tag:blogger.com,1999:blog-8764541874043694159.post3365753117452920423..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: Beyond disappointmentFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger73125tag:blogger.com,1999:blog-8764541874043694159.post-70821622297283208532018-02-14T10:50:24.922+00:002018-02-14T10:50:24.922+00:00" a far more interesting discussion about whe..." a far more interesting discussion about whether or not banks earn seigniorage from lending, how we could measure this and whether it constitutes a hidden subsidy that should be removed."<br /><br />I fully agree that that is a crucial question. Personally I think commercial banks' right to create money does amount to a subsidy of such banks. My reasons, for what they are worth, are here:<br /><br />http://www.kspjournals.org/index.php/JEB/article/view/740Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-88533447509549132952017-11-29T11:16:13.074+00:002017-11-29T11:16:13.074+00:00There may be a simple explanation for the gender i...There may be a simple explanation for the gender imbalance. Since the subject is economics, at least in the USA there are far fewer women economists than men. I don't know about the situation in Britain. In 2010 only a third of economics doctorates in the US were earned by women. Psychology, sociology and life sciences doctorates awarded were majority female by the same year. Thus, if majority-women conferences in these fields were held (at least in future after they have got further ahead in their careers, replacing older men in their fields and get invited to speak at conferences) it would not be evidence of sexism against men. https://www.aeaweb.org/articles?id=10.1257/jep.29.1.89<br /><br />As for people of colour, that's 9% of speakers, not far off what one would expect in the 87% white UK (2011 census).<br /><br />Norbert Haering considers the problem of whether INET is an establishment Trojan horse. http://norberthaering.de/en/32-english/news/68-george-soros-inet-an-institute-to-improve-the-world-or-a-trojan-horse-of-the-financial-oligarchyAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-162680090144163802017-10-30T19:36:27.996+00:002017-10-30T19:36:27.996+00:00«Goldman Sachs in fact started as a very small com...«<i>Goldman Sachs in fact started as a very small company which bought these credits, at a discount, from groceries and cobblers and whatever)</i>»<br /><br />To expand on this story, here are the quite interesting details:<br /><br />https://www.immigrantentrepreneurship.org/entry.php?rec=100<br />«<i>Goldman’s start in banking was very austere. Unlike the prominent German-Jewish banking families of New York, he operated alone, assisted only by a part-time bookkeeper. He inaugurated his new career by hanging a shingle marked “Marcus Goldman, Banker and Broker” outside his small basement office next to a coal chute on Pine Street in lower Manhattan. Goldman carved out a niche for himself by becoming a banker and broker of trade bills for the wholesale jewelers on Maiden Lane and tanners in “the Swamp” along Beekman Street. Traversing those neighborhoods in the morning, he purchased their promissory notes ranging from $2,500 to $5,000 (approximately $43,000 and $86,000 respectively in 2010$) at a discount averaging between eight and nine percent. Decked out in a Prince Albert frock coat and tall silk hat, traditional banker’s attire at the time, he tucked the documents into the inner band of his hat. By the afternoon, with his hat bulging, he then negotiated the sale of these notes to uptown commercial bankers, earning commissions of one-half of one percent.<br />By purchasing and reselling merchants’ promissory notes and providing the sellers with access to working capital on terms more attractive than those afforded by commercial bankers, Goldman essentially operated within the antecedent to the commercial paper market. He was not the only “note shaver” in New York, but he transacted business in a yet largely untapped market. Conducting his business by foot, he observed his environs firsthand. He was therefore able to gauge potential competition and to acquire new clients. Business was good. By the end of his first year, he sold approximately $5 million dollars (approximately $86 million in 2010$) of commercial paper.</i>»Blissexnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-19691207988716261682017-10-30T19:34:37.483+00:002017-10-30T19:34:37.483+00:00«The point: it is illuminating to think of 'mo...«<i>The point: it is illuminating to think of 'money' as in fact many, many different kinds of money, often indeed created by private partners (think of the cash credits of grocery shops of fifty years ago;</i>»<br /><br />M Knibbe as a rule is someone who write excellent and interesting points, but this is nowhere are lucidly written as the famous quote from H Minsky:<br /><br />www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997<br />“<i>Both the monetarist and standard Keynesian approaches assume that money can be identified quite independently of institutional usages.<br />But in truth, what is money is determined by the workings of the economy, and usually there is a hierarchy of monies, with special money instruments for different purposes.