tag:blogger.com,1999:blog-2499715909956774229.post2299823615338725639..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: Money Creation: Propagating ConfusionStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger44125tag:blogger.com,1999:blog-2499715909956774229.post-22918513119914489112014-04-24T02:39:32.363-07:002014-04-24T02:39:32.363-07:00Not all liabilities are the same. Everyone can cre...Not all liabilities are the same. Everyone can create money; the problem is to get it accepted (Minsky).Jussinoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13813904597716691012014-04-24T02:32:39.154-07:002014-04-24T02:32:39.154-07:00Well said, thanks Frances!Well said, thanks Frances!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78517092313037294652014-04-20T13:48:20.316-07:002014-04-20T13:48:20.316-07:00Similarly, when General Motors issues corporate bo...Similarly, when General Motors issues corporate bonds to finance the construction of a new plant, that's creating liabilities out of thin air. To state that banks are doing it too doesn't say anything interesting. Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27246922290555199662014-04-19T15:33:49.406-07:002014-04-19T15:33:49.406-07:00The persistence of Example 1A depends on the stren...The persistence of Example 1A depends on the strength of the economic growth and on the strength of central bank’s policy response (which also might change the banking system, but that’s for another time). Let us define the “strength of economic growth” as a positive net interest margin for Bank 1. This is important because the deposit creation generated by unprofitable lending will eventually result in asset write downs that destroy deposits. Banks must remain profitable throughout the deposit expansion life cycle. Funds must be lent out (revenue) at a rate higher than the cost of funds (expenses) and the revenue must ultimately be realized.<br /><br />Example 1A glosses over the temporary nature of deposit expansion. The original loan will eventually be repaid, increasing Bank 1’s reserve account balances, which ends Bank 1’s need to access the central bank’s discount window for reserves. Reserves borrowed from the discount window will be returned to the central bank (destroyed), and the deposit grown will shrink to its original state. And…viola! The banking system looks exactly the same as initially. So everything is good….? <br /><br />Great discussion in the original article and comments on MRT’s BoE article. I hoped I have contributed to this discussion by illustrating how lending can potentially create deposits when profitable lending results in interbank payments that have to be funded by discount window lending. Perhaps these examples can help inform ongoing discussions!<br />Frankienoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82057510896991045112014-04-19T15:33:04.282-07:002014-04-19T15:33:04.282-07:00I apologize for my tardy response. I only recently...I apologize for my tardy response. I only recently came across MRT’s BoE paper and Mr. Williamson’s response to it. I would like to add some personal notes on misconception #1 – Does the act of lending create deposits? <br /><br />The abridged version is that lending creates deposits in situations having the following characteristics. <br />(1) Lending results in an interbank payment <br />(2) Bank 1 does not have sufficient reserve balances to settle the payment<br />(3) The interbank rate is above the discount rate, generating a discount window loan<br /><br />And this situation can persist only so long as the above characteristics are preserved and the Bank is generating a sustainable net interest margin from such lending activity.<br /><br />Mr. Williamson’s example uses a scenario where Bank 1 originates a $20,000 consumer loan. The loan is booked as $20k loan (asset) and $20k deposit (liability). This loan expands Bank 1’s balance sheet. The consumer uses the $20k loan to purchase a car from a car dealer who has an account with Bank 2. Since consumer and car dealer use different banks, a bank-to-bank transaction is necessary to settle payment. (Bank-to-bank transactions are settled in each Bank’s account at the central bank. Central bank accounts are commonly called “reserve accounts” and balances in these accounts are “reserves”). The example concludes with some accounting and concludes that the banking system looks exactly the same as initially. So