If we used cows as media of exchange (if we bought and sold everything else in exchange for cows), would you say that dairy farming is a special industry that is macroeconomically important?
I would. Because if we used cows as media of exchange, then what happened on dairy farms would affect the supply of media of exchange, and I think the supply of media of exchange is macroeconomically important in explaining short-run recessions.
And if you wouldn't say that, why would you say that banks are special and macroeconomically important in the real world?
Banks can create the medium of exchange "at the stroke of a pen", and lend it out for a monthly fee. But a talented artist can create valuable drawings at the stroke of a pen, and lend those drawings out for a monthly fee to those who want to hang them on their walls. If the medium of exchange is not special, or macroeconomically important, then banks are no more special or macroeconomically important than that talented artist.
Ask yourself these two questions:
1. Is the medium of exchange a special good, that is unlike all other goods, in a way that is macroeconomically important?
2. Are commercial banks special firms, that are unlike other firms, and unlike other financial intermediaries, in a way that is macroeconomically important?
I think those two questions are very closely related. It would be hard to answer "no" to the first and "yes" to the second. That's because:
Banks are financial intermediaries whose liabilities are used as media of exchange. If the medium of exchange is not a special good, and not a macroeconomically important good, then banks cannot be special or macroeconomically important either. Banks would be no more special or macroeconomically important than mutual funds.
My own view:
In long run equilibrium, banks are no different from other financial intermediaries. They borrow and lend. They make life easier for ultimate borrowers and ultimate lenders to get together, just like shopkeepers. And the main task of monetary policy is to keep the economy in that long run equilibrium by preventing monetary instability by preventing banks lending either more or less money for some people to invest or consume than other people want to save.
But in the short run disequilibrium, the quantity of medium of exchange matters a lot:
1. Every market in a monetary exchange economy is a market for the medium of exchange. This means that the medium of exchange is special because there are two ways an individual can get more medium of exchange: he can buy more medium of exchange (by selling more of other goods); or he can sell less medium of exchange (by buying less of other goods).
2. An excess demand for the medium of exchange prevents people making
the mutually advantageous exchanges that would be possible if barter
were easy so we did not need monetary exchange. That's what we call a
"recession". If I could sell my goods, I would want to buy your goods; and if you could sell your goods, you would want to buy my goods; but neither of us will part with our money because we don't know whether that money will return to us, and it's too difficult to organise a swap.
3. Unlike other goods, people will accept more medium of exchange even if they do not plan to hold more medium of exchange and even if they think nobody else plans to hold more medium of exchange. We accept money in exchange for other goods only because we know that others in turn will accept it from us. The quantity of medium of exchange is supply-determined in a way that is not true of other goods. The talented artist can create drawings at the stroke of a pen, but cannot rent them out unless he can find someone who wants to hang that drawing on his wall. An excess supply of drawings immediately refluxes to the artist. The talented artist cannot create an excess supply of his product; banks (in aggregate) can. I borrow the drawings because I want to hold the drawings; I borrow the money because I want to buy something else.
So I think that commercial banks are macroeconomically important because, and only because, they influence the supply of media of exchange. Otherwise, if that were not important, they would be just like any other financial intermediary.
But tell me: is the medium of exchange a special good, and a macroeconomically important good, and a good whose supply matters, in your macroeconomic view of the world? If not, what's the big deal about banks?
And if we did use cows as money, would you forget about financial intermediaries, and start writing about dairy farms instead? Or if we used the drawings of talented artists as money, would you forget about financial intermediaries and start writing about artists instead?
For Steve Roth.
Worthwhile Canadian Initiative 
Nick:
“Commercial banks care about the spread, which means both their lending and borrowing rates and opportunities. (Central banks aren’t like that.)”
Good central banks are like that. Here is a recent BoE’s version of Bagehot’s dictum: “lend early and freely (ie without limit), to solvent firms, against good collateral, and at ‘high rates’”.
Tom: “Is there a typo in there… or two, because I don’t follow. Let me re-phrase and please tell me where I go wrong:”
There are no typos there.
