5 ms·

This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypol

This used to be true, but hasn't mattered for a long time. The reserve requirement is zero for most (all?) US banks. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

NovemberWhiskey 5y ago
It doesn't matter because no banks have been anywhere near the reserve requirements that were previously in effect. The change to the "ample reserves" regime is just a tacit admission that lending is not functionally limited by reserve ratios in the U.S. at the moment.
- mgraczyk 5y ago
  Yep that's what I meant by "hasn't mattered for a long time".
  - NovemberWhiskey 5y ago
    I'm sure you know, but (based on discussions that took place at the time of the announcement back in 2020) I know a lot of people who leapt directly to the assumption that the removal of the reserve requirement was so that banks could "create even more money out of thin air than they were previously allowed to do". I hope you don't mind me clearing that misconception up, even if it's not for your benefit!
tibanne 5y ago
Strange that private companies are allowed to create money from nothing don't you think?
- howeyc 5y ago
  That's how it has been for a while, as the bank of England paper explains. The key is that the bank is "on the hook" for being able to get that money back eventually. So they don't just loan indiscriminately.
  - SilasX 5y ago
    But “eventually” can mean “now, as an easy loan from the central bank/lender of last resort”, which trust the solvency of the bank’s loans.
  - hgomersall 5y ago
    "On the hook" right up until the point they're about to go bust, then they hand over responsibility to the government to rescue them from their rampant speculation.
  - deleted 5y ago
    [deleted]
- mgraczyk 5y ago
  It's strange if you have a particular conception of money. If you think of money as a social technology used to improve aggregate well being, then it's just a property that empirically makes sense. Private banking, with effective regulation, has proven to be a fairly effective way to stabilize the business cycle and unblock growth
  - cryptica 5y ago
    Sure, it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy... Great for crooks!
    - JumpCrisscross 5y ago
      > it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy This is financial Luddism. Just because something is unfamiliar doesn’t mean it’s bad. Private money creation is necessary for a growing, dynamic economic condition. (The problem is simpler in a static or simply cyclic economy.) Growth is heterogenous. To preserve price and bank stability, you want money created where it’s needed and not in excess where it’s not. In times past, this was largely geographic: banks in the West created money faster than banks in the agrarian South. Today, the divisions are more complex: a bank serving tech companies probably creates more deposits than one serving aging manufacturers. Centralising this function in a state apparatus has been proposed. But the central bank would have to run and then implement an economic model. Decide where and for whom to create money. This is central planning. It has a poor track record. (This is also the argument against bank concentration [1].) [1] https://fred.stlouisfed.org/series/DDOI01USA156NWDB https://fred.stlouisfed.org/series/DDOI01USA156NWDB
      - cryptica 5y ago
        The way the banking system works now, it mostly creates money where it's not needed. That's why there is such high inequality which keeps growing. New capital is just deployed to chase old capital. It creates anti-competitive moats which prevent money from going where it's really needed and where it could be used most efficiently. It makes bureaucracy viable and economic efficiency non-viable. The vast majority of people who benefit from bank loans are not value creators, they are rent-seekers. Value creation necessarily requires taking calculated risks and banks these days aren't willing to take any risk.... They need full collateral. It's all about existing collateral. In the short term, the safest investment you can make is to build a moat around your existing investment... But if everyone in the economy is busy building moats (because that's the only activity which is sufficiency safe for banks to fund), there will be nobody remaining to do useful stuff which moves the economy forward.
- User23 5y ago
  It’s the defining characteristic of a banking license. Like any license it permits activity that would otherwise be illegal. In this case, creating new dollars.
  - deleted 5y ago
    [deleted]
- deleted 5y ago
  [deleted]
drexlspivey 5y ago
So basically all commercial banks are free to issue unlimited loans (and create unlimited new dollars)?
- User23 5y ago
  Basically, yes. There are “capital” requirements, but as far as I can tell that’s basically just laundering their loan business by trading equity with peer banks, which are of course largely based on loan performance.
  - deleted 5y ago
    [deleted]
danielmarkbruce 5y ago
The capital requirements result in something similar. In the end, a loan by JPM of $100 is backed by about $90 of deposits and about $10 of JPM equity. In practice JPM has more capital than that, but there is some adjustments to the loan amount given the risk of any loan etc. So, JPM needs more equity if it wants to ramp up it's loans.

