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Money creation in the modern economy (2014) [pdf]

bankofengland.co.uk

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Re: Money creation in the modern economy (2014) [pdf]

#81

Post by louloulou »

kgwgk wrote: post #75
louloulou wrote: post #47

Earlier quoted context omitted.

You should read the article, because it seems you're the one with the misconception. how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"

What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least tem…

>through deposits or other liabilities

This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this.

i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

Re: Money creation in the modern economy (2014) [pdf]

#82

Post by kgwgk »

louloulou wrote: post #81
kgwgk wrote: post #75

Earlier quoted context omitted.

What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least tem…

>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank.

It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended).

It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc.

That’s not the same as

how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans"

which is wrong.

Re: Money creation in the modern economy (2014) [pdf]

#83

Post by NovemberWhiskey »

mandelbrotwurst wrote: post #14
stephen_g wrote: post #7

Earlier quoted context omitted.

Lots of countries have no reserve requirement. It actually doesn’t change much, just the asset mix banks hold. How much a bank can lend is basically entirely determined by the amount of paid-up capital, not reserves anyway. The maximum ratios are fairly strictly regulated (e.g. Basel rules).

So, I'd been interpreting this change as meaning that they're no longer required to carry some minimum amount of cash. I would be more confident in banks if they were required to carry some minimum fraction of their balances in cash in order to guarantee availability of funds. That said, I'm re-reading the page that I linked a bit more closely and realizing that it doesn't just say "reserve requirements must be satis…

This is the nuance you are missing:

https://fred.stlouisfed.org/series/EXCSRESNS

The reserve requirement served no purpose because banks were holding trillions of dollars in excess of their reserve requirements meaning that the reserve ratio was an ineffective monetary policy tool.

Re: Money creation in the modern economy (2014) [pdf]

#84

Post by IncRnd »

soVeryTired wrote: post #73
IncRnd wrote: post #70

Earlier quoted context omitted.

That's just randomly quoting sentences out of context. What you quoted is from the standpoint of a particular central bank , not from the standpoint of an arbitrary lending bank . Absolutely, many lending banks have reserve requirements imposed upon them, just not in the particular country of this paper!

In most counties in the west, reserve requirements don't constrain lending. For example, Canada, the UK, and Australia have a reserve requirement of zero. Fractional reserve banking doesn't really exist anymore outside of economics textbooks. Capital requirements are what constrain lending in the west (I think the Chinese government does try to control lending in part via a reserve requirement). For example, the "Cor…

The United States has reserve requirements. The EU has reserve requirements. India has reserve requirements.

Re: Money creation in the modern economy (2014) [pdf]

#85

Post by louloulou »

kgwgk wrote: post #82
louloulou wrote: post #81

Earlier quoted context omitted.

>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agr…

I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time.

The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.

Re: Money creation in the modern economy (2014) [pdf]

#86

Post by kgwgk »

louloulou wrote: post #85
kgwgk wrote: post #82

Earlier quoted context omitted.

The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agr…

I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.

You didn’t say

"if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans]

You said

"if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered]

Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole]

Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.

Re: Money creation in the modern economy (2014) [pdf]

#87

Post by zzzzzzzza »

stephen_g wrote: post #7
mandelbrotwurst wrote: post #5

Earlier quoted context omitted.

The Fed actually completely eliminated the reserve requirement in March of last year (1). Unsurprisingly, this hasn't gotten a lot of attention from the corporate media. 1 - https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Lots of countries have no reserve requirement. It actually doesn’t change much, just the asset mix banks hold. How much a bank can lend is basically entirely determined by the amount of paid-up capital, not reserves anyway. The maximum ratios are fairly strictly regulated (e.g. Basel rules).

newb question what is paid up capital?

Re: Money creation in the modern economy (2014) [pdf]

#88

Post by louloulou »

kgwgk wrote: post #86
louloulou wrote: post #85

Earlier quoted context omitted.

I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.

You didn’t say "if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans] You said "if a bank has $1 million in deposits (of actual cash that peop…

I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct.

It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank.

If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.

Re: Money creation in the modern economy (2014) [pdf]

#89

Post by SkyMarshal »

whimsicalism wrote: post #15
SkyMarshal wrote: post #11

I think Richard Werner's empirical research on how banks create money is probably better than anything put out by the banking system itself, including the central banks. https://www.researchgate.net/publication/265909749_Can_Banks... https://www.researchgate.net/publication/283907413_Do_banks_... His work made realize that not even the banking system fully understands the banking system. (Werner is the economist that…

I think we give far too much credence to term coiners. I'm unsurprised to see him recommended here, as HN seems to veer heavily towards inflation trutherism, anti-central banking, and libertarianism, even if most commentators probably wouldn't share Werner's antivaxx beliefs.

It wasn't that he coined the term, but that he recognized an important phenomenon and published a description of it before anyone else, which later came to inform major decisions about the worst financial crisis since the Great Depression.

Naming that phenomenon was just a byproduct of recognizing and writing about it, and I mention it only because it implies all of the above.

And his vaxx beliefs aren't relevant to research he did prior to the COVID outbreak, but if you have a specific critique of that research I'd be interested to hear it.

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