Let me re-phrase:
The level of water on the Canadian side of Lake Ontario cannot be higher than the level of water on the US side. Because if (hypothetically) it were higher, water would immediately flow downhill from the Canadian side to the US side, making the levels the same.
The talented artist who rents out paintings cannot create an excess supply of his paintings in public hands. Because even if hypothetically he did create an excess supply, people would immediately return the unwanted paintings back to him, eliminating that excess supply.
“Why does a recession (which you say is equivalent to “excess demand for MOE”) lead to less buying and not more borrowing,”
If there is an excess demand for MOE, individuals can respond by either: 1. buying less other stuff (including buying less IOUs); or 2. Selling more other stuff (including selling more IOUs). But if everyone else is also trying to sell more other stuff (including selling more IOUs) you won’t actually be able to sell more other stuff (including selling more IOUs), because you can’t find people who want to buy more other stuff (including buying more IOUs) from you. So 2 won’t work in aggregate. But 1 always works, because nobody can stop you simply buying less other stuff (including buying less IOUs).
Gotta go to work. Back later.
Nick,
Your view of the medium of exchange seems to be that it is special because (1) people hold inventories of it and (2) it is highly liquid on the sell side. But aren’t these statements also true of commodities? The MOE is special in that everyone holds inventories of it, as opposed to most commodities, of which only some people hold inventories, but this difference strikes me as non-critical. If there were an excess supply of soybeans, then soybean holders would reduce their demand for everything else in order to replenish their soybean supplies, just as money holders do with money when there is an excess demand for money. Soybean gluts don’t cause recessions because prices are not sticky in terms of soybeans. If there is an excess demand for soybeans, the price goes up until inventory holders are willing to sell. If there is an excess demand for money, the price stays the same, and the excess demand doesn’t get corrected, so you get a recession. But I submit that any widely inventoried, stickily priced good could cause recessions in the same way. The medium of exchange is special maybe in part because it is so unusually widely inventoried, but mostly because it also happens to be the medium of account and therefore stickily priced. (I think I have argued in the past that, due to indexation, there was, in the 70’s, some stickiness to the price of labor in terms of petroleum, which is widely inventoried, and therefore an excess demand for petroleum helped cause recessions even though it is clearly not a medium of exchange.)
“What I am saying here is that creating MOE is the only underlying reason why banks are special”
Finally. A root of the problem. The sort of banking done in your (and many other peoples’) model is only a small part of what a major financial institution like Bank of America or Morgan Stanley does. The top 20 banks of the world have something like $44 trillion in assets. If they find a way to collectively screw up it WILL affect the economy. We’ve already seen this in events post 2007, so it’s not just a theory.
Another root is the assumption that the system will behave according to the preferences of the customers. Remember the old joke – “where are the customers’ yachts”? The banks stole at least several hundred billion dollars. We have the court documents to prove it.
Moreover most of this was lost or will be subject to up in litigation for years to come. Morgan Stanley is currently defendant in 44 major lawsuits (for amounts over $100 million, often way over) with more to come. It looks like the banks will have to repay the GSEs so much money, that the government’s loans to the GSEs will be profitable – repayment of multiple tens of billions of dollars.
If banks behavior gets bad enough (Countrywide, Libor, Lehman, Bear Stearns, Dexia, Bankia, Spain, Cyprus and Greece, Ireland… and now China?) they will have macroeconomic effects, and it’s necessary to look at mechanisms and incentives. After all Moral Hazard has been part of Macro for a while IIR.
Nick, thanks! You wrote:
“cannot create an excess supply of his paintings in public hands” … “in public hands” … that’s the key there! He certainly can create an excess supply… or “stock” … he can even mail them for free like AOL DVD’s … such that everybody on Earth is sick to death of them, and trashcans are overflowing… but he can’t force them into their hands. Why is “in their hands” so important though?
You write:
“But if everyone else is also trying to sell more other stuff (including selling more IOUs) you won’t actually be able to sell more other stuff (including selling more IOUs), because you can’t find people who want to buy more other stuff (including buying more IOUs) from you.”