NovemberWhiskey 5y ago

It doesn't matter because no banks have been anywhere near the reserve requirements that were previously in effect. The change to the "ample reserves" regime is just a tacit admission that lending is not functionally limited by reserve ratios in the U.S. at the moment.

mgraczyk 5y ago
Yep that's what I meant by "hasn't mattered for a long time".
- NovemberWhiskey 5y ago
  I'm sure you know, but (based on discussions that took place at the time of the announcement back in 2020) I know a lot of people who leapt directly to the assumption that the removal of the reserve requirement was so that banks could "create even more money out of thin air than they were previously allowed to do". I hope you don't mind me clearing that misconception up, even if it's not for your benefit!

tibanne 5y ago

Strange that private companies are allowed to create money from nothing don't you think?

howeyc 5y ago
That's how it has been for a while, as the bank of England paper explains. The key is that the bank is "on the hook" for being able to get that money back eventually. So they don't just loan indiscriminately.
- SilasX 5y ago
  But “eventually” can mean “now, as an easy loan from the central bank/lender of last resort”, which trust the solvency of the bank’s loans.
- hgomersall 5y ago
  "On the hook" right up until the point they're about to go bust, then they hand over responsibility to the government to rescue them from their rampant speculation.
- deleted 5y ago
  [deleted]
mgraczyk 5y ago
It's strange if you have a particular conception of money. If you think of money as a social technology used to improve aggregate well being, then it's just a property that empirically makes sense. Private banking, with effective regulation, has proven to be a fairly effective way to stabilize the business cycle and unblock growth
- cryptica 5y ago
  Sure, it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy... Great for crooks!
  - JumpCrisscross 5y ago
    > it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy This is financial Luddism. Just because something is unfamiliar doesn’t mean it’s bad. Private money creation is necessary for a growing, dynamic economic condition. (The problem is simpler in a static or simply cyclic economy.) Growth is heterogenous. To preserve price and bank stability, you want money created where it’s needed and not in excess where it’s not. In times past, this was largely geographic: banks in the West created money faster than banks in the agrarian South. Today, the divisions are more complex: a bank serving tech companies probably creates more deposits than one serving aging manufacturers. Centralising this function in a state apparatus has been proposed. But the central bank would have to run and then implement an economic model. Decide where and for whom to create money. This is central planning. It has a poor track record. (This is also the argument against bank concentration [1].) [1] https://fred.stlouisfed.org/series/DDOI01USA156NWDB https://fred.stlouisfed.org/series/DDOI01USA156NWDB
    - cryptica 5y ago
      The way the banking system works now, it mostly creates money where it's not needed. That's why there is such high inequality which keeps growing. New capital is just deployed to chase old capital. It creates anti-competitive moats which prevent money from going where it's really needed and where it could be used most efficiently. It makes bureaucracy viable and economic efficiency non-viable. The vast majority of people who benefit from bank loans are not value creators, they are rent-seekers. Value creation necessarily requires taking calculated risks and banks these days aren't willing to take any risk.... They need full collateral. It's all about existing collateral. In the short term, the safest investment you can make is to build a moat around your existing investment... But if everyone in the economy is busy building moats (because that's the only activity which is sufficiency safe for banks to fund), there will be nobody remaining to do useful stuff which moves the economy forward.
User23 5y ago
It’s the defining characteristic of a banking license. Like any license it permits activity that would otherwise be illegal. In this case, creating new dollars.
- deleted 5y ago
  [deleted]
deleted 5y ago
[deleted]

drexlspivey 5y ago

So basically all commercial banks are free to issue unlimited loans (and create unlimited new dollars)?

User23 5y ago
Basically, yes. There are “capital” requirements, but as far as I can tell that’s basically just laundering their loan business by trading equity with peer banks, which are of course largely based on loan performance.
- deleted 5y ago
  [deleted]

danielmarkbruce 5y ago

The capital requirements result in something similar. In the end, a loan by JPM of $100 is backed by about $90 of deposits and about $10 of JPM equity. In practice JPM has more capital than that, but there is some adjustments to the loan amount given the risk of any loan etc. So, JPM needs more equity if it wants to ramp up it's loans.