I've been having a conversation with a number of adherents to Modern Money Theory or Modern Monetary Theory (MMT) about my recent post, "Modern Money Theory Versus Where Does Money Come From?."
It's a closed conversation, so I won't be sharing their comments outside the group. However, I am posting my comments here, which even though one-sided, should be, hopefully are, self-explanatory. The names have been deleted to protect group-member identities.
Hi [name] (and all),
I'll mostly address [name]'s comment directly, as others agreed with her.
I was familiar with the BOE. They don't require reserves. I knew that before they came out with their video and issued statements explaining their system.
That "loans create deposits" isn't inconsistent with the video. The video may not be exhaustive, but I don't see where it is wrong other than that.
To be fair to the video, it didn't suggest that households must save and deposit before banks can lend, at least not that I caught. Do I need to watch it again watching for where he does say that? (not that you said the video did say it; you mentioned textbooks but could, probably not, have also meant that the video was the same)
As for the idea of the interest-rate spread between what banks charge and what they can borrow from the Fed, I have no reason to doubt that, that happens. How is that incompatible with the Multiplier though? The Fed has ramped up the reserves via QE. If it were to have not done that at all, what reserves would banks be borrowing?
Randy Wray has suggested that the Fed would simply create the money to then lend. Perhaps that's right. It doesn't sound unreasonable. I just wonder where MMT gets its info. Randy Wray speaks as if it is via implication or derived from observation from the outside. I'd love to hear it from the Fed the way the BOE came out and explained its operations/requirements, which are a bit different, as mentioned.
"...nor is central bank money ‘multiplied up’ into more loans and deposits." It would be if there were strings attached to excess reserves rather than paying banks interest while they are unwilling or unable to lend (they say borrowers aren't there: don't meet standards). That's a huge other issue though. The Fed is concerned with the impact on Money Markets were the Fed to charge interest on excess reserves.
Anyway, I don't yet see that the video necessarily precludes MMT.
Are you aware that the Fed's 10% requirement does not allow that 10% to be in the form of borrowed funds for more than a set time? I supplied Randy Wray with the still current Fed rules concerning some of it. It's all readily available on the Fed's site. I've read it. I don't have it memorized, but no US bank under the Fed is supposed to be able to operate on 100% borrowed money. That's why I raised the enforcement question.
Does anyone in the group know whether the Fed enforces 10% capital (free and clear other than the obligation to depositors)? After all, what differentiates regular from excess reserves if all reserves can be from borrowed money? It wouldn't make any sense whatsoever. Do you agree with that? That's not a rhetorical question. I really want to know whether you agree or disagree and why. In fact, none of my questions here are rhetorical.
Of course, banks today are into way more than they were before the repeal of Glass-Steagall. They have "assets" all over the place since deregulation. That's made the whole thing rather murky to all but those who specialize in digging into the banks business. I haven't done that. Sadly, I don't know of anyone who has and is writing openly about it for people who are interested but don't have the time or means to do the research.
I'm not saying that MMT is wrong. I just do not know in any detail, and I've read MMT's critique of the Multiplier (at least two versions mentioned in my blog post), how what was said in the video is wrong. I think MMT's position remains rather vague or shouldn't even be taken as a statement that what was said in the video is wrong but rather just needs additional info attached.
Ordinarily, I wrap my head around various schools of thought rather easily. I don't find MMT nearly accessible enough yet. Perhaps it's still in its infancy too much to expect that. I'm not being pushy here. I hope I'm being helpful in that what I'm saying should stimulate MMT to do a clear side-by-side comparison.
[name 2] mentioned Warren Mosler. I've read quite a bit of his stuff and heard him a number of times. In my view, he's much more effective speaking.
What I'd really like to see is an MMT video that lays out MMT the way the video in my post handled the Multiplier. Has that been done? [I don't think so.] If not, those who lead MMT need to get a pro to help them make a really solid, clear video so we'll all know exactly how MMT sees the mechanics of money creation and destruction [emphasis added], etc.
The ratios are against specific funds. A bank must have them. If the only thing a bank were to have consisted of those specific funds, the bank would not be able to use any borrowed money to meet the required reserves.
I've read John Carney several times and have never been favorably impressed. His article discusses a new bank as an example in support of his vague (to me) thesis, but such a new, small bank would be exempt from reserves in the first place.
I'd have to see evidence from the Fed that loan origination fees alone would satisfy. That would be the Fed gambling on loan repayments right along with the bank. Maybe they do that, but I'd have to see it rather than simply taking John Carney's word for it.
As for the suggested video that the MMTers should do, it should focus first on money mechanics as MMT differs directly with typical Money Multiplier videos. The video should make things absolutely clear via diagrams. It should be clear about what is wrong with the traditional view versus where that traditional view simply needs updating (where the traditional still exists whether or not it is being utilized). It should not resort to vague terms but rather define its terms. For instance, is the Money Multiplier "dead" or simply not being utilized for whatever reason (such as to bailout banks rather than mark to market, which is my contention).
I like much about MMT. I believe it is right about fiat currencies generally and the tax-basis of highly functioning legal tender. I also appreciate MMT placing importance on employment and wages (though I'd go much, much further on those). MMT has also made strides making clear that it does understand inflationary dangers, which I never doubted because those at the top of the movement are obviously way too intelligent to have not known about such dangers.
Thank you, and I hope my efforts have been, and will continue to be, helpful.
As I mentioned when getting the private-group discussion rolling, "I'm not being combative or anti-MMT with this. I really don't know the answer(s) and am just trying to find out while hopefully helping to educate the masses about monetary and banking reform and MMT."
Hi [name 3],
You appear to have understood my questions quite a bit and perhaps completely. I was aware of banks borrowing to meet reserves. I thought I had been clear on that, but I could have emphasized it more.
My issue really boils down to both liquidity and solvency but more so liquidity.
From what you wrote in your comment (I haven't been able to get over to your off-LinkedIn posts), I'm gathering that your understanding is that the Fed for purposes of required reserves, isn't worried about a bank's liquidity. The Fed is only mandated to be sure that there is some ratio (set by the Fed) where if there is a large number of withdrawals at the given bank, the set percent should ordinarily cover things.
However, because you see the Fed as ordinarily always willing to supply funds, reserves are really rather unnecessary. Ben Bernanke openly said that perhaps we should move to a system san reserves. Of course, he didn't go into it, which is the problem (deliberate or lax). Since we are quickly moving away from coins and paper bank notes, I can see where doing away with reserves would be easy if the Fed would backstop the banking system, which it would.
On targeting a rate of interest, I had heard Randy Wray discussing it. He says the Fed "hits its target," whereby Randy knows that what you've expressed here is what's going on.
Just to be clear, I'm not saying here that the Fed is never concerned with solvency. Obviously, it is concerned, as it is exactly what it dealt with (poorly) right after the Lehman collapse.
I'm coming to the possible conclusion that what matters is the Fed's position regarding collateral from the banks. The Fed is always in first position, so who cares about the bank's balance sheet?
I'm uncomfortable with that though on two levels. First, it would be wrong of the Fed not to care. Second, what with the Fed's stress testing and the like lately, it would seem out of the Fed's new character.
Here are the Fed's collateral requirements that I know of. The document appears to cover the Fed as a source for overnight loans and more, which I assume, would be used by banks to meet reserve requirements.
Thank you for your comment.