far so good. <br /><br />The example contains a key assumption: Bank 1 has sufficient balances in its reserve account to settle interbank payments. What would happen if Bank 1 did not have sufficient balances in its reserve account to settle the interbank payments? Well, Bank 1 would have to go to the interbank lending market and purchase sufficient reserves at the interbank rate to bring its reserve account positive. Ultimately reserves move from one reserve account to another and the banking system looks exactly the same as initially. So far so good. <br /><br />The interbank lending rate is key to answering the question of whether lending creates deposits. Suppose the interbank rate for Bank 1 is higher than the central bank discount rate. (Let’s call this Example 1A). What is Bank 1 to do? Bank 1 will go to the central bank’s discount window (or standing facility if you prefer) to borrow reserves. Importantly, discount window borrowing results in increased reserve balances. The banking system is changed for the duration that the discount window lending is outstanding, which will be determined by Bank 1’s need to maintain a positive balance in its reserve account AND the discount rate is lower than the interbank rate. Thus, the act of lending creates deposits in situations where the loan generates interbank payments and Bank 1 does not have sufficient reserve balances to settle the payments. <br /><br />Example 1A may be observed when there is upward pressure on the interbank rate and the central bank has yet to respond with either an open market operation or adjustments to one or more of its policy rates: the interest rate on reserves, the target rate, and the discount rate. Frankienoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-116177023756512782014-04-10T12:55:44.290-07:002014-04-10T12:55:44.290-07:00Martin Wolf obviously clueless about how monetary ...Martin Wolf obviously clueless about how monetary economies and and accounting work, as well. http://www.ft.com/intl/cms/s/0/46a1ce84-bf2a-11e3-a4af-00144feabdc0.html?ftcamp=published_links%2Frss%2Fcomment_columnists_martin-wolf%2Ffeed%2F%2Fproduct&siteedition=intl#axzz2yVktQsCQ Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-8754579042114075132014-03-31T16:12:00.768-07:002014-03-31T16:12:00.768-07:00I'm not going to get into a discussion about m...I'm not going to get into a discussion about military tactics with the crazy guy on the corner who thinks he's Napoleon.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-70908347409374358432014-03-31T15:33:55.466-07:002014-03-31T15:33:55.466-07:00Stephen,
I'm afraid banks really can fund the...Stephen,<br /><br />I'm afraid banks really can fund their own loans "out of thin air." They could even fund their own capital out of thin air--although regulators would frown on this. <br /><br />See here: http://www.cnbc.com/id/100497710John Carneyhttps://www.blogger.com/profile/12845826989991018084noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-21547410759577745082014-03-31T09:19:30.108-07:002014-03-31T09:19:30.108-07:00Anger management issues, little troll? Unable to t...Anger management issues, little troll? Unable to talk about the issue at hand because you have no idea about economics?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79624386737997283862014-03-30T16:55:36.208-07:002014-03-30T16:55:36.208-07:00"in my opinion more insight into the issue th..."in my opinion more insight into the issue than contemporary mainstream models"<br /><br />Your opinion is as valuable as the paper it is printed on. Oh, it's not printed on paper? Exactly.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-72960342384508426852014-03-30T14:55:52.889-07:002014-03-30T14:55:52.889-07:00I forgot to point out that besides the excess supp...I forgot to point out that besides the excess supply on the good and labour market and the underemployment equilibrium perspective (also forgot to point out that the latter makes more sense if you think that the situation will persist) there have been some brilliant first steps at disequilibrium research back in the days (I am only familiar with Malinvaud's "Theory of Unemployment Reconsidered") which provide in my opinion more insight into the issue than contemporary mainstream models.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-73665557553722708182014-03-30T14:47:53.445-07:002014-03-30T14:47:53.445-07:00It depends on your view:.
