Not Hard Core Porn: Can the Fed Constrain the Money Supply?
This is a continuation of the discussion started in Bill Mitchell's recent blogpost (My response to a German critic of MMT – Part 1)
http://bilbo.economicoutlook.net/blog/?p=38964#more-38964
Please free to check in as a comment if you'd like further clarification on the issues raised in the blogpost.
Francisco J. Flores
Also don't forget the doggy's blurb for the path to a better world:
http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
Francisco J. Flores
Also don't forget the doggy's blurb for the path to a better world:
http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
The Initial 2 Posts:
This is actually a question:
RE: “….but cannot control the broad money supply or the volume of “central bank money” in circulation…. This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation. … The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability. …”
• Technically, isn’t the private banking sector constrained in the US by the “10% on deposits” reserve requirement. If the banking sector wanted to go crazy and they are at 10x deposits/reserve deposits wouldn’t they have to stop lending. Of course individual banks can go into Fed funds market, but on a consolidated basis isn’t the sector constrained? If so, then technically the sovereign CAN control the broad money supply, correct? Again, always helps when MMT says stuff that is 100% correct. Sometimes we need qualifiers. (“…cannot DIRECTLY(?) control the volume in circulation.”…)
RE: “….but cannot control the broad money supply or the volume of “central bank money” in circulation…. This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation. … The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability. …”
• Technically, isn’t the private banking sector constrained in the US by the “10% on deposits” reserve requirement. If the banking sector wanted to go crazy and they are at 10x deposits/reserve deposits wouldn’t they have to stop lending. Of course individual banks can go into Fed funds market, but on a consolidated basis isn’t the sector constrained? If so, then technically the sovereign CAN control the broad money supply, correct? Again, always helps when MMT says stuff that is 100% correct. Sometimes we need qualifiers. (“…cannot DIRECTLY(?) control the volume in circulation.”…)
Jerry and Neil:
RE: “…I think the answer to your question is that if the Fed desires to maintain the stability of the financial system we have at the moment, it would find that it has to make the necessary reserves available to the banking system. … No. The Fed has to supply sufficient reserves to cover the reserve requirements …”
• Ok. So my point was to refudiate the notion that the Fed cannot control the broad money supply. And of course you gentlemen confirmed that that is exactly what the Fed does, as does Professor with the last statement I quoted.
• I find this to be a bad habit among MMT proponents. A detailed description on the intracisies of the monetary/fiscal system and then an assertion/conclusion or the title of an article/blog/dissertation that contradicts the description.
• Ok. So my point was to refudiate the notion that the Fed cannot control the broad money supply. And of course you gentlemen confirmed that that is exactly what the Fed does, as does Professor with the last statement I quoted.
• I find this to be a bad habit among MMT proponents. A detailed description on the intracisies of the monetary/fiscal system and then an assertion/conclusion or the title of an article/blog/dissertation that contradicts the description.
• The prototypical example of course is the statement that taxes and borrowings don't fund spending. Of course a true statement when looked at through a certain prism, from a certain angle including all the aspects, and in the broader sense of he words. And of course FALSE when looked at as 99% of humans would look at it.
Professor and Mel:
ReplyDeleteRE: "...In an endogenous money system where commercial banks create credit at will, the central bank cannot control broad money aggregates unless they wish to send banks bankrupt and create a financial crisis. ... This mess. The one Prof. Mitchell describes in the article:
“If cheques start bouncing because of a shortage of reserves then financial panic would follow.” ..."
• But as I've pointed out, with the 10% Reserve Deposit requirement, why would banks go bankrupt and create a financial crisis? I think folks are confusing 2 opposite economic situations:
1) A Crises of Confidence where folks are nervous about bank solvency and pull their money out to stuff in their mattresses - necessitating the Fed to inject reserves to create liquidity (see 2008), and the opposite case
2) Excessive Confidence where excessive testosterone causes strong loan demand, exceeding banks' ability to lend while maintaining their 10% Reserve Deposit/Total Deposit ratio.
I'm referring to Case 2, where the fed can CONTROL loan (and thus money) growth, demonstrating the falsity of the statement denying any such control. The Feds refusal to increase Reserves merely stops loan (and money) growth. No crisis is necessary.
RE: "... That is the sense in which Modern Monetary Theory (MMT) proponents talk about a lack of control, which just builds on the Post Keynesian views on circuit theory and endogenous money. ... ..."
• Talking about this in academic circles is fine. But stating this obviously nontrue statement in platforms reviewed by politicians, other academics, financial bureaucrats, business people, and financial professionals is harmful to MMT.
Mel:
ReplyDeleteRE: "... Steve Keen has cited Alan Holmes ... In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. ..."
• This is all well and good for individual banks. But looking at the private sector as a consolidated entity, if he sector has reached the 10% Reserve/Deposits ratio (in the US), unless the Fed provides additional reserves, the sector will be forced to borrow from the Discount Window at a penalty rate, get dinged as a bad bad bank, and possibly slapped on the wrist - hard. No bank likes to be forced to borrow from the Discount Window. Lending will be constrained. That's called the Fed having some CONTROL over loan growth.
RE: "... The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves.” ... ..."
• Again: the Fed having some CONTROL over loan growth.
"Technically, isn’t the private banking sector constrained in the US by the “10% on deposits” reserve requirement. If the banking sector wanted to go crazy and they are at 10x deposits/reserve deposits wouldn’t they have to stop lending."
ReplyDeleteNo, the constraint here is that the Fed has to release more reserves. If it does not, the Fed Funds rate would rise as banks compete to borrow the reserves they need to meet their reserve requirements. And the Fed is VERY DETERMINED to keep the Fed Funds rate at its target, so it releases reserves.
“….but cannot control the broad money supply or the volume of “central bank money” in circulation…. This might seem a little confused. On the one hand, the government is a monopoly issuer of its own currency but then cannot control the volume in circulation. … The way to understand it is to realise that the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability. …”
This reflects the fact that a monopolist can generally dictate either price (interest, in this case) or quantity but not both. The monopolist can set a price and allow the market to determine quantity, or set a quantity and allow the market to determine price. Think of a concert promoter. He tries to set a price where all the tickets will sell, and everyone who wants one gets one. But what happens in the real world is that not all the tickets sell (market determines quantity) or demand exceeds seat capacity (market--scalpers--determine price). The Fed is a price-rule monopolist. They set a price (interest rate target) and let the banking system determine the money supply.
This is a semantics game that drives me nuts. To most humans - words matter. But to my fellow MMTers, its "feelings" that count, and I believe its a major flaw - ball and chain - in MMT acceptance. So again, and again, and again:
Delete• What you SAID was: "NO, the constraint here is that the Fed has to release more reserves."
• What you MEANT was: "YES, the constraint here is that the Fed has to release more reserves."
The Fed is very DETERMINED to keep the Fed Funds rate within target, and it does so by CONTROLLING the level of reserves (including CONSTRAINING it) and thus controlling the level of bank debt.
That's right up there with MMTers saying that borrowing and taxes don't fund spending in the US. Sheesh! http://mmt-inbulletpoints.blogspot.com/2018/03/not-porn-do-taxes-and-borrowings-fund.html
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