<br />Money not only arises in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted.</i>”<br /><br />But even H Minsky's description can be improved adding some detail: more precisely, "money" is usually is created by buyers, not by banks; the role of banks is to *endorse* it. Consider the case of someone who wants to buy a car that costs $15,000 they could pay the seller with a "promise to pay" for $15,000, and that "promise to pay" is "money" issued by the buyer. But the seller won't accept that "promise to pay" from the seller because they don't know their reliability. The will however accept a cheque drawn on a bank for $15,000 because they know the bank's reliability.<br />Therefore what happens in between is that the buyer gives his "promise to pay" $20,000 to a bank (this is called "borrowing") and gets in exchange a "promise to pay" $15,000 from the bank (this is called crediting his account with the bank with a loan), and this allows him to pay with a cheque drawn on the bank.<br /><br />As long as cheques circulate, lending needs not be funded. As our blogger says, only payments need to be funded, and even that not all payments, except in a purely accounting way: more precisely only *net* payments need to be funded, and even more precisely only one type of payment need to be "really" funded: *net* withdrawals from bank accounts, that is conversion of bank "money" into central bank "money", which can only be done if the bank has "credit" with the central bank.<br /><br />Just being a bit pedantic :-)<br />Blissexnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-28628497105447665922017-10-30T17:14:00.823+00:002017-10-30T17:14:00.823+00:00History tells us you cannot trust either the priva...History tells us you cannot trust either the private banks or the government with money creation. That's why we need a third constitutionally arms length institution with unimpeachably beneficial mandated monetary distribution policies like a universal dividend and a substantial discount to the "retail product" of every business model that is reciprocally rebated back to participating businesses. This institution could also serve as a truly objective and balanced central bank whose overweening mandate was increasing economic prosperity and freedom for all agents with a bias toward increased traditional production with fewer actual resource usage. That way it could be a true lender of last resort instead of being the hand maiden of the too big to fail banks.Anonymoushttps://www.blogger.com/profile/10115431758912669755noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-47582956915749962042017-10-30T09:40:28.885+00:002017-10-30T09:40:28.885+00:00Hey, I'm not defending her piece, merely trans...Hey, I'm not defending her piece, merely translating it! I don't think she has the foggiest idea what she is talking about as far as money creation goes. But her real target is private sector banks, not money creation. She wants to nationalise banks and have the state direct lending to uses that she considers "productive". Like that has worked so well in the past. Welcome to Soviet Britain. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-71575078261315048992017-10-30T07:37:35.291+00:002017-10-30T07:37:35.291+00:00Sure sure and lending requires payments (that'...Sure sure and lending requires payments (that's why what are essentially bank IOUs are accepted as money, because you can be sure of payment)<br /><br />But read that Guardian piece. Nothing there explains to readers that banks cannot create money for payments, there is nothing about the liabilities side of banking, nothing that deviates from the view Rendhal was attacking. <br /><br />As for the idea nationalised banking would be more productive. Lord save us from government hubris. I mean ok, a development bank and maybe subsidising start-ups. But "spending that is currently funded by bank lending should be taken over by the state, because the state"? Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-68591064932632579202017-10-29T16:51:00.263+00:002017-10-29T16:51:00.263+00:00She does say that banks create money when they len...She does say that banks create money when they lend. And as I keep saying, Luis, it is not lending that is funded, but payments. <br /><br />I agree this article is more than slightly misleading, but that is because it completely omits payments - which is also the criticism I level at mainstream economists. It is also very confused. She's not really talking about money creation at all. Her real argument is that bank lending is unproductive, and therefore spending that is currently funded by bank lending should be taken over by the state, because the state will direct it more productively. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30390632489500391902017-10-29T14:24:46.965+00:002017-10-29T14:24:46.965+00:00Here the Guardian tells its readers commercial bac...Here the Guardian tells its readers commercial backs crate money out of thin air and does not mention they must be able to finance their lending<br /><br />https://www.theguardian.com/global/shortcuts/2017/oct/29/how-the-actual-magic-money-tree-worksLuis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39201551365671114622017-10-27T02:09:05.285+01:002017-10-27T02:09:05.285+01:00" haven't we all gotten tired of the &quo..." haven't we all gotten tired of the "whirlwind" graphs that lacks any economic intuition? "<br /><br />Yes we've gotten tired of them, but if they also prove that we're stuck between a rock and a hard place because the paradigms of Debt, Loan and For Production Only enforce that "stuckness" ....then we'd better actually look at and come up with a new paradigm pronto.