So even if interest rates are very low, you can’t actually borrow because banks don’t want your IOUs, because everybody is trying to sell them IOUs. Is that it?
Nick, so during recessions (times of excess demand for MOE), if in aggregate the public is trying to sell more IOUs than the banks want, and interest rates are very low (historically low), then why is it that long term rates don’t go up? Instead it seems like the requirements for “credit worthiness” go up. Or perhaps actual credit worthiness goes down. Or perhaps though low, rates are still high compared to the public’s ability to pay them. But then again, if demand for MOE is truly high, then the public SHOULD be willing to pay the rates and in fact force the rates higher, no?
Cullen explains this differently: he says that rather than an excess demand for MOE, instead there’s “not enough income relative to desired saving.” Also “spending is a function of income relative to desired saving. QE doesn’t increase income or saving so why would spending increase?”
http://pragcap.com/banks-are-special-the-ins-outs-of-money/comment-page-1#comment-152840
http://pragcap.com/when-non-banking-experts-become-overnight-banking-experts/comment-page-1#comment-152629
Commentator Geoff brings up the difference between money and wealth:
http://pragcap.com/when-non-banking-experts-become-overnight-banking-experts/comment-page-1#comment-152918
Nick, I was discussing this further with “Geoff”… he brought up “People don’t want to borrow, even at the low interest rates, because they are trying to save. They don’t actually want more MOE … they want more … more income, or savings.”
http://pragcap.com/when-non-banking-experts-become-overnight-banking-experts/comment-page-1#comment-152923
My response was the example of underwater homeowners who wanted to take advantage of low rates but couldn’t because their homes were underwater and/or they’d lost creditworthiness (regular work). But they didn’t really demand more MOE, they demanded a better balance sheet, no? MOE (through borrowing) was the way to get there. Since they’d be paying off an old debt with a new one, MOE levels wouldn’t change.
Tom,
“People don’t want to borrow, even at the low interest rates, because they are trying to save. They don’t actually want more MOE … they want more … more income, or savings.”
Or they want an asset that has a greater potential return than the cost of servicing previously incurred debt.
Nick, it seems I lost one of my comments there somehow. Let me try again. You write:
“The talented artist who rents out paintings cannot create an excess supply of his paintings in public hands.”
So the “in public hands” part is crucial there. The artist could certain create WAY more (stock? supply?) than was wanted, and even mail them out to people for free… and trash cans would be overflowing w/ his work, but he couldn’t get them into their “hands.”
Regarding people selling IOUs to banks for MOE… well I guess I cover that above. I was just rephrasing you (in my lost comment): banks don’t want it (IOUs) because too many people are selling. But again, oddly rates are low, so why doesn’t excess MOE demand drive long term rates up?
Perhaps it’s because creditworthiness is down. Or the definition of creditworthiness is up. Or incomes are down so rates appear high. Some combination of those? I’m going to say mostly that creditworthiness is low (the homeowner’s house is underwater, or he lost his job, or both) but a little bit of all that. But again, it seems in the case of the homeowners, it’s not debt created MOE that’s desired, but a change of debts: an improvement in BSs. A temporary increase in MOE/debt levels is the way to get there. Improving the BS improves the feeling of wealth.
re: Artist: I know we’re talking analogy here, but what’s the general way to distinguish “excess supply” (e.g. overflowing trashcans with the artists work) from “excess supply in the public hands” (e.g. hanging on walls)? Do these two kinds of “excess supply” go by different names in general? Because certainly the artist can create the former kind but not the latter.
“if in aggregate the public is trying to sell more IOUs than the banks want, and interest rates are very low (historically low), then why is it that long term rates don’t go up?”
Interest rates go down for safe borrowers, and go up for risky borrowers that no-one wants to lend to. So safe banks and governments will have low borrowing costs, and underwater homeowners won’t.
Nick,
I would tend to agree with you that the ability of banks to issue liabilities that are used as a medium of account gives them a special status and that this status is important macroeconomically.
