Fields Institute presentation series – video 2
Jun24
on June 24, 2012
at 5:18 pm
This is the second video from Steve’s talks at the Fields Institute in Toronto Canada, entitled A Monetary Minsky Model. The talk focuses on integrating the theories of Hyman Minsky into mathematical modelling.
Damien,
Thank you for the responses.
Of course reserves are peanuts (given low reserve ratio requirements, etc.)….and of course the real game is current account assets (customer and interbank loans), and current account liabilities (customer deposits and interbank loans extended, etc).
I am still perplexed by your responses, as you seem to be harping on the ‘agenda’ of the ‘positive money’ kooks, which is not really part of this specific presentation. I am asking this sincerely…..educate me please instead of harping about ‘rabbit holes’ and ‘dead ends’. Your response is exactly the sort of non specific response that does not contribute to the dialogue. It is exactly the sort of response that guys like Krugman make to Steve. They ‘know where the train of thought’ is going…so they dismiss everything along the way. That is just laziness.
What exactly is wrong with that presentation (other than the failure to utilize fractional reserve ratios)? Obviously the reserve math is wrong, as the presenter does not seem to take into account reserve ratios. This is likely a choice to help simplify things for the audience.
Is the book keeping math wrong? Where? Are the balancing interbank transactions wrong? Do reserves mix with current account funds?…Is that statement wrong?
The value I saw in this presentation was how it showed the way reserves function in the background, and how that enables ‘credit’ to be treated as ‘money’. The key points that I thought this presentation made clear are the following:
1. Deposits are IOUs, unsecured loans from the banks to depositors.
2. The clearing mechanism transaction structure is performed on the reserve side (though the reserve math is wrong here…a reserve ratio is not presented here).
3. The clearing mechanism is in fact what makes it possible for bank credit (just an IOU from a bank to you) to have “moneyness”. The clearing mechanism creates an equivalency between IOUs at different banks. This literally is the glue that holds the system together. It is not trivial.
4. The reserve system is in effect the scoring system for commercial banks, and there is a set of rules which govern how the reserve side relates to the current account side.
5. When a bank makes a loan, it simply creates an IOU to a customer (a deposit).
6. The customer in turn presents an IOU to the bank (a contract of some sort).
7. To the bank, the contract (loan) is an asset. The new deposit is a liability. To the customer, it is the opposite.
8. If the customer spends the money, and it ends up in another bank, and background re-balancing in the reserve system is required since the lending banks liabilities just went down.
Is any of this incorrect? Then why is it a bad presentation? You can not criticize it for being a bad presentation because you know that the presenter will follow up with some other kooky ideas. It helps to make understanding this a lot easier, and in that respect, it is valuable.
Mahaish,
I understand that EFFECTIVELY loans are not constrained by reserves..that is the fundamental point of the endogenous money argument. But there are still rules, and banks have to ‘go through the motions’. At some point (the end of the month)…they have to go get reserves…perhaps through interbank borrowing…and if the funds are not available and pressure gets put on interbank rates..then the central bank steps in with repos, etc. The entire process, as Steve has stated, results in bank credit increases dragging reserves up with them….
Hi Brant – I’ll be back later and rest but : “Do reserves mix with current account funds?” – this “non-mixing” thing it comes from nowhere, means nothing and in the presentation comes out as important : he “discovered” it after a “clue” he found in the book written by the guy who organised the event and who was about to receive a prize later ! – The Bromsgrove group is full of “going nowhere” side issues like this – I wasted a whole weekend with them, I’m letting people know here if you read their stuff and find “I didn’t know that before” there is a good chance they made it up and its nonsense rather than your lack of knowledge on the subject
have a read of this damo,
it will explain all the permutations much better than i can,
http://bilbo.economicoutlook.net/blog/?p=381
http://neweconomicperspectives.org/category/scott-fullwiler.
remember we are talking about NET assetts, not total assetts, that treasury injects into the banking system, and then the central bank adjusts , or attempts to adjust the portfolio composition of those net assetts by the private sector.
cheers mahaish
the second link, need to read the helicopter drops article, damo
Damien,
OK. Again you focus on the agenda, and not the message, which was a primer on reserve banking systems.
Is anything in their explanation of how the system works fundamentally wrong? Not once have you given a concrete answer to this question.
I have not once asked if their theories about how to restructure the system are absurd…yet over and over you seem to jump ahead and declare this.
