Modern Money Theorists Need Instructional Videos!

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.

Tom1

Tom Usher


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.

[Video: www.washingtonsblog.com/2014/03/bank-england-admits-loans-come-first-deposits-follow.html]

[PDF: www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf]

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.

Comment 2:

[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.

Comment 3:

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.

www.federalreserve.gov/monetarypolicy/reservereq.htm

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."

Comment 4:

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.

www.frbdiscountwindow.org/frcollguidelines.pdf

Thank you for your comment.

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Modern Money Theory Versus Where Does Money Come From?

That video is correct; however, it has so far been impossible to get a straight answer from a Modern Money Theory (MMT) leader L. Randall Wray as to whether MMT agrees with that video's statements.

Examples of my attempts to get an answer:

My reply to: "Debt-Free Money: A Non-Sequitur in Search of a Policy," by L. Randall Wray

Part 1: My Questions to L. Randall Wray on the Money Multiplier

Part 2: My Questions to L. Randall Wray on the Money Multiplier

Tom1

Tom Usher

I grant you that the definition of the Money Multiplier is still up in the air there. The fractional-reserve banking manner of multiplying the deposits is the Money Multiplier, but Wray uses the term in a practical sense in that the Fed has created all the reserves but the money out in circulation hasn't multiplied 10-fold. Therefore, they call the method dead. They also say it's dead because the fractional-reserve way is not the only way money is created. The MMTers say that money (a loan) can be created before any deposits are made.

As you should see from my posts, I want to know whether the Fed enforces the 10% requirement. I believe it does.

I'm not sure exactly where L. Randall Wray and I are talking at cross-purposes. Randy has a way of writing as if readers are already supposed to know even though I don't think he does it intentionally.

Here's the introduction on the Wikipedia (which intro is pretty good):

In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-reserve banking system.[1] Most often, it measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio, and it is an economic multiplier.[2]

In equations, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio, the reserve ratio requirement is that R/M ≥ RR; the fraction of reserves must be at least the reserve ratio. Taking the reciprocal, M/R ≤ 1/RR, which yields M ≤ RX(1/RR), meaning that commercial bank money is at most reserves times 1/RR, the latter being the multiplier.

If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.

In the United States since 1959, banks lent out close to the maximum allowed for the 49-year period from 1959 until August 2008,[citation needed] maintaining a low level of excess reserves, then accumulated significant excess reserves over the period September 2008 through the present (November 2009). Thus, in the first period, commercial bank money was almost exactly central bank money times the multiplier, but this relationship broke down from September 2008.

As a formula and legal quantity, the money multiplier is not controversial – it is simply the maximum that commercial banks are allowed to lend out.[citation needed] However, there are various heterodox theories concerning the mechanism of money creation in a fractional-reserve banking system, and the implication for monetary policy.

Part 2: Modern Money Theorists Need Instructional Videos!

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David Duke & I: "Zionist Terror in Gaza - Free Gaza and Free the World" - YouTube

Updated:

David Duke

David Duke

Today, July 17, 2014, David Duke released a new video. In it, he makes clear that he is anti-racist, anti-ethnic bigotry, and for using only non-violent means to overthrow those Zionists who are racists, ethnic bigots, war criminals, liars, land thieves, and baby killers. David lauds those Jews, including in Israel, who stand up against the extremely evil ones who now control the Zionist Project. He also makes plain, so Hamas will understand that Hamas' rockets are playing right into the wicked Zionists' hands, that those rockets are pointed to by the US mainstream media as Israel's excuse to continue slaughtering innocents in Gaza.

Those are all the same things I've been writing and publishing:

Tom1

Tom Usher

The rockets from Gaza, of course, were, and are, always fired in retaliation for the gross violations of the Zionists against Palestinians.

The Gazans didn't start the cycle of violence. The Zionists did that when they moved to Palestine (mostly from Europe to start with and under the guise of anti-Semitism with the "Dreyfus Affair" used as the primary excuse followed ironically later by the Nazis) because the Zionists coveted the land and planned to steal it and conquer it by military and terroristic means if necessary.

Lying, twisting, and grossly exaggerating, etc., have certainly never been below them. It's policy and an industry with them, as it has been for many others down through the ages and including at present. The Zionists do it blatantly and keep it up even after having been exposed.

The Zionists considered other land to take rather than Palestine, but settled on Palestine even though it was already settled. They reportedly used the phrase "a land without a people for a people without a land" even though Palestine was continually populated by non-Jews before and since the time that the Jews were largely dispossessed via a series of three Roman-Jewish wars from 66 AD to 135 AD, all of which wars the Jews lost. Their God was not with them.

The Roman Empire was the instrument of their punishment, and the covetous should have been corrected by the experience. Some people just seem to be too thickheaded to learn humility and other virtues.

Well, the Palestinians fought back physically against the Zionists and many of the Palestinians continue to try to do so and even though they do not have the weaponry to defeat the Zionists, who are supplied by the US that has pledged by federal statute to maintain the racist Zionists' quantitative and qualitative edge in weaponry against all of the enemies the Zionists make. The US does that because of self-styled Christian-Zionist (false Christians) support in the US, without which support, the US would never have made such a pledge.

The US supplies the money to the Zionist that is earmarked for weapons purchases from the US. The US taxpayers are paying US weapons manufacturers to the tune of billions of United States dollars per year to supply the Zionists with free weapons and ammunition to use to savagely oppress millions of non-Jews in Palestine and Israel and to threaten and attack Israel's neighbors and others in the region and beyond if the Zionists feel the urge. They even have a nuclear-weapons program that initially they concealed from the US government and which they developed via plans stolen from the US by Zionist spies in the US.

So you hate David Duke because decades ago he was in the KKK? Do you honestly hold to the position that a man can't change, that he can't stop, turn, repent, and work to atone? If that's your view, then you and I certainly can't walk together into Heaven.

David called on God to bless the courageous Jews who stand up to their fellow tribe members. I will take it one step further.

May God bless the wrongheaded Zionists with the truth of their wickedness (the Zionists who have been stealing Palestinian land and homes and murdering and imprisoning and torturing Palestinians with impunity and with the backing of wicked non-Jewish Zionists around the globe and especially right here in my own country, The United States of America). May God open their eyes and ears and hearts and minds to the truth that they are wrong and must stop, turn, repent, and work to atone to the best of their ability.

I'm sure David agrees with me.

Here's David's video:

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