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Private banks create monetary aggregates by lending it to private borrowers. The fact that money is created as credit means there are already natural limits to

Private banks create monetary aggregates by lending it to private borrowers. The fact that money is created as credit means there are already natural limits to private bank money creation (there aren't unlimited numbers of bank customers who want to borrow money and pay back more later, and some of the people and companies that would like to borrow are not people the bank trusts to be able to make the repayment) The role of the Bank of England is providing the banks with central bank reserves they can borrow as and when needed to back that privately created money up. So it gets to influence the demand for borrowing private bank money by setting the basic interest rate at which the banks can borrow reserves (mainly by intervening in secondary markets for them, but that's an implementation detail), which means it can make it more expensive to borrow reserves, which will lead to banks lending money at higher interest rates to fewer people, which will lead to less money creation This stuff is all in the paper...

scotty79 4y ago
But if the private banks already have some money they can lend it again to borrowers. So they could be inflating money supply pretty much indefinitely. Sure, the number of private borrowers is limited but they are happy to sign all of their future life earnings away in exchange for some money now. And as supply of money grows inflation happens so borrowers need more and more money feeding creation of more money and further inflation. The role of central bank as a limiter of credit action (through fractional reserve) is way more important than feeding new core money into the private banking system so it can be borrowed by private borrowers. Feeding new money is kinda optional and it's most important role is possibly enabling new banks to be created. In absence of it only companies that already have a lot of money could create a bank. The other thing is that if economy development outpaces growth of money supply created by private banks whole system could get stuck in deflation. Which was not great last time it happened.
- notahacker 4y ago
  Honestly, I have no idea why you're arguing popular misconceptions about central banks under a paper written by a central bank explaining how central banking works... Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). So the quantity of money at a given interest rate is ultimately set by the demand of creditworthy borrowers at that interest rate, which is certainly not unlimited. Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, and it's not "kinda optional" for them to provide enough reserves for the system's day to day needs. Instead, they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.
  - scotty79 4y ago
    > Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. > The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, In the last two decades that requirement was adjusted at least 5 times in my country so tinkering with it is definitely a tool that some central banks use. In the nineties it was even set to 30% to quench hyperinflation. > Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. First formal central bank, The Bank of England was created to finance the war. Central banks gradually acquired their modern roles as they developed. The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. > they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy. That the thing they do most often but not their most powerful tool.
    - notahacker 4y ago
      > 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. 2008 happened because banks overestimated the resilience of the value of housing collateral that backed their loans to an economic downturn, meaning they got back less than they lent out, not because they had any incentive to inflate money supply pretty much indefinitely, which they obviously didn't do (I mean, if they really had no practical constraints on money creation, they could have solved 2008 for themselves by loaning unlimited amounts to pump house prices back up again...). Inflation wasn't even high in 2008. > The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. And how do they get cheaper money elsewhere? They borrow it on the interbank lending market, the one which the central bank actively intervenes in to set the base interest rate by buying and selling bonds in sufficient quantities to drive the rate up or down (Why does the interbank lending market even exist? Because the 'lender of last resort' makes lending spare reserves to other banks a low risk activity equivalent to exchanging them for government bonds) Seriously, I suggest you read TFA which explains all this rather than continuing to insist that it is wrong ... > That the thing they do most often but not their most powerful tool. It's their most powerful tool in normal circumstances, and how monetary policy works. Preventing private credit creation isn't a tool, it's a nuclear weapon, and one most likely to be introduced and enforced by a government department which isn't a central bank...

scotty79 4y ago

But if the private banks already have some money they can lend it again to borrowers. So they could be inflating money supply pretty much indefinitely. Sure, the number of private borrowers is limited but they are happy to sign all of their future life earnings away in exchange for some money now. And as supply of money grows inflation happens so borrowers need more and more money feeding creation of more money and further inflation. The role of central bank as a limiter of credit action (through fractional reserve) is way more important than feeding new core money into the private banking system so it can be borrowed by private borrowers. Feeding new money is kinda optional and it's most important role is possibly enabling new banks to be created. In absence of it only companies that already have a lot of money could create a bank. The other thing is that if economy development outpaces growth of money supply created by private banks whole system could get stuck in deflation. Which was not great last time it happened.

notahacker 4y ago
Honestly, I have no idea why you're arguing popular misconceptions about central banks under a paper written by a central bank explaining how central banking works... Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). So the quantity of money at a given interest rate is ultimately set by the demand of creditworthy borrowers at that interest rate, which is certainly not unlimited. Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, and it's not "kinda optional" for them to provide enough reserves for the system's day to day needs. Instead, they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.
- scotty79 4y ago
  > Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. > The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, In the last two decades that requirement was adjusted at least 5 times in my country so tinkering with it is definitely a tool that some central banks use. In the nineties it was even set to 30% to quench hyperinflation. > Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. First formal central bank, The Bank of England was created to finance the war. Central banks gradually acquired their modern roles as they developed. The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. > they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy. That the thing they do most often but not their most powerful tool.
  - notahacker 4y ago
    > 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. 2008 happened because banks overestimated the resilience of the value of housing collateral that backed their loans to an economic downturn, meaning they got back less than they lent out, not because they had any incentive to inflate money supply pretty much indefinitely, which they obviously didn't do (I mean, if they really had no practical constraints on money creation, they could have solved 2008 for themselves by loaning unlimited amounts to pump house prices back up again...). Inflation wasn't even high in 2008. > The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. And how do they get cheaper money elsewhere? They borrow it on the interbank lending market, the one which the central bank actively intervenes in to set the base interest rate by buying and selling bonds in sufficient quantities to drive the rate up or down (Why does the interbank lending market even exist? Because the 'lender of last resort' makes lending spare reserves to other banks a low risk activity equivalent to exchanging them for government bonds) Seriously, I suggest you read TFA which explains all this rather than continuing to insist that it is wrong ... > That the thing they do most often but not their most powerful tool. It's their most powerful tool in normal circumstances, and how monetary policy works. Preventing private credit creation isn't a tool, it's a nuclear weapon, and one most likely to be introduced and enforced by a government department which isn't a central bank...