However this idea risks obscuring the much more important way in which banks matter, which relates to their lending decisions. For many agents, whether they can realise their planned expenditure depends mainly on whether the bank will lend them money. The decisions of banks can therefore be the critical determinant in whether spending takes place or not. The bank is making the crucial decision, not the household or firm. This, more than their role as suppliers of money, is why banks are important. If banks only supplied the medium of exchange by lending to agents who did not have unfulfilled spending plans, they would matter less.
Of course, this control of the purse-strings makes banks very important, but it doesn’t make them special – the actions of non-bank lenders can matter in the same way. The difference is that banks account for the majority of lending to borrowers at the margin of credit-worthiness.
Knowing why banks matter is important. It explains why we need to understand what shapes banks’ lending behaviour. It’s hard to explain the growth and contraction of credit before and after the crisis without understanding how banks operate. It also tells us that we cannot afford to lose sight of what non-bank financials are doing. Although banks are important, they are not special enough to be exclusively so.
Cullen helped bring to light some concepts concerning your artist analogy (same thread I linked to before). Well I can’t blame Cullen entirely… these are my thoughts mostly in response to me explaining the artist thing to him.
Artist actually repos his paintings… he agrees to buy them back at a premium. So it’s the art patron that makes money here.
Artist burns his painting when he gets it back (loan agreement is burned… and of course in the case of borrowers (artists) and art patrons (banks) the bank burns the MOE too (i.e. debits the account)).
Now after I just “straightened” Cullen out about which was the bank and which the borrower in the artist example, you’ll tell me that I had it backwards! Right? Or did I get it right? 😉
you got it backwards. The artist rents his paintings out in Nick’s example.
Philippe, yeah I know, but I thought what was important about that example was that the painting (like a loan agreement or most other goods) is unlike the MOE (the “rent”). Isn’t that the point he’s trying to make there? That that artist can’t create an excess supply of rented artwork on the walls of art patrons, but that banks in aggregate can create an excess supply of MOE? Just like borrowers can’t in aggregate (in reaction to a recession) force the banks to hold an excess supply of their IOUs (loan agreements)… thus they need to reduce (in aggregate) spending instead (to meet their own excess demand for MOE).
Nick’s point seems very simple in that example. If you are an artist who paints pictures and then lends them to people for a fee so that they can hang them on their wall, you can’t supply more paintings than people want overall, because if people don’t want the paintings they’ll just bring them back to your studio.
Philippe, right. However that’s what distinguishes money from all other goods (like paintings). For the right price people will always take money.
So if you’re trying to lend out paintings it’s a very different business than lending out MOE. So in that sense I see how he’s comparing the painter to the bank but nonetheless concluding they are inherently different because of the product they are lending.
Perhaps I was stretching things too far by putting the painter in the borrower’s shoes and the patron in the bank’s.
I think Nick’s point is that people will always accept money even if they don’t actually want money itself, because they know they can use the money to buy other things, because everyone else accepts it. i.e. they can get rid of it.
So the argument is that banks can create an excess supply of money because people will always accept it, even if their only intention is to subsequently get rid of it. If everyone accepts it and everyone also wants to get rid of it, then you can have an excess supply that nonetheless keeps circulating and pushing up prices. It doesn’t get ‘returned to the studio’ as it were. But it seems to me that even if that were true the money could just keep circulating in the financial sector, pushing up asset prices, without leaking out much into the real goods and services economy.
I don’t really get the point about the IOUs. In a recession, demand for some IOUs increases whilst demand for others falls. So borrowing costs for risky borrowers can increase whilst borrowing costs for low-risk or risk-free borrowers like governments falls to near zero. Bank deposits are bank IOUs, i.e. bank debts, or loans to banks. So an increased demand for bank deposits (a form of money) is also an increased demand for loans to banks. But only for loans to safe banks!
Philippe, I get what you’re saying, however, I’m not sure I follow the “real goods and services economy” point.
