User talk:Mischling

FRB

Hi

You said:

"The question of whether banks extend credit rather than recycle existing money for example, I would personally say is tautologous within a strict interpretation of the textbook system, might be somewhat useful in a system that allows banks to sell loans to non-banking entities (securitization),"

You are making it too complex. All that is required is some simple banking practices used for hundreds of years. For example before the telephone, banks could only settle transactions between themselves by physically meeting or by written correspondance and they tended to meet as a group at a 'clearing house' to settle once a day. At the clearing house loans could be arranged and surplus funds could be lent.

So a bank AAA with adequate reserves, against existing deposits, makes a loan to a customer that will later pay bank BBB. The customer loan at AAA only becomes 'solid' when something physical happens at BBB and meanwhile the loan to the customer is the banks obligation or the banks credit. BBB can for example agree to loan AAA the loan money. And the result of this is that a new deposit is created at AAA for the loan amount in favour of BBB and a new deposit is created at BBB for the selling customer. But no reserves had to be transferred because there is a net zero transfer of reserves. If AAA later pays BBB the loan amount then then the deposit at AAA in favour of BBB is reduced by the loan amount. The loan did not require an existing deposit.

Which is why the researchers say the text book and other academic contributions to money creation are 'misintruction' and are not connected to the real world of banking.

It is not original research to describe how a bank lends money in the USA today using fedwire with automatic FED overdrafts where by definition the bank can repay the overdraft without collateral at the federal funds rate. But none of this simple stuff is permitted on wiki because it is reverted for no reason at all. Andrewedwardjudd (talk) 08:07, 11 May 2011 (UTC)andrewedwardjudd

Hi, I have replied to your message on my talk page.Andrewedwardjudd (talk) 05:36, 12 May 2011 (UTC)andrewedwardjudd

I'm afraid I can't find either my original message, or your response on your talk page. If you restore it, I will happily comment there. So i will simply re-iterate here - this a complex system, and banking practices have changed repeatedly over hundreds of year. In an electronic banking system, which we have now, the bookkeeping entries you refer to are solid when they are made, so it is not particularly helpful to talk about it the way you describe it above. It's also important to clearly distinguish between the textbook context and the current banking system, which for the most part no longer uses reserve based regulation.Mischling (talk) 13:43, 12 May 2011 (UTC)

Sorry but i managed to delete that text and the whole section is now restored with my comments. So there is that part to clarify.

You have now raised three other points

• electronic banking and bank book keeping.

when the bank creates a loan obligation for the bank that is payable to the customer as drawable funds it writes a loan account entry, but the bank may not yet have paid this money to another bank. But the bank is liable to pay it when asked. For example in Australia electronic card sales transactions are settled the next morning in a batch run where the final amounts owning are netted rather than paid over in the smaller transaction amounts. So if the customer gets a loan to pay a customer at bank bbb, the banks books are written before the obligation is settled. Saying the banks bookeeping entries are solid in that context is not clear as to what you mean.

• The text book account versus reality. Obviously the text book account amounts to 'misintruction' that 'avoids known institutional realities', where writers pointing out 'institional details are asigned to the outer darkness' -Goodhart.
• although banks may have no specified reserve requirements, in the boe system they are required to hold a certain amount of cash - which amounts to the same thing as on overnight reserve requirement. But even if we ignore that aspect of banking, it is important to see that the banks with no required reserves still have available "excess reserves". If you ignore this wording of excess reserves you will be unable to follow the constant references in modern banking to the banks lending excess reserves to other financial institutions which in turn means the banks are borrowing excess reserves from others as they require them.Andrewedwardjudd (talk) 14:30, 12 May 2011 (UTC)andrewedwardjudd

I personally take issue with the papers that talk about excess reserves, and I also think it's a very questionable assumption to assume that any Economist really understands how this system works, or ever has, but leaving that aside. I don't disagree with the general point you're making at all - and there's no need to belabour Goodhart, it's not a question of whether or not it amounts to mis-instruction - it's simply wrong. It's wrong in the same way that pre-copernican astronomy was wrong.(And frankly, epicycles had better predictive value.) The keynsian model (since he almost certainly originated it) is specifically wrong not because modern banking systems no longer use reserves, but because it doesn't include loan defaults, loan repayments or any model of how those two things inter-operate with inter bank lending. As you're quite rightly pointing out, you can drive a truck through inter-bank lending in terms of money creation once you figure out how to abuse it.

What economics needs, imho, is a textbook model that is accurate within its own frame of reference, and whose behaviour is fully understood. That can then be used as basis for saying, with these modifications you have an X system, and this changes its behaviour in this way. Otherwise, institutional realities are different everywhere, and endlessly classifying them and arguing about them - is well what economists do at the moment extremely well, to no useful purpose.

