Banks don't lend reserves. Why QE is pointless...

[JP Hochbaum]

"Banks do not “use” reserves as the raw material for loan-making. Rather, they lend out their own deposits, which are created by keystrokes. Post Keynesians have been saying this since a seminal piece by Basil Moore was published in 1979 (and it is easy to find early precursors all the way back to the dawn of time–as I demonstrated in my 1990 book, Money and Credit in Capitalist Economies).

S&P’s top economist, Paul Sheard, has written an excellent piece, Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves published here:

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf



- See more at: EconoMonitor : Great Leap Forward » Banks Don’t Lend Reserves! Who Knew? MMT, That’s Who!

And why is this important? Because money is endogenous, it is created when there is demand for it:


"Theory that money exists just as it's needed by the economy, because bank system reserves are increased or decreased to accommodate for demand. Under the endogenous money theory, if banks can borrow money at the Federal Reserve discount rate and still lend money profitably, then the money available for banks to borrow will become available as necessary to support the level of consumer lending individual banks require."

Read more: What is endogenous money? definition and meaning

 

[Beaudreaux]

"Banks do not “use” reserves as the raw material for loan-making. Rather, they lend out their own deposits, which are created by keystrokes. Post Keynesians have been saying this since a seminal piece by Basil Moore was published in 1979 (and it is easy to find early precursors all the way back to the dawn of time–as I demonstrated in my 1990 book, Money and Credit in Capitalist Economies).

S&P’s top economist, Paul Sheard, has written an excellent piece, Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves published here:

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf



- See more at: EconoMonitor : Great Leap Forward » Banks Don’t Lend Reserves! Who Knew? MMT, That’s Who!

And why is this important? Because money is endogenous, it is created when there is demand for it:


"Theory that money exists just as it's needed by the economy, because bank system reserves are increased or decreased to accommodate for demand. Under the endogenous money theory, if banks can borrow money at the Federal Reserve discount rate and still lend money profitably, then the money available for banks to borrow will become available as necessary to support the level of consumer lending individual banks require."

Read more: What is endogenous money? definition and meaning

To monetize the debt. They have to get the money they print, and then loan to themselves, out into the economy somehow. This is just the easiest way. But... as the article title states...

I remember Bernanke stating under oath to Congress a few years back that the Fed would not, under any circumstances, monetize the debt. Guess what?

 

[imagep]

To monetize the debt. They have to get the money they print, and then loan to themselves, out into the economy somehow. This is just the easiest way. But... as the article title states...

I remember Bernanke stating under oath to Congress a few years back that the Fed would not, under any circumstances, monetize the debt. Guess what?

Most of the federal debt is owned by the private sector, but to the extent that the fed purchases treasuries beyond any treasuries that have matured, yes, they are monitizing the debt. Which isn't entirely a bad thing. As our economy grows, and our population grows, we need more money circulating to facilitate trade. And our government could either hand this money out to people for free (welfare), or they could lend it into circulation (through our banking system), or they can spend it into circulation (government spending), and I do believe that we do a little of all of that.

 

[JP Hochbaum]

To monetize the debt. They have to get the money they print, and then loan to themselves, out into the economy somehow. This is just the easiest way. But... as the article title states...

I remember Bernanke stating under oath to Congress a few years back that the Fed would not, under any circumstances, monetize the debt. Guess what?

"If the recent rapid accumulation of Treasury debt on the Fed’s balance sheet constitutes a permanent acquisition, then the corresponding supply of new money would be expected to remain in the economy (as either cash in circulation or bank reserves) permanently as well. As the interest earned on securities held by the Fed is remitted to the Treasury, the government essentially can borrow and spend this money for free. If, on the other hand, the recent increase in Fed Treasury debt holdings is only temporary (an unusually large acquisition in response to an unusually large recession), then the public must expect that the monetary base at some point will return to a more normal level (through sales of securities or by letting the securities mature without replacing them). Under this latter scenario, the Fed is not monetizing government debt—it is simply managing the supply of the monetary base in accordance with the goals set by its dual mandate. Some means other than money creation will be needed to finance the Treasury debt returned to the public through open market sales."

Economic Synopses - Research Publications - St. Louis Fed

 

[Beaudreaux]

Most of the federal debt is owned by the private sector, but to the extent that the fed purchases treasuries beyond any treasuries that have matured, yes, they are monitizing the debt. Which isn't entirely a bad thing. As our economy grows, and our population grows, we need more money circulating to facilitate trade. And our government could either hand this money out to people for free (welfare), or they could lend it into circulation (through our banking system), or they can spend it into circulation (government spending), and I do believe that we do a little of all of that.

I agree (hope that doesn't surprise you). I have no problem with monetizing the debt if it's done in either of the two latter examples you give, since those also have the potential to produce more jobs, revenue to the government to recoup the debt and a more than likely longer sustained positive impact on the economy.

 

[Beaudreaux]

"If the recent rapid accumulation of Treasury debt on the Fed’s balance sheet constitutes a permanent acquisition, then the corresponding supply of new money would be expected to remain in the economy (as either cash in circulation or bank reserves) permanently as well. As the interest earned on securities held by the Fed is remitted to the Treasury, the government essentially can borrow and spend this money for free. If, on the other hand, the recent increase in Fed Treasury debt holdings is only temporary (an unusually large acquisition in response to an unusually large recession), then the public must expect that the monetary base at some point will return to a more normal level (through sales of securities or by letting the securities mature without replacing them). Under this latter scenario, the Fed is not monetizing government debt—it is simply managing the supply of the monetary base in accordance with the goals set by its dual mandate. Some means other than money creation will be needed to finance the Treasury debt returned to the public through open market sales."

Economic Synopses - Research Publications - St. Louis Fed

So according to the St. Louis Federal Reserve, if I get a woman pregnant, and we give it up for adoption later, we are not actually parents, nor is she pregnant between now and the time of the adoption, nor did we actually have sex. Nice.

Reminds me of this song from a very funny movie (the actual clip from the movie has been blocked on youtube by the studio)

 

[Kushinator]

"Theory that money exists just as it's needed by the economy, because bank system reserves are increased or decreased to accommodate for demand. Under the endogenous money theory, if banks can borrow money at the Federal Reserve discount rate and still lend money profitably, then the money available for banks to borrow will become available as necessary to support the level of consumer lending individual banks require."

Read more: What is endogenous money? definition and meaning

You are aware that banks generally never borrow from the discount window. It is a sign of weakness, which is why the Fed does not publish discount window lending data until years after.

 

[JP Hochbaum]

You are aware that banks generally never borrow from the discount window. It is a sign of weakness, which is why the Fed does not publish discount window lending data until years after.

Yes it is mostly interbank lending.