<br /><br />"DSGE models are stock-flow consistent" The alleged absolute importance of Stock-flow consistency as well as the economic validity of certain accounting identities....are rendered irrelevant to the solution....when one recognizes the new monetary paradigm of Direct and Reciprocal Gifting, and one also recognizes that the costing/pricing system, payment system and the money system are all digital and hence a discount policy to the consumer implemented at the point of sale throughout the entire economic/productive process that was rebated back to those enterprises by a monetary authority specifically mandated to do so. Why? Because it would enable immediate and potentially very large increases in individual purchasing power via what, up until one sees it, is considered impossible, namely the painless and BENEFICIAL integration of price deflation into profit making systems.<br /><br />Keen and probably every other macro-economist are undoubtedly very bright. What they lack is the integrative habit that aids in paradigm perception and an unfortunate habituation to abstraction. Hence they're generally off in some theoretical and/or mathematical fugue....instead of doing the equivalent of zen meditation on the moment to moment commercial operations that take place in the economy continually....and then integrating the economic insights to be found there into their macro policy solutions.Anonymoushttps://www.blogger.com/profile/10115431758912669755noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-67496700605761006712017-10-26T23:20:44.878+01:002017-10-26T23:20:44.878+01:00Rendahl again: I just want to thank you for being ...Rendahl again: I just want to thank you for being so honest on twitter about your mistake. That's the right way to go, and I appreciate it.<br /><br />As for Keen, let me just say that I do not respect his work in any way. What he presented at INET 2017 was exactly the same stuff as he presented in Cambridge in 2011 -- so much for NEW economic thinking. Also, haven't we all gotten tired of the "whirlwind" graphs that lacks any economic intuition? <br /><br />In any case, he seems to be accusing me [on twitter] of not being on top of an economic discussion before I was born (the capital controversy). Yeah, I agree, I'm not. But it seems like most people at the time just rolled their eyes and went on with their lives, which sounds like a good idea to me -- having read up on it, it seems like a non-event. But as a very junior academic then, I created quite a stir by pointing out that: 1, DSGE models are stock-flow consistent; and 2, that Keen's own models satisfy Say's law at all times, and are hence supply driven. Both these statements stunned both Keen and his followers, which I thought reflected very poorly on his intellectual ability.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-32461758127133423312017-10-26T23:07:06.559+01:002017-10-26T23:07:06.559+01:00Dear Luis,
when I borrow from a bank and withdra...Dear Luis, <br /><br />when I borrow from a bank and withdraw my money via an ATM I'm not actually withdrawing my money but using one kind of money (bank deposit money) to buy another kind of money, i.e. government bank notes. The bank has to buy these notes from the central bank, depending on the country. As the government requires a 1:1 exchange rate between government and bank money, this also (together with the fact that deposit money can be used to pay tax-debts with the same 1:1 exchange rate) guarantees that deposits created by different banks are interchangeable (and even indistinguishable); in a 'free banking' system this would not be the case. Up to a point, balance sheets of banks are not important, because if they lack the funds to buy notes when people 'withdraw' money from the bank, the ECB will provide these banks with ELA (Emergency Liquidity Assistance) which enables these banks to buy the notes. As happened, for a time, in Greece. And governments will bail out these banks. This is of course a chartalist point of view: central banks exist to enable the interchangeability of deposits created by different banks (together with the borrowers, of course) and tax debts can be extinguished using the 1:1 exchange rate (I'm an economic historian: there have been times when taxes had to be aid with cash but when many different kinds of cash were used to do this while some of these coins might have been worn; do not take the present situation for granted!). Let's extend this a little: when a company buys something from another company it generally emits a payable/receivable. When the seller excepts this, a legally binding transaction follows: ownership of goods or transfer of services takes place (guaranteed by law and i.e. by the government). Imagine that the government accepted receivables