I was more interested in relating Nick’s definition of a recession (excess demand for MOE) to the balance sheet recession concept that I’m more familiar with. I think it’s possible that they might actually be two ways of looking at the same thing.
Cullen, Geoff, Steve Roth, and I have been kicking this around at pragcap. I think this is a nice current summary from Cullen:
http://pragcap.com/when-non-banking-experts-become-overnight-banking-experts/comment-page-1#comment-152980
“I’m not sure I follow the “real goods and services economy” point”
Monetarists argue that this “excess supply of money” ends up pushing up the prices of goods, causing general price inflation. But it seems to me that any supposed “excess supply of money” could just push up asset prices, without having much effect on general inflation.
“I was more interested in relating Nick’s definition of a recession (excess demand for MOE) to the balance sheet recession concept that I’m more familiar with”
The BSL theory claims that recession can be caused by too many people trying to save and pay down debt at the same time, whereas Nick’s argument seems to be that recessions can only be caused by too many people wanting to hold money (MOE) at the same time, either in the form of cash or deposits.
But the cost of borrowing for low-risk borrowers falls in a recession whilst the cost of borrowing for risky borrowers rises, which suggests that people don’t necessarily want to hold money, they just want safe and liquid assets with some sort of return, which could be government bonds, bank deposits, blue-chip corporate bonds etc.
“I borrow the drawings because I want to hold the drawings; I borrow the money because I want to buy something else.” Well, you might be an art dealer, planning to rent out the drawings yourself to customers. Admittedly, few are art dealers, while everyone deals in the medium of exchange.
The more important point is that it is an oversimplification simply to distinguish between money on the one hand and all other goods on the other hand. Non-moneys differ considerably in liquidity—in the ease with which one can get rid of them in exchange for their “true worth” (what they would fetch in a well-functioning market for them—or something like that). The more liquid a good, the more willing people are to accept it in an exchange even if they don’t want to hold it. The more “near moneys” there are, and the nearer they are to pure money, the less the importance of pure money itself—the less appropriate it is to call it the medium of exchange. But even in a situation with lots of very-near moneys, the medium of account has special importance. So for theoretical purposes—so as to cover near-money scenarios, too–the notion medium of account is more basic than medium of exchange.
Banks are the more important in our situation because of our paucity of near-moneys.
I meant BSR (Balance Sheet Recession) not BSL, obviously.
Andy: assume everyone holds inventories of milk (they’re all Brits, and get random urges for a cuppa). Let’s see if an excess demand for milk has the same effect as an excess demand for money:
If there’s an excess demand for money/milk, everyone either: tries to sell more of all other goods to buy more money/milk; or buys less of all other goods to sell less money/milk.
It just doesn’t work for milk, because:
1. dairy farmers sell milk and never buy milk; everyone else buys milk and never sells milk. Everyone both buys and sells money.
2. When we buy or sell milk, we buy or sell it only for money. When we buy or sell money, we buy and sell it for everything else.
Nick Edmonds: “However this idea risks obscuring the much more important way in which banks matter, which relates to their lending decisions. For many agents, whether they can realise their planned expenditure depends mainly on whether the bank will lend them money.”
Imagine a financial intermediary that borrows money and lends money but does not issue its own money. (It’s a non-bank FI). Sure, normal financial intermediaries like that matter, by making it easier for savers and spenders to meet each other, but their macro impact on aggregate demand is minimal. If you want to save, and I want to spend, and we meet, you lend me $100, which means you spend $100 less and I spend $100 more, so total spending is unchanged. It only makes a difference if you would have held that $100 in cash if you hadn’t met me, and I would have held the same amount of cash either way. Non-bank financial intermediation only affects aggregate demand insofar as it reduces the demand for money for any given supply of money.
Nick,
Dairy farmers drink milk, don’t they? If dairy farmers decide they want to drink more milk but there’s a price ceiling, they will sell less milk and buy less of everything else. If everyone else’s wages are denominated in milk (even if they’re paid in money) you will get unemployment, because the people who normally sell stuff to dairy farmers will have to reduce their production.
