Money multiplier does exist. But it means different things for different people. Whether money creation is endogenous or exogenous, whether one leads to another or the other way around, by current regulations, roughly nine dollars are 'counterfeited' for every one dollar printed by the public central bank. And it should be explained to people, because they don't know they are being ripped by private banks. Now, I have been explained that such system brings huge benefits to society, providing cheap credits to entrepreneurs, ..., that it should just be regulated and limited so that it never grows above a low% of GDP, etc... I believe it. But people need to know so they stop thinking 'debt has to be repaid' and stop this toxic culture of unneeded austerity. This is really counter-intuitive and most our citizens don't know anything about it. They are being morally blackmailed. It's a secondary question to know which bank creates money first or second. This is not helping if you say: 'money multiplier is a myth'.
Thank you for this. Question please: WHY do traditional econ textbooks teach about the money multiplier and loanable funds and crowding out? Is the orthodox econ profession (and central banks and Wall Street) intentionally trying to mislead everyone? Or, are they simply ignorant? Also, can you point me to other sources of info that would help me understand the investment implications of MMT? Thank you.
I think it's a combination of a number of things. On the one hand is institutional inertia. Professors who have spent a lifetime teaching things one way don't want to change; the old stuff makes sense to them and the new stuff doesn't. Textbook authors are hesitant to print the latest research because those professors won't buy their books, and also, it's the latest research and what if it's wrong? There's also been decades of neoclassicals declaring that anybody who disagreed with them was a crank, and now that the evidence is coming out that those people were right all along, it's pretty hard for them to do an about face and admit they've been wrong for decades. And, taking the more cynical view, there are indeed powerful interests served by most people not understanding how the economy actually works. A lot of mainstream economics really has become apologetics for the interests of the 1%. (I wouldn't say this is a conspiracy, but more a result of groupthink, cultural isolation, aka "being out of touch," and incentives to retain funding.) As for investment approaches, there are a few people who take an MMT appraoch to investment. See Mike Norman for one, and Jim Boukis. (Of course, I offer you no promise that they know what they're doing! :)
I get the point he's making, but saying that bank lending is not in any way reserve constrained is a bit misleading, there is a constraint based on reserves in that banks must hold a particular percentage of their liabilities in reserves to ensure that they remain solvent, regulations usually pushes this up higher than bank themselves may want to. So if a bank has lent upto is allowed limit for the reserves it has then it is constrained by regulation that it can't lend more unless it gains more reserves. After the financial crash the BoE had to QE to provide the banks with extra reserves as the required % of reserved required went up (from 8 to 15% if memory serves me right?) meaning that if a bank is already near its limit it needs new reserves to cover this legal requirement and so QE is necessary for the banks to continue lending. Or have I got completely the wrong end of the stick?
Yeah, that's not correct. Banks can make the loans regardless of whether they have enough reserves to meet requirements, because they can always get the reserves they need later, at some cost. The cheapest way to get those reserves is to attract savers to open bank accounts, either depositing cash or transferring reserves from some other bank. The cost here would be the advertising, and the cost of interest paid on deposit accounts. But that's usually too slow of a method if the bank needs to meet a requirement for like, tomorrow. For short-term needs, the bank can first try to borrow from some other bank that has a surplus. The cost of that would be the cost of the inter-bank loan, the Fed Funds rate. (What happens if every bank is trying to do this at the same time? It would put upward pressure on the Fed Funds rate, forcing the Fed to add reserves to the banking system in order to hit its interest rate target). If the bank doesn't want to do that, it can sell an asset (either temporarily through repo, or outright) in order to obtain the reserves. The cost here would be the interest forgone on the asset. And, the most costly option for the bank, it can borrow directly from the Fed, which will always lend to banks (either through the discount window or through automatic overdrafts). This is less prefered because the Fed charges a penalty rate for this, but of course it happens all the time. If the Fed notices that the banks are chronically in debt to the Fed, it will do an open market operation to add reserves so the banks can pay the Fed back. The point is, the bank lending (deposit creation) happens first, and this leads to the creation of reserves if necessary to support it.
Crowding out is what you call it when large corporations can't hold the economy hostage and pay whatever labor price they dictate.
Money multiplier does exist. But it means different things for different people. Whether money creation is endogenous or exogenous, whether one leads to another or the other way around, by current regulations, roughly nine dollars are 'counterfeited' for every one dollar printed by the public central bank.