View 1: Right now ther...It depends on your view:. <br /><br />View 1: Right now there is an excess supply on the output and labour market (I am all ears for your story about 40% - 50% youth unemployment in Spain or Greece that does not work without involve involuntary unemployment). So the labour market is clearly not in equilibrium.<br />This perspective is useful if you are policy-orientated, focus on employment and the failure of the usual price mechanism that makes excess demand/supply disappear.<br /><br />View 2: There is a continuum are multiple equilibria and right now we are in one of the worst ones because of the timid policies of central banks and governments worldwide. This view is useful if you are doing theory (multiple equilibria stories are a bit harder to teach laymen than the notion of involuntary unemployment as excess supply) and want to emphasize that a recession is a gigantic market failure.<br /><br />Of course I know very well that you do not agree with either of these perspectives and thus basically with the very basic of macroeconomics since Keynes and Friedman (I might also mention that Smith and Mill already wrote that what we call today Say's law does only hold in a barter economy) ... but you being engaged in fringe economics is your problem and not mine.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-28819652924186006292014-03-30T14:21:27.756-07:002014-03-30T14:21:27.756-07:00"Propagating Confusion " Spreading alarm..."Propagating Confusion " Spreading alarm & despondency also. Reading this article & comments makes me feel that, economically, I'm in an airplane, and the Pilot & 1st Officer are trying to read an upside-down map while arguing about those little red flashing lights & the blaring klaxon.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91663892608049862842014-03-29T12:01:43.654-07:002014-03-29T12:01:43.654-07:00"I think this is only true if the "if ne..."I think this is only true if the "if necessary" is taken to mean "necessary to maintain the target interest rate" and not "necessary to allow the banking system to work efficiently"."<br /><br />In general, though it might be a bit of both - as the interest rate target is also related to what is considered to be necessary to maintain financial stability. Also a bank might borrow directly from the CB, in which case the CB would be supporting the bank directly rather than setting an interbank lending rate.<br /><br />"If the CB sees it targeted rate under threat (which could happen if demand for loans increased and desire to keep money in the bank stay the same) it will increase base money so that banks can attract more funds." <br /><br />By "desire to keep money in the bank stay the same" do you mean people as a whole want to withdraw more money as currency? In that case the CB would normally buy bonds and issue more currency, maintaining its target interest rate. I'm not sure how that relates to the banks 'attracting more funds' though.<br /><br />"I do not think a successful bank would ever lend on the assumption that the CB will provide needed reserves after the fact."<br /><br />Agreed, but they also won't check to see if they currently have enough reserves to 'lend out'. What would be relevant is the assessment of the loan itself and the bank's capital position. Banks do of course also estimate how much cash they think they will need to meet customer withdrawals in the near future, but that doesn't tend to change much, and they can get more cash quite quickly if they need to. Management of reserves required for interbank settlement or regulatory reasons is separate from the loan decision itself.PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17366871422952967832014-03-29T11:26:01.585-07:002014-03-29T11:26:01.585-07:00"Day-to-day banks act as intermediaries and n..."Day-to-day banks act as intermediaries and need to be able to attract fund to back their lending."<br /><br />Say a bank makes a loan, and creates a deposit in the process, thereby expanding the broad money supply. Essentially all the bank has to do then is manage to pay a lower rate of interest on the deposit than it receives on the loan. So in that sense the bank is an intermediary between the deposit holder and the borrower. However the bank created the 'money' in the process of making the loan, rather than getting money from the depositor and then lending it out to the borrower.PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31150068505817336572014-03-29T11:16:48.624-07:002014-03-29T11:16:48.624-07:00He/she seems to really like the BOE paper. Maybe n...He/she seems to really like the BOE paper. Maybe not so redoubtable. Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57667346664301531752014-03-29T11:11:49.830-07:002014-03-29T11:11:49.830-07:00Actually, no. Sometime I'll write this down an...Actually, no. Sometime I'll write this down and post it.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22947248290155249852014-03-29T11:10:08.767-07:002014-03-29T11:10:08.767-07:00"...catapulted a large part of the world out ..."