(I’m assuming that the dairy farmers’ increase in milk consumption comes out of inventory — i.e. they were already producing their maximum output. Now milk isn’t really a good example, because it’s highly perishable, so you have to turn over your inventories quickly, and therefore you can’t consume out of inventories for very long. Petroleum is a better example: most people don’t hold inventories of it, but some people hold fairly large inventories, and if they decide they want to consume more of those inventories at the current price, and the price can’t rise, and wages are indexed to oil prices, then there will be a recession.)
As far as being a MOE, I don’t think that makes money truly “special,” but it does mean, as a matter of degree, that money is an extreme, in that it is (1) more liquid than anything else and (2) more broadly and deeply held in inventory than anything else. So if you want to start a recession and you have a choice of goods with which to start it, your best bet is to use the MOE. And banks aren’t truly special for producing the MOE, but they are at an extreme in terms of their potential macroeconomic impact relative to other industries (roughly in the same sense that the US and China are at an extreme in terms of their potential economic impact relative to other countries, but more so). Also, in practice, money happens to be the MOA (and there are nominal rigidities), so it actually is special, and perhaps that makes banks special too, but that’s another story.
Tom,
“Fed deposits [are] mostly for facilitating bank MOE (which is more special)”
What does this mean?
Nick said: “Likewise, an individual commercial bank that accepted a deposit before figuring out if it had potential customers for loans wouldn’t be very wise. My bank both advertises for new borrowers and advertises for new depositors.”
Let’s say you transfer some demand deposits from bank A to bank B into a checking account. You’re saying bank B can now lend out these same demand deposits to a borrower. Correct?
Philippe: “more special” … I don’t expect all to agree w/ me on that. That’s an assertion on my part: I tend to look at bank deposits as the CORE of our money system: playing the role of MOE in the majority of transactions, especially in the private sector: bank cards, credit cards, check writing, home loans, car loans, automatic withdrawals for mortgages, electric bills, gas, water, power, trash etc. I don’t know if that’s actually true, but that’s how I live my life, so maybe I’m biased there! (I don’t like touching or managing dirty, clunky, losable scraps of paper or bits of metal). I see all the rest playing a facilitating role: Fed deposits, cash, etc.
Look at it this way, if we banned cash (my dream) and there was just a single commercial bank, then the private sector would run off of bank deposits entirely. In addition, if there were no reserve requirements then the ONLY role for reserves would be for transactions between the public & banks on one hand, and the gov, Fed, or foreign govs on the other. The domestic private economy would be entirely run off of bank deposits w/ no role for “base money” whatsoever.
Now perhaps in the future… if people just HAVE to have cash, we could invent some way for people to print their own, much like we print out our own coupons now. The banks would LOVE it! They could close down all those ATM machines (they’d litter the landscape like public pay phones do now)… boarded up, graffiti covered. The banks could ditch the stupid vaults, and reduce robberies to 0 (and probably fire lots more people). Plus the gov would no longer need a Mint or the BEP or any of that nonsense.
… in short, there’d be a veritable cornucopia of benefits!!
… wait even more benefits come to mind! No more cash registers (inefficient… those people who make them can get real jobs ;), convenience store robberies (except for stolen merchandise), pan-handlers (they’d only be looking for food)… wow! Now that I think about it, I’m even more in favor of a cashless society!
… it’d be interesting to see what drug dealers do in a cashless world!
… plus think of the surveillance benefits! Keeping us safe from all sorts of stuff!:
http://nsa.gov1.info/utah-data-center/
“If you don’t have anything to hide, you have nothing to fear!”
Hahahaha! 😀
Nick
“Imagine a financial intermediary……”
If I want to save and you want to spend, that’s fine if I’m prepared to lend to you. If I’m not prepared to lend to you and you can’t spend, there’s no way I can save. All that happens when people try to save and other people aren’t spending is that nominal income falls. I think both Keynesians and monetarists would agree on this (although the monetarist would focus on saving money as opposed to saving generally).
