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January 11, 2011

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Open thread: Okay. Here's a post from Billy Blog, the Modern Monetary Theory (MMT)economics blog bobbyp turned me on to a number of months. It discusses the failure of quantitative easing to produce the results the Fed expected and the general principles that would explain that failure according to MMT. I found it particularly interesting and accessible. (Sometimes I find it hard to read all the way through the posts over there, but not this one.) Here's a taste:

The mainstream view is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves.

The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.

But banks do not operate like this. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost).

The point is that building bank reserves will not increase the bank’s capacity to lend. Loans create deposits which generate reserves.

The reason that the commercial banks are currently not lending much is because they are not convinced there are credit worthy customers on their doorstep. In the current climate the assessment of what is credit worthy has become very strict compared to the lax days as the top of the boom approached.

The post guts the fractional-reserve banking-based money-multiplier model taught in macroeconomics courses. (I always liked that model just for math's sake, though it seemed like a very roundabout way (do you really need an infinite series of loans and deposits to show this?) of explaining that x number of dollars in reserves are required to lend out y number of dollars based on the reserve requirement. Oh, well. So much for the time spent on Money and Banking in 1990.)

A bank can lend more than it has in reserve (or in excess of it's reserve requirement), and then borrow from other banks. But banks collectively cannot (although they can still go to the Fed). To suggest otherwise seems similar to deciding that you and your neighbor can get rich just by selling the same rocks back and forth to each other.

wj, doesn't he cover that here (emphasis added)? It sounds like your saying exactly the same thing: "(although they can still go to the Fed)".

...they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost).

wj: ...get rich just by selling the same rocks back and forth to each other.

But isn't that exactly how it works?

Act Three. Flipper. Not the Dolphin.

David and Chana discover a dark criminal plot inside their toxic asset. They do this with the help of several reporters from the Sarasota Herald-Tribune, who turn them on to a Florida mortgage fraud mastermind nicknamed "The King of the Flip."

This American Life: Toxie

That is more or less the story of what happened -- a group conspiring to inflate values by selling assets back and forth among themselves (and taking out bigger and bigger loans). I know, it's not an exact analogue and eventually someone winds up holding the bag, but the image (rocks back and forth) was just irresistible.

Also, too: Even if we assume for the sake of argument that he's wrong about the reserve constraints on loanable funds, there's no reason to think that banks won't hold excess reserves in the absence of worthy borrowers, thus making quantitative easing, in the form or increased reserves, ineffective at generating economic activity through increased lending.

"Also, too: Even if we assume for the sake of argument that he's wrong about the reserve constraints on loanable funds, there's no reason to think that banks won't hold excess reserves in the absence of worthy borrowers, thus making quantitative easing, in the form or increased reserves, ineffective at generating economic activity through increased lending."

There is actually much to say they WILL and HAVE held reserves in the absence of qualified borrowers, by new and more stringent definitons of qualified. There is also much to say that there are many fewer loan applications in the first place.

QE2 and (what will surely be) QE3 are about reducing the value of the dollar to make our exports more attractive. It is the nexus of monetary policy and Washingtons desire to "narrow the trade gap".

Part of the intended benefit of QE is lowering longer term rates, thereby reducing the cost of lending.

I'm not sure there is a consensus at this point on the effects of the program, but Janet Yellen, at least, is citing research supporting the idea that it is proving beneficial.

BY,

The consensus of opinions I have read agree that it is holding the cost of lending, the challenge is whether that reduced cost is a meaningful stimulator of lending in this environment.

No matter how easy it is to get to the fire the dog that's been burnt isn't rushing to get there.

If you'll be attending, this will be helpful to give me an answer to in email or anywhere in writing, including here, wherever.

I'd also like to put together an email mailing list for those who wish to be on it.

And I don't expect anyone to do this, but if anyone has a name tag, I won't rip it off your shirt, or order you to leave. :-)

I have lots of pictures from the previous time; and everyone's name. And I have access to most people's email addresses in scattered places.

What I've lacked is time to put those together, but mostly time to sort the photos, kill the bad ones, pick the good ones, assemble the email addresses, ask everyone in one email what sizes or formats they'd like them in, whether the current 1-2 megs a piece works, or prefer zipped mass, or thumbnails, or etc.

Reducing the photos is, again, a small job, but I have an endless number of small jobs and much larger, so any feedback I can cut and paste and stick in a file for later use is... useful.

Only if anyone is interested, of course. I can look at the pictures all I want. :-)

Oh, and restating the following in writing would help. Apologies, see previous sentence. :-)

New boilerplate:

All photos I take stay private to me without written permission to you.

I won't take pictures of you at all, if avoidable, if I'm aware you'd prefer I not.

Do you prefer/allow?:
1) no pictures taken.
2) pictures stay me-only?
3) pictures also to you? (My preference, but need info

on delivery preferences.)
4) pictures may be posted to Facebook my Friends only?
5) pictures may be posted to FB Friends of Friends?
6) pictures posted on the web allowed?

7) Other.

:-)

Boilerplate on delivery possibilities to come eventually.