to extinguish tax debts, using a 1:1 exchange rate. Ot that the government established a bank which accepted receivables at a 1:1 exchange rate in exchange for bank notes. That would turn these receivables into a highly liquid kind of money. In the eighteenth century this something like this happened with bills of exchange: the joint liability rule turned them into quite liquid money! The point: it is illuminating to think of 'money' as in fact many, many different kinds of money, often indeed created by private partners (think of the cash credits of grocery shops of fifty years ago; Goldman Sachs in fact started as a very small company which bought these credits, at a discount, from groceries and cobblers and whatever). Aside: central banks define 'seigniorage' as the interest difference they earn on the government bonds bought with the deposit money they earned by selling bank notes to banks (your withdrawal!) and the costs of replacing worn out notes. A comparable definition can be used for private banks, who earn interest on the debts which are the counterpart of the deposit money banks and borrowers create. http://www.google.nl/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjQ7Or7oo_XAhUBmBoKHXnqAhIQFggnMAA&url=http%3A%2F%2Fwww.bankofcanada.ca%2Fwp-content%2Fuploads%2F2010%2F11%2Fseigniorage.pdf&usg=AOvVaw11IdQF1a8AKeast8dQL9Mk <br /><br />Merijn Knibbehttps://www.blogger.com/profile/02028625365326471593noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-90912972430627125732017-10-26T17:01:33.885+01:002017-10-26T17:01:33.885+01:00Rendahl, Frances,Does anyone want to look at and c...Rendahl, Frances,Does anyone want to look at and comment on the complementary policy to a universal dividend I have posted about here? <br /><br />The point of sale throughout the entire economic process is a terminal summing point of costs and prices for any item or service, and momentary stopping/transforming point of production into consumption. Hence if you implemented at that point a reciprocal policy of discount to the consumer and rebate of that discount back to merchant of relatively high percentage....... it would reduce/reverse the necessary market and hence continual build up of new private debt which is the problem Steve Keen has re-discovered.Anonymoushttps://www.blogger.com/profile/10115431758912669755noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-60287183850066627512017-10-26T16:46:11.989+01:002017-10-26T16:46:11.989+01:00I meant to add, on the question of helicopter mone...I meant to add, on the question of helicopter money, that I don't think the government necessarily has to run surpluses to maintain confidence in the currency. The "NPV of future receipts "is implied, not actual. It is enough that people believe that government is able and willing to back its central bank. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-86399897488017076332017-10-26T15:35:46.793+01:002017-10-26T15:35:46.793+01:00Agree. Agree. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-71994375358673433062017-10-26T15:21:10.548+01:002017-10-26T15:21:10.548+01:00Rendahl, you are awesome! Please start a blog.
Si...Rendahl, you are awesome! Please start a blog.<br /><br />Sincerely, BritonomistAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57919866372135126002017-10-26T14:38:43.317+01:002017-10-26T14:38:43.317+01:00Anonymous, a bank lending to an investor with the ...Anonymous, a bank lending to an investor with the explicit intention that the money will be used to buy the bank's shares is fraud. Barclays has been charged with fraud over the Qatar deal. It's sub judice, of course. https://www.sfo.gov.uk/2017/06/20/sfo-charges-in-barclays-qatar-capital-raising-case/<br />If it were permitted, it would indeed be "bailing themselves out". But it is rightly illegal. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-69877059454462121082017-10-26T14:31:27.662+01:002017-10-26T14:31:27.662+01:00Rendahl, of course I will correct what I said on t...Rendahl, of course I will correct what I said on twitter. We seem in fact to be in complete agreement. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-41516818412700121922017-10-26T12:24:48.097+01:002017-10-26T12:24:48.097+01:00Frances, I do love a happy ending and I'm plea...Frances, I do love a happy ending and I'm pleased that you and Rendahl seem to have now realised you've basically been vehemently agreeing with each other all along.<br />On a purely practical level, isn't it the case that banks (to amend the quotation slightly) 'can't create money out of thin air to bail themselves out' because it's illegal to lend money to themselves? Hence the alleged 2008 Barclays-Qatar workaround which is still being investigated as far as I'm aware. Of course, if Barclays get away with it, we might have to conclude that banks *can*, in fact, bail themselves out. (My definition of 'get way with' in this context is 'not get sent to jail for a long time').<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-75998298976069331282017-10-26T12:14:19.310+01:002017-10-26T12:14:19.310+01:00Rendahl back again: My final answers on the matter...Rendahl back again: My final answers on the matter.