So I agree that if all a financial intermediary does is lend my money to someone I was going to lend to anyway, then it’s not making much difference. And sometimes that’s all that’s going on. But not always. One of the most important features of the growth of ABS / CDO market prior to the crisis was the channelling of funds to borrowers from sources that would never have made those loans directly. This process had a huge impact on the national structure of assets and liabilities. That’s going to have a big macroeconomic effect.
Now you could say “Well, the financial intermediary is not important. All I need to know is that, for some unspecified reason, lenders became prepared to provide funds to a much wider class of borrowers.” And you could try and analyse it in those terms. But you’ll never be able to explain why it happened without understanding what was going on in shadow banking.
“I see all the rest playing a facilitating role: Fed deposits, cash, etc.”
Ok but what does that actually mean? What does “facilitating role” mean?
If you owe me $100, and you pay me with a $100 note, has that note “facilitated” your $100 debt?
The problem is that “reserves just play a facilitating role” is a meaningless phrase.
“if we banned cash”
So are you saying people should be forced to use private banks? They should have no choice in the matter? That doesn’t sound like much of a market to me, more like a form of fascism.
“w/ no role for “base money” whatsoever.”
Even in your strange imaginary economy with only one commercial bank (!?!?) where people are forced to use that bank and forbidden from withdrawing their money from that bank (basically a weird monopoly fascist system), there is still a role for base money, because the bank has to make payments to the state, which it has to do with base money. Also if any one else has accounts at the central bank then payments to those accounts would also have to be made with base money.
re: “w/ no role for “base money” whatsoever.”
Philippe, you took that out of context… I pointed out that this was with regard to transactions completely within the private economy. I explicitly pointed out, just as you did, that it would STILL be needed for transactions between CB deposit holders + the CB itself, or for transactions involving… well, here, I’ll just quote what I said:
“…if there were no reserve requirements then the ONLY role for reserves would be for transactions between the public & banks on one hand, and the gov, Fed, or foreign govs on the other.”
That was in the sentence immediately preceding the one you quoted.
BTW, I’m not proposing we establish this weird fascist uni-bank… Hahaha.. I’m simply pointing out that IF we had such a bank (as some MMT folks imply or state we should *** I think! *** not really sure what they think about that), then I was describing how that would affect the role of base money.
But regarding analysis purposes, I think it is OFTEN fine to consider ALL the commercial banks in aggregate AS IF they were one big commercial bank with lots of highly competitive branches… a view which is essentially the same as the uni-bank model. Now of course in some respects this is not a fair way to look at it, … I’ll grant you that.
“facilitating role” … I warned you that was my opinion and that not all would agree. I explained what I meant: that MOE … point of sale … is more and more done explicitly with bank deposits directly …. or on the spot generated credit via a credit card, and cash is getting sidelines somewhat. I think that MOE is the MOST important aspect of money (NOT MOA!) and thus bank created MOE is more and more important… and that’s why I see it as the core of our monetary system.
You are free to disagree if you want. I know I’m not going to convince people of my opinion on this.
So viewed in that way, we get the bulk of our money through private loans. Sure … some comes from bank held Tsy debt (very very little) and some comes from Fed held Tsy debt, but the bulk through private bank loans. Once a loan is made, the borrower can chose to exchange his bank created MOE for outside cash money… or change it back again. But the source was most likely a loan.
The Tsy and the Fed send out very little in the way of cash payments directly to private non-bank entities.
Philippe… hmmm… Wait! Are you the same “phil” that I was just in a thread with on my blog??
… and BTW, although I actually am all about convenience and prefer using a bank or credit cards almost all the time… and having ALL my bill payments fully automated… you apparently missed the subtle ironic undertone in most of that! I realized that it sounded kind of fascistic… and that NSA link about the Utah data center is a joke… it’s a parody site (yes, I know the center is real). It’s pretty funny actually, you should check it out.
“I think it is OFTEN fine to consider ALL the commercial banks in aggregate AS IF they were one big commercial bank”
Do you think it is fine to consider all shops as if they were one big shop? All businesses as if they were one big business?