So far I haven't found a moment to do anything about pictures from last month, besides glance and slightly organize, but for future reference, hopes, and dreams. :-)

I've also linked here.

I do invite people who are actually known on Balloon Juice to please spread the invite around, and similarly elsewhere on other blogs you think appropriate. It's an open meeting.

If fistfights break out, I'll use my cane on people.

No, I won't. I'll speak gently. Or otherwise deal. I don't expect it to be a problem.

But, really, do pass it on, and particularly as regards BJ, and your other favorite blogs. People Do Not Have To Know Me to be welcome.

I do hope to see Jacob again; that would be wonderful.

ral, the whole reason that flipping houses (or rocks) back and forth to inflate values works is that there are people outside the system who may eventually buy them at the inflated prices. Until that outside buyer/sucker appears, there is no gain for those selling back and forth -- because there is no value being added anywhere.

Similarly with banks borrowing overnight from each other. Until someone borrows from the Fed, there is nobody outside to make allow a net addition to the reserves -- and, as noted originally, banks prefer not to be the one to go to the Fed because it costs more. So all overnight borrowing does is allow those banks who have not hit their limit to lend to those who went over.

And, at least as I understood it, HSH's explanation seemed to imply that reserve requirements had no effect precisely because the banks could just borrow from each other, essentially without limit (and without going to the Fed to get more reserves into the system). But perhaps I misunderstood that part.

wj: ... Until that outside buyer/sucker appears, there is no gain for those selling back and forth -- because there is no value being added anywhere.

No, in the report what happened is they were able to obtain large loans, one paying off another but with enough excess to grab a pile of cash. Of course, at the end the scheme collapsed.

And, at least as I understood it, HSH's explanation seemed to imply that reserve requirements had no effect precisely because the banks could just borrow from each other, essentially without limit (and without going to the Fed to get more reserves into the system). But perhaps I misunderstood that part.

Maybe it was my aside about the money multiplier that led to your misunderstanding, wj. But what I quoted does discuss the central bank as the utlimate source of funds when inter-bank lending has been exhausted. That aside, I wouldn't say that reserve requirement have no effect, just not as significant an effect as the idealized money-multiplier model suggests or as some people in charge of monetary policy seem to have expected according to the quotes included in the post at Billy Blog.

It's a two-sided argument, as I see it. One side is whether banks really need reserves before they can lend. The other is whether banks will lend simply because they have the required reserves (or something in excess thereof).

But paying interest, whether at the inter-bank rate or the discount-window rate, on loans needed to meet reserve requirements will have some effect on banks' lending decisions.

Sorry I will miss the BABBLing -- I am not in Oakland but in northern New Jersey. Here is something that might be of interest to one or more east coast ObWingers, specifically those whose profession is software development: a software engineering job in Jersey, specifically the one I am leaving. Send me email if you might be interested in it -- anacreon at gmail -- I'm trying to help my employers find a replacement. Description is, coding and maintaining real-time news server in C on Linux.

Alas, Jacob informs me that he has other commitments this Saturday.

Incidentally, most of us tend to not notice addendums/updates on posts, when we read comments. I therefore mention that there's an update to this post, if you scroll back up, with a Picture Of Cats, if anyone is interested in.

There's a guy there, too.

You're looking considerably more svelt, Gary. Hopefully that is a good & healthy thing.

There appears to be something resembling a smile on your face, too. I hope that too is a sign that things are looking up for you of late.

Slart: I've lost weight since then.

I seem to have at least temporarily stablized in the past four to five days at between 194 to 195.5 lbs.

I smile and laugh constantly.

And have other expressions, as well. They're all constant, but not continuous.

I suppose a few hour's worth of video would be a tad much to post.

;-)

I've rarely been so depressed that I've totally lost all sense of humor. It just turns a bit blacker and more bitter, at times, and becomes even more self-directed. But even when suicidal, I find things to laugh at.

And I know I'm funny, because people laugh at me all the time. That's logical, right?

Ho!

However, I try not to smile with my mouth open until such time as I can get my teeth at least cleaned, if not more. I'm self-conscious about that.

I'd also furrow my brow less whenever I can afford to replace my last pair of prescription glasses, which lost in early 2003.

I had a full eye exam in mid/late 2008, but although I know exactly where and how to buy the cheapest pairs available on the internet, it's optional spending, because reading glasses do, and my distance vision isn't that bad, and the amblyopia can't be cured, other than the cosmetic operation that I had as a child so nobody but me notices it.

Apparently I don't have depth perception, though I sure have something that I think looks like depth.

But I do knock things over very easily, and constantly, and bump into things.

Not being inside someone else's brain, it's difficult for me to judge what the distinction is. When I saw Coraline in a movie theater, in 3-D, I certainly saw what looks like 3-D to me, just as I have no trouble telling when one thing is further away from another, etc.

As usual, TMI.

And I know I'm funny, because people laugh at me all the time. That's logical, right?

As Bob Monkhouse said, they laughed when I said I was going to be a comedian. But no one's laughing now!


But no one's laughing now!
I just heard a hilarious joke, myself.

Not sharable, but it certainly had quite a set-up before it got to the punchline.

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