<br /><br />1, "I hope you will agree that creating money with a stroke of the pen (or a few taps on a computer keyboard) is indeed what banks do." <br /><br />Under the hypothesis that they have a decent asset at their disposal (i.e. a borrower with a realistic capacity of repaying), and with the understanding that they either have or will acquire the relevant reserves, yes. But this -- and I say this again -- is far from "nothing". In addition, this is also a non-issue for mainstream economist. If you look at the most standard textbook new Keynesian models, money is endogenously created through the demand for goods and services. (Alas, the banking sector is not explicitly modeled).<br /><br />2, Being technically insolvent is not an issue for a central bank. The liabilities are a just a claim on liabilities, not on assets (e.g. "I promise to pay the bearer on demand the sum of five [ten/twenty/fifty] pounds", as it says on the pound notes). So helicopter drops are indeed possible even without the government running surpluses. Will it be inflationary? Well, that's the hope! But in a zero interest environment, not even that is clear. If the drop ends up in the mattresses instead of being spent, nothing will happen.<br /><br />3, Here is what you have written on twitter: <br /><br />"He says (I quote) "Banks can't create money or we wouldn't have had to bail them out."<br /><br />"Lol. He doesn't seem to know the difference between assets and liabilities."<br /><br />"I am seriously appalled. I will respond to him, of course. With a detailed post explaining exactly why and how he is wrong."<br /><br />"Rendahl's claim is that banks do not create money when they lend."<br /><br />This is not true, as you have yourself admitted. That is, you spread false information about what I have said, and even claimed that you quoted me.<br /><br />Given that you have now acknowledged that, it would be becoming for you to perhaps admit that to the twitterati. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87508137734096408142017-10-26T10:40:01.471+01:002017-10-26T10:40:01.471+01:00Kudos to you Frances for writing that. Such gracio...Kudos to you Frances for writing that. Such graciousness is vanishingly rare Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87683570440523280912017-10-26T05:27:43.277+01:002017-10-26T05:27:43.277+01:00A discount policy as per above of 50% would give e...A discount policy as per above of 50% would give everyone a potential 50% raise. When has any politician or economist accomplished such a policy benefit for both individuals and enterprise? What enterprise could resist opting into such a policy? And finally, a 50% increase in purchasing power that was tied to an actual purchase plus a sufficient dividend would also increase the likely profitability of enterprises generally and go a very large way toward smalling up or eliminating their need to continually borrow which is the solution to the problem guys like Steve Keen are searching for because the continual necessity to borrow is currently the only way to keep modern economies from promptly falling into recession...but remains unresolvable without monetary Gifting because continual private borrowing even at 0% interest eventually outstrips individual's and enterprise's ability to service those debts. Please think about it.Anonymoushttps://www.blogger.com/profile/10115431758912669755noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27275520340283899412017-10-26T00:22:16.480+01:002017-10-26T00:22:16.480+01:00If you tie monetary policy reciprocally to every p...If you tie monetary policy reciprocally to every point of "retail" product sale, that is from one business model to the next within and throughout the entire economic/productive process with a high percentage discount policy to their "consumer" and that a monetary authority rebates back to the business granting the discount you could beneficially integrate price deflation into profit making systems, instantaneously increase individual purchasing by a large percent and hence tremendously stabilize the actually productive economy.<br /><br />As for the FIRE economy, even with a new paradigm, you'd need to stand up on your own hind legs and "grow a couple", that is a couple of new ethical neurons and firmly regulate things like collusive kickbacks to home building firms for them inflating their prices to consumers. The high percentage discount policy would go a long way toward nixing that, but again, you'll need to attack the host of economically de-stabilizing profit wriggling that goes on in the Finance, Insurance and Real Estate economies.<br /><br />Legal tender laws are actually all a nation actually needs to justify its currency and money system. That it requires taxation is one of the weaker tenets of MMT. Re-distributive taxation is mostly captured by old paradigm thinking. With a sufficiently abundant universal dividend to everyone 18 and older and the discount policy above one could immediately render transfer taxation for welfare, unemployment insurance and quite quickly even social security, therefore benefiting both the individual and enterprise. Taxation could then be free to be used for one of its few legitimate purposes discouragement of individual, commercial-ecological and systemic vices, and at times when the nexus of greed and DSGE fallacy like the derivative mania that lead up to the GFC was in its infancy.Anonymoushttps://www.blogger.com/profile/10115431758912669755noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-23181797663793462072017-10-25T21:32:26.400+01:002017-10-25T21:32:26.400+01:00/continued.......
