

api 6y ago
Doesn't reducing the price of lending tend to lead to more lending?
- erichocean 6y ago
  We must protect the Federal Reserve from rhetorical attacks by HN commenters. The best way to do this is to muddy the waters as much as possible as to what is going on. Literal FUD.
- throw0101a 6y ago
  > Doesn't reducing the price of lending tend to lead to more lending? Theoretically, yes. If loans are 2% instead of 4% then that may induce people to take one up to do some kind of economic activity (start business, renovate house, buy a new car, etc). But it is not guarantee: people may feel too financial vulnerable to take risks with borrowed money. This is where the limits of monetary policy are run it. There are points where the government starts spending on various projects: if a contractor is hired to build a bridge, and it will take "x" years, then all of its employees may feel more confident and do more spending because for the next "x" years they're set. Their money then goes into other people's pockets, into other people's pockets, etc. Public/government spending to kickstart demand is what Keynesian economics basically is.
  - darawk 6y ago
    Sure, there are limits. But fundamentally, holding all else constant, increasing bank reserves decreases the cost of lending, which increases the quantity of lending, which increases the money supply.
    - 6y ago