What wikipedia needs is for Economics to sort its act out, and that's not going to happen anytime soon unfortunately. Mischling (talk) 20:43, 12 May 2011 (UTC)

Mischling, We can forget all about "excess reserves" providing we have a method of communicating the bank has surplus dollars available for lending. For example if you have ten dollars you do not need till tomorrow afternoon, you have ten surplus dollars you can lend me to cover my dollar deficiency so that today i can meet my obligations requiring ten dollars. Andrewedwardjudd (talk) 06:38, 13 May 2011 (UTC)andrewedwardjudd

That was the point I was making about the inter-bank lending market. However, language matters, and definitions in a subject like this particular so - reserves in the banking context has a specific meaning in terms of the fractional reserve on deposits - using the same term for surplus funds available for lending is dangerous. Mischling (talk) 12:15, 13 May 2011 (UTC)

I agree it is easily possible to get very tied up in knots by some of the banking terms.

The words 'deposit' and 'reserves' are not immediately obvious unless the context is clear because the word 'deposit' alone is misleading and the same is true for 'reserve'.

But can we agree terms so we can discuss this topic? Or are you saying that is not possible? I am not sure what you are saying.  :-(

The earlier difficulty we had is that neither of us can understand the others loan example.

In your example you said the bank had '1000 in deposit' and had no reserves, but after the loan of 900 it had reserves of 100. Reserves are dollars. The bank would have had to possess the 100 dollars or have borrowed them after '1000 was in deposit'.

If the bank had just opened for buisiness with no money or deposits, and had just taken 1000 deposits it would have the equivalent of 1000 dollars 'in the vault' and 1000 created money deposits owed to customers. This bank would have 1000 reserves 'in the vault'.

So the issue here at the moment is banking terms as i read it. If we can resolve that i think things will be clearer Andrewedwardjudd (talk) 12:58, 13 May 2011 (UTC)andrewedwardjudd

One of several i fear. I'm using reserve in the same way the main wiki page uses it - i.e. the fractional reserve that the banks were required to keep on deposits in the pre-Basel models. Essentially this is the identity liabilities(deposits) * (1 - reserve fraction) = loans(assets). I recommend simplifying the definition of money to the concept of an electronic account at the bank, and leaving physical money out of it entirely, when studying the core banking processes btw.

To operate a fractional reserve bank you need a base money, such as government fiat or gold. If we have no central banks then we still have a base money. The reserve essentially consists of base money and other valueable assets which can be used to easily get base money. The money owed to the customers is created by the bank and is just IOUS for base money. We cannot explain or work with fractional reserve if we do not have a base money and the banks created IOU money. Ie fractional reserve operates with two money types where one is created by the bank. So in your example if you have '1000 in deposit' and have no reserve of base money and later have a reserve we need to know where you got that base money from. When you say "I recommend simplifying the definition of money to the concept of an electronic account at the bank, and leaving physical money out of it entirely, when studying the core banking processes btw." that makes zero sense to me. The very core of fractional reserve banking is the physical base money. Yes it could be an electronic base if the customers could exit the banks and hold the electronic base by some method - personal smart card maybe - but that would have to have a central register with the same data held there to match the personal smart card.

On my page you said, "Let me suggest that one of the historical issues with descriptions of FRB is a confusion between 'money' and bank deposits. Fractional reserve banking is really a system regulating (or not) the quantity of bank deposits (which are completely interchangeable with physical money, and indeed are in that sense money - but it is bank deposit regulation that is the critical factor here.)" Bank deposits as IOUS are not completely interchangeable with physical money. The bank cannot use customer deposit IOUS to credit another banks customer. Andrewedwardjudd (talk) 19:43, 17 May 2011 (UTC)andrewedwardjudd

There is no rule of nature that governs the operation of fractional reserve banking systems - they are whatever we create them to be. That is one of the issues, there is no single "fractional reserve banking system" - there are different versions in every country, and across historical periods. What was a system that was based on physical core money, has now mutated into something that isn't. I'm afraid the concept you're using of base money is meaningless in Basel regulated banking systems. The country I live in is to all extent and purposes completely electronic - I can do a direct transfer from my bank account to a friends bank account with no physical money or even cheques involved, and it's perfectly normal to do this even for very small amounts of money. Physical currency in every country that i'm aware of is printed on demand - not as a fixed ratio of exchange - it is, to all extends and purposes irrelevant. This is nothing new, even in the 19th century the ratio of transactions that were mediated through cheques or direct exchanges between bank accounts were of the order of 7:1. The issues with fractional reserve banking have always been the expansion and contraction of money represented as bank deposits. Nobody buys a house with cash - unless they're living in Detroit i suppose.

So how we do best explain a complicated system with a lot of different variations? Well, the best way, certainly used successfully in other sciences, is to start with a simple system whose behaviour is well understood, and then start building on and comparing different versions of it. Let me also suggest something here - you aren't going to figure out how this thing actually works by reading other people's descriptions of it - to the best of my knowledge, no accurate description of this thing and its behaviour currently exists, or has ever existed. The best way to dig into it is to reverse engineer from the available data of call reports, gross monetary figures etc.

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