It’s not much of a market if you can consider all the businesses as if they were the same single business.
The reality is you can’t consider all the commercial banks as if they were one big commercial bank because they’re not one big commercial bank. That’s the basic problem. And an imaginary world in which everyone is forced to use one bank and forbidden from withdrawing their money from that bank doesn’t have anything to do with the real world. So its not actually a useful example for describing the real world.
“bank created MOE is more and more important”
But what do you mean by “important”? For example in a gold standard system there are far more banknotes and bank deposits in existence than there is gold bullion or coin. Does that mean that banknotes and deposits are more “important” than the gold?
“we get the bulk of our money through private loans”
You’re making the mistake of assuming that because most money is things like M2 this means we get the bulk of our money through private loans. You’re getting things mixed up.
Philippe,
Yes, base money is important. Yes it serves an important role, even in a one commercial bank world. I’m not saying it’s not important, but the fact is with inflation targeting or CB funds rate targeting or a combo of both (what we’ve typically had: CB funds rate short term, e.g. every six weeks, and inflation rate long term), then the quantity of money is endogenous in both the short run and the long run. It’s the nominal rate of interest that is exogenous in the very short run (6 weeks or less, for the Bank of Canada anyway), but endogenous in the long run. Summary: it’s all endogenous long run.
… and BTW, cashless isn’t really so far fetched:
http://www.cbsnews.com/8301-202_162-57399610/sweden-moving-towards-cashless-economy/
http://www.wired.com/business/2012/08/canada-will-beat-us-to-cashless-economy/
and in terms of percentage of value of all transactions in the US, it’s only 0.2% (from the Cleveland Fed):
“Do you think it is fine to consider all shops as if they were one big shop? All businesses as if they were one big business?”
I could be wrong, but I’m pretty sure that’s done all the time in macro economics. Do you see Nick using the word “aggregate” here? Aggregation, from what I can tell, is a big part of macro.
There’s a difference between macroeconomic forms of aggregation and treating a sector (banking for example) as if it were a simple monopoly, which is what you want to do. It’s not a monopoly, so it doesn’t make sense to describe it as one.
Your example with one monopoly bank which people are forced to used and forbidden from withdrawing their money from, has absolutely no similarities to the system as it exists in reality.
the central bank supplies reserves at a given (target) interest rate (subject to other requirements such as collateral and adequate capital) so in that sense the quantity is endogenously determined – the CB sets the price and lets quantity float. I don’t think that means what you seem to think it means. The nominal funds rate is not endogenous, the central bank sets the funds rate.
“in terms of percentage of value of all transactions in the US, cash is only 0.2%”
Yes the total value of cash transaction is relatively small, because people tend to use cash for relatively small transactions. The largest value of transactions goes through wire transfers, and this category includes central bank wire transfers via settlement systems like Fedwire. Fedwire is the system through which payment in reserves, i.e. reserve settlement, occurs in the US.
“According to the Fed’s data, average daily dollar volume of payments settled via Fedwire – the Fed’s real-time gross settlement system – was 17 percent of GDP in 2011 (Federal Reserve 2012). This is a fairly typical percentage that one sees across countries, as Fullwiler (2008) shows. In other words, within 5 to 10 business days, the value of payments settled using central bank balances eclipses that country’s annual gross domestic product (GDP).”
(Scott Fullwiler: An endogenous money perspective on the post-crisis monetary policy debate, page 8)
Click to access post%20crisis%20monetary%20policy%20debate.pdf
“the nominal rate of interest that is exogenous in the very short run (6 weeks or less, for the Bank of Canada anyway), but endogenous in the long run.”
It’s not endogenous in the ‘long run’. The central bank always sets the base rate (Fed Funds rate etc). The CB might decide to raise or lower the interest rate to try and control inflation or change expectations, but this is a decision that the central bank makes. It decides to change the interest rate, the interest rate doesn’t change ‘endogenously’.
Philippe, if they are targeting inflation, it is. The rate changes as a function of what’s required to keep inflation on target.