I give up. You seem to have some sort of strange attitude / mental block and are unable to separate the message from the messenger.
without wishing to verbal damo, brant
think the point is, changes to central bank balance sheets effect bank balance sheets and visa versa, so the non mixing idea is a bit troublesome in terms of describing the process.
if you read the above link i posted by scott fullwiler, the “helicopter drops” article, i think is a much better way to decribe the inter action taking place.
i recomend reading as much scott fullwiler stuff as possible, since he is an expert when it comes to explaining central bank ops
in the link he also wades into the keen krugman debate in one of his posts, basically agreeing with steves position
Brant Williams
June 27, 2012 at 6:45 am | #
“The entire process, as Steve has stated, results in bank credit increases dragging reserves up with them….”
Does it?? And has Steve stated this?
Bank credit increases will only result in reserves moving from one bank to another one. And then likely back again if required.
The central bank may step in if required to provide reserves to a bank but this could happen in a time of decreasing bank credit.
“3. The clearing mechanism is in fact what makes it possible for bank credit (just an IOU from a bank to you) to have “moneyness”.”
Not really.
Some people just do not want to accept that bank credit = real money. But it is.
Reserves are in fact no more than the banks money. Reserves could be real money but to allow competition and choice another level has been set up. So rather than everyone having an account at the central bank and using reserves to buy goods and services etc only banks and treasury have accounts and we then open accounts at the next level down (commercial banks)
Its the failure to accept this point (bank credit = money) that causes the problems.
MMT, et all monetary theories have nearly every swirl and pool of money/debt located. What they haven’t recognized is 1) the always underlying and overweening effect of COST accounting on individual purchasing power and 2) even though it is important to understand a system…it’s even more important that a system SERVE MAN INSTEAD OF MAN SERVING THE SYSTEM.
That’s two things
1) the underlying problem with the mechanics of the system and
2) the missing/misaligned intention that is necessary to have BOTH a free flowing system AND a truly free citizenry.
“4. The reserve system is in effect the scoring system for commercial banks, and there is a set of rules which govern how the reserve side relates to the current account side.
5. When a bank makes a loan, it simply creates an IOU to a customer (a deposit).”
4 regarding the scoring system??? . Its seems to be moving into making stuff up to suit the presenters beliefs.
Reserves just allow banks to settle with each other. And more importantly for monetary sovereign Govts to spend and tax
GOVT SPENDING AND TAXES IS THE KEY TO THE WHOLE SYSTEM. Our banking and money system allows a powerful ruler or Govt to spend and tax. Banks are just a delegated but key part of this structure.
5. No it creates money for the customer in the form of bank credit (a deposit)
By the way the Guns and Butter audio clip of Stephanie Kelton and Michael Hudson of recent vintage was interesting. It made me realize why I have always liked Michael Hudson so much. It’s because there is always a strong moral sentiment to everything he says. And yet he’s still largely talking policy. Well, he’s an economist and an academic, I understand that.
What we really need now is “the voice of one crying in the wilderness, Make straight the way of the”….new evolved and truly free system.
“GOVT SPENDING AND TAXES IS THE KEY TO THE WHOLE SYSTEM.”
Our banking and money system allows a powerful ruler or Govt to spend and tax. Banks are just a delegated but key part of this structure.
Won’t actually argue with this, but why not enable the individual with his/her sufficient purchasing power money-vote make economic policy instead of TBTF Banks, too big producers and too big and captured government? Now how do you suppose we might make sure that individuals had sufficient purchasing power to be the primary maker of economic policy…..hmmmm?
Hi Brant :
In 2005 Lloyds Bank plc
had customer deposits of £131 Billion,
at the same time their Cash & Reserves were
$1 Billion : a reserve ratio of 0.882%
http://www.lloydsbankinggroup.com/media/pdfs/investors/2006/2006_LTSB_Group_R&A.pdf
In 2011 The Deposits were £414 Billion
and the Reserves were
£61 Billion : a reserve ratio of 14.7%
http://2011.lloydsbankinggroup-
annualreport.com/media/96137/ConsolidatedBalanceSheet_%20LBG_AR_2011.pdf
Given that the balance sheet of Lloyds has gone from Gross Assets
of £310 Billion to £970 Billion in the same time,
it’s like 2 new banks the size of the original one in 2005 have been added.
For these two new banks, they started off with nothing and
gained deposits of £283 Billion
and at the same time acquired Reserves of
$60 Billion – a reserve ratio of 21 %
This shows that these much vaunted “Reserves” – Central Bank “Real Money” etc are not the driver of Commercial Banking acedemics claim them to be. With the Reserves Lloyds had in 2011 and using the Reserve ratio they used back in 2005 then they would have deposits of £61 Billion/0.00882 = £69,616.10 Billion… or ball park : £79 Trillion. They only had £414 Billion.