And it should be explained to people, because they don't know they are being ripped by private banks.
Now, I have been explained that such system brings huge benefits to society, providing cheap credits to entrepreneurs, ..., that it should just be regulated and limited so that it never grows above a low% of GDP, etc... I believe it.
But people need to know so they stop thinking 'debt has to be repaid' and stop this toxic culture of unneeded austerity. This is really counter-intuitive and most our citizens don't know anything about it. They are being morally blackmailed.
It's a secondary question to know which bank creates money first or second.
This is not helping if you say: 'money multiplier is a myth'.
Does this apply to banks in United states?
Yes.
Deficit Owls thank you
Do you know where I can find information on this so I can study this for myself?
Sure, start here: bilbo.economicoutlook.net/blog/?p=31063
Thank you for this. Question please: WHY do traditional econ textbooks teach about the money multiplier and loanable funds and crowding out? Is the orthodox econ profession (and central banks and Wall Street) intentionally trying to mislead everyone? Or, are they simply ignorant? Also, can you point me to other sources of info that would help me understand the investment implications of MMT? Thank you.
I think it's a combination of a number of things. On the one hand is institutional inertia. Professors who have spent a lifetime teaching things one way don't want to change; the old stuff makes sense to them and the new stuff doesn't. Textbook authors are hesitant to print the latest research because those professors won't buy their books, and also, it's the latest research and what if it's wrong? There's also been decades of neoclassicals declaring that anybody who disagreed with them was a crank, and now that the evidence is coming out that those people were right all along, it's pretty hard for them to do an about face and admit they've been wrong for decades.
And, taking the more cynical view, there are indeed powerful interests served by most people not understanding how the economy actually works. A lot of mainstream economics really has become apologetics for the interests of the 1%. (I wouldn't say this is a conspiracy, but more a result of groupthink, cultural isolation, aka "being out of touch," and incentives to retain funding.)
As for investment approaches, there are a few people who take an MMT appraoch to investment. See Mike Norman for one, and Jim Boukis. (Of course, I offer you no promise that they know what they're doing! :)
I get the point he's making, but saying that bank lending is not in any way reserve constrained is a bit misleading, there is a constraint based on reserves in that banks must hold a particular percentage of their liabilities in reserves to ensure that they remain solvent, regulations usually pushes this up higher than bank themselves may want to. So if a bank has lent upto is allowed limit for the reserves it has then it is constrained by regulation that it can't lend more unless it gains more reserves.
After the financial crash the BoE had to QE to provide the banks with extra reserves as the required % of reserved required went up (from 8 to 15% if memory serves me right?) meaning that if a bank is already near its limit it needs new reserves to cover this legal requirement and so QE is necessary for the banks to continue lending.
Or have I got completely the wrong end of the stick?
happyflea
Yes, you didnt get It
Care to explain then?
positivemoney.org/how-money-works/banking-101-video-course/how-much-money-can-banks-create-banking-101-part-4/
bilbo.economicoutlook.net/blog/?p=9075
Yeah, that's not correct.
Banks can make the loans regardless of whether they have enough reserves to meet requirements, because they can always get the reserves they need later, at some cost. The cheapest way to get those reserves is to attract savers to open bank accounts, either depositing cash or transferring reserves from some other bank. The cost here would be the advertising, and the cost of interest paid on deposit accounts.
But that's usually too slow of a method if the bank needs to meet a requirement for like, tomorrow. For short-term needs, the bank can first try to borrow from some other bank that has a surplus. The cost of that would be the cost of the inter-bank loan, the Fed Funds rate. (What happens if every bank is trying to do this at the same time? It would put upward pressure on the Fed Funds rate, forcing the Fed to add reserves to the banking system in order to hit its interest rate target).
If the bank doesn't want to do that, it can sell an asset (either temporarily through repo, or outright) in order to obtain the reserves. The cost here would be the interest forgone on the asset.
And, the most costly option for the bank, it can borrow directly from the Fed, which will always lend to banks (either through the discount window or through automatic overdrafts). This is less prefered because the Fed charges a penalty rate for this, but of course it happens all the time. If the Fed notices that the banks are chronically in debt to the Fed, it will do an open market operation to add reserves so the banks can pay the Fed back.
The point is, the bank lending (deposit creation) happens first, and this leads to the creation of reserves if necessary to support it.
loanable funds theory in no way says that banks can't create money. this is just wrong.