...catapulted a large part of the world out of equilibrium"<br /><br />Equilibrium is not an observation about the state of the world. Part of an economic model is the equilibrium concept, and that model in turn can be used to think about what is going on in the world. And every model has an equilibrium concept - New Keynesian models, new monetarist models, old-fashioned IS-LM models. Whatever. So your statement neither describes the state of the world nor any model one would use to think about the Great Recession.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76517091971430454172014-03-29T10:03:21.351-07:002014-03-29T10:03:21.351-07:00"Banks expand credit, and then the CB expands..."Banks expand credit, and then the CB expands reserves, if necessary, after the fact"<br /><br />I think this is only true if the "if necessary" is taken to mean "necessary to maintain the target interest rate" and not "necessary to allow the banking system to work efficiently".<br /><br />Day-to-day banks act as intermediaries and need to be able to attract fund to back their lending. An endogenous increase in lending would be driven by an increased desire to keep money in the bank and/or an increased desire to borrow.<br /><br />If the CB sees it targeted rate under threat (which could happen if demand for loans increased and desire to keep money in the bank stay the same) it will increase base money so that banks can attract more funds. <br /><br />While CB policy undoubtedly helps banks manager interest rate risk I do not think a successful bank would ever lend on the assumption that the CB will provide needed reserves after the fact, which is sort of implied in the above statement.<br /><br /><br /><br /><br /><br />Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13201820514809299522014-03-29T09:13:34.409-07:002014-03-29T09:13:34.409-07:00you can change the settings in the blogger 'de...you can change the settings in the blogger 'design' or 'layout' section, if I remember correctly. PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43850398202519377552014-03-29T07:47:13.127-07:002014-03-29T07:47:13.127-07:00"lending out deposits"
I'd suggest ..."lending out deposits"<br /><br />I'd suggest reading the redoubtable JKH on this, on this BOE paper, and on the various meanings we might attach to the term "intermediation."<br /><br />He explains why intermediation can be an apt term to describe what banks do (carefully understood), while it is conceptually incoherent or at least confusing, in accounting terms, to assert that "banks lend deposits":<br /><br />"which is a strange phrase on its own, with some epistemological head scratching associated with it"<br /><br />http://monetaryrealism.com/money-creation-in-the-modern-economy-bank-of-england/<br /><br />Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11631570694736301232014-03-29T07:36:21.906-07:002014-03-29T07:36:21.906-07:00banks don't 'lend out' bank deposits b...banks don't 'lend out' bank deposits because bank deposits are bank liabilities, not bank assets. PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-36105738011194250072014-03-29T07:27:03.007-07:002014-03-29T07:27:03.007-07:00"But in a world with a fixed base this would ..."But in a world with a fixed base this would not be true."<br /><br />Maybe, but that's clearly not the world we inhabit.<br /><br />"Much of the money supply elasticity that endogenous money likes to focus on is actually provided by boring old CB policy and not by anything intrinsically "endogenous" about the money creation process by banks itself."<br /> <br />The CB provides additional reserves in response to prior credit expansion by banks. Banks expand credit, and then the CB expands reserves, if necessary, after the fact. So the process of money creation starts with banks making loans to 'credit worthy' borrowers who demand the loans. It doesn't start with the central bank injecting a fixed quantity of reserves which the banks can then 'lend out' and 'multiply up' into more deposits. PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-68955804425097722472014-03-29T07:19:00.769-07:002014-03-29T07:19:00.769-07:00"Part of what you want people to understand i..."Part of what you want people to understand is the mechanism by which the Bank pegs the Bank Rate"<br /><br />Isn't that explained in the Paul Tucker quote above?<br /><br />"The alternative way for the central bank to establish itself as the rate-setter is to be prepared to supply (or absorb) whatever liquidity the market demands at its chosen rate(s). The most precise way of doing this is through so-called ‘standing facilities’ in which the central bank lends (secured) whatever is demanded at a fixed rate or takes on deposit whatever is supplied at a fixed rate."PJnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-44436323491810751762014-03-29T05:59:54.176-07:002014-03-29T05:59:54.176-07:00"It would be much more useful to tell a story..."It would be much more useful to tell a story for lay people that focuses on the bank as a financial intermediary, with deposits and loans determined jointly by the behavior of depositors, borrowers, and banks. Basically, it's a general equilibrium problem, and we have to get this across in a way that people will understand."<br /><br />Do you have a favorite reference?Mark Thomsonhttps://twitter.com/markmthomsonnoreply@blogger.com