So I would say that central ban.../continued.......<br /><br />So I would say that central banks create base money backed by the (very) long-term ability of the government to pay, and commercial banks create bank money backed by the long-term ability of the borrower to pay. In the case of the central bank, the credibility of the government/central bank combination determines the purchasing power of the monetary base. In the case of the commercial bank, I agree with you that bank money can be regarded as exchangeable at par for base money. However, the credibility of that peg in my view is rather more complex than you suggest. <br /><br />In the case of insured deposits, the par value peg is guaranteed by the insuring body, usually the government (it could be an insurance fund, but these generally have government backing, so the ultimate guarantor is still the government). Additionally, depending on the structure of the bank's balance sheet, there may be government guarantees for a proportion of uninsured deposits, due to the presence of government debt in the asset base. Of course, government can't guarantee the value of its debt, but as a fall in the price of government debt is the same as a fall in the future value of base money (since government debt is a future claim on base money), this does not affect the peg. Rather, both base and bank money are equally debased and the peg holds. So the bank money that depends for its value on a healthy balance sheet is the proportion that is uninsured and not backed by government debt. It is not *all* bank money. This creates moral hazard - a known problem with deposit insurance - since banks have less incentive to maintain a healthy balance sheet when a substantial proportion of their liabilities are effectively guaranteed by government. <br /><br />On reserve pricing - yes, I agree, the central bank controls credit creation by means of the price of reserves. There is a limit to its control, however. Raising the price of reserves to discourage lending may not work if the price of collateral pledged by borrowers is rising rapidly, as in a real estate boom. And lowering the price of reserves to encourage lending may not work if banks and/or borrowers have damaged balance sheets. I am unconvinced, therefore, that interest rate policy alone would have prevented the pre-crisis bubble or the post-crisis stagnation. That said, I think there were other things central banks and regulators could have done. <br /><br />I hope this has cleared up our misunderstanding. <br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-33568640841520528002017-10-25T21:31:55.391+01:002017-10-25T21:31:55.391+01:00Rendahl, thank you for your clarification. It'...Rendahl, thank you for your clarification. It's clear that I had omitted the most important part of your comment, and in so doing, misrepresented what you said. My sincere apologies. Luis did indeed understand your intention better than I did. <br /><br />The heart of this misunderstanding is your fifth point. <br /><br />I have spent much of the last seven years explaining to anyone who will listen that banks do not "lend out" deposits or reserves. Rather, they create both loan assets and matching deposit liabilities "from nothing" by means of double entry accounting entries. This is what I mean by "ex nihilo". I hope you will agree that creating money with a stroke of the pen (or a few taps on a computer keyboard) is indeed what banks do. <br /><br />However, your definition of "ex nihilo" appears to be different from mine. As I understand it, you take "ex nihilo" to mean creating money without asset backing. I would completely agree that creating money without asset backing is not what banks do. Nor can they, since creating liabilities without asset backing would render them insolvent. They create money backed by debt assets. <br /><br />Really, central banks can't create money "ex nihilo" by your definition, either. In open market operations, the central bank buys assets in return for base money (I take this to be what you mean by "constrained by paper"). The central bank could issue helicopter money, which is money created by the central bank without asset backing and spent directly into the economy. If done on a large scale, this would render the central bank technically insolvent. However, in this case there must be implied fiscal backing, namely the NPV of future tax receipts from a credible government that is fully committed to supporting the central bank. Without that, helicopter money would be extremely inflationary, since without either the backing of assets or a credible fiscal guarantee, the central bank cannot maintain the purchasing power of base money. Isn't this equivalent to a bank relying on long-term interest bearing debt assets to support the value of its short-term liabilities?<br /><br />/to be continued.....<br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com