If you look at the Bank of England Annual Accounts in 2005 and 2011
Bank of England 2005 Accounts :
http://www.bankofengland.co.uk/publications/Documents/annualreport/2005accounts.pdf
Bank of England 2011 Accounts :
http://www.bankofengland.co.uk/publications/Documents/annualreport/2011/financialstatements2011.pdf
On the liability side of the Bank of England’s Balance Sheet, the Commercial Bank reserves have gone up from 2.3 Billion to 154.4 Billion between 2005 and 2011, the big mover on the Asset side that balances this is “Other loans and advances” that has gone from nothing to £199.8 Billion. A look at the notes to this item shows that this is one large loan to a company called : The “Bank of England Asset Purchase Facility Fund Limited”, It’s balance sheet (http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1107.pdf) shows the £199.8 Billion as a creditor and the balancing assets being essentially £197 Billion of UK Gilts and $1 Billion of Corporate Commercial paper.
This Asset Purchase Facility Company is the vehicle for what the UK Government calls “Quantitative Easing”.
The bookkeepng for this is as follows :
The Asset Purchase Facility Fund
Dr Reserves at the Bank of England £198 Billion
Cr Loan owed to the Bank of England (£198 Billion)
Having got this loan of £198 Billion of Central Bank Reserve Money
it went out and bought, from pension funds – (non-Bank companies)
£198 Billion of Government Gilts that the Pension companies already owned
So the Asset Purchase Facility Fund then looked like this :
Dr Gilts £198 Billion
Cr Loan owed to the Bank of England (£198 Billion)
and for a moment the pension companies went from say this :
Dr Gilts £898 Billion
Cr Pensions owed (£ 898 Billion)
to
Dr Gilts £700 Billion
Dr Reserves at the Bank of England £198 Billion
Cr Pensions owed (£ 898 Billion)
The next moment, they banked this cheque in a
Commercial Bank, so the Pension companies looked like this :
Dr Gilts £700 Billion
Dr Current Accounts with Commercial Banks £198 Billion
Cr Pensions owed (£ 898 Billion)
and the Commercial Banks then changed by this :
Dr Reserves £198 {£61 Billion in Lloyds}
Cr Current Account of Pension Company (£198)
The pension companies then had the choice to leave this money in the commercial banks or spend it somehow. One of the other big movers on the balance sheet of Lloyds between 2005 and 2011 was “Debt securities in issue” which went up £145 Billion, (the issue of these Debt securities essentially replaces the old Inter-Bank Debt as, despite the balance sheet tripling in size between 2005 and 2011 Inter-Bank Debt went from £32 Billion to only £40 Billion)
Lots of things happen in the market from day to day, with lots of parties from around the world but with Government Gilts being bought up by the Bank of England, and the pension companies needing something to “invest in”, so as not to keep large balances in unsecured current accounts in shaky banks, and with lots of Bank issued Debt securities now around, its likely that a large part of the Net effect will be that the pension companies bought the Bank Issued Commercial debt to give:
Pension companies :
Dr Gilts £700 Billion
Dr Bank Issued Debt Securities £198 Billion
Cr Pensions owed (£ 898 Billion)
and the Commercial Banks are then changed to this :
Dr Reserves £198
Cr Debt securities in issue (£198)
So as “Reserves” are not the “driver”, the “real money”, that allows commercial banks to issue loans, then instead of Quantitative easing kick starting a £22.5 Trillion economic boom, it has just left £198 Billion of dead weight – low earning – reserves on the Assets of the Commercial banks and has just taken some safe Gilts away from pension companies and replaced them with a less safe Commercial Bank Issued Debt Securities and current accounts.
Is the plan to load up the Pension companies’ assets with Commercial Bank issued debt then declare the Banks Bankrupt, thus wiping out the pension companies ? It’s a more realistic aim than “Quantitative Easing” creating, via the “monetary multiplier”, a £22.5 Trillion bonanza, which hasn’t happened and isn’t about to (According the Academic economists – and those who think that Reserves are the ‘Glue’, or some other inappropriate metaphor, that is the ‘base’ of the banking world – that the banking system can take a reserve and multiply it by the Monetary Multiplier (to maintain the reserve ratio) and issue out oh : £198 Billion/0.00882 = £22.5 Trillion in new Loans – by issuing a series of smaller and smaller loans that form a declining geometric progression – and if £22.5 Trillion of fresh money won’t fix the
financial crisis then nothing will !)
In both the old and new (pre and post financial crisis) game, the Reserves are a technical issue, if you want to add a technical detail for interest then that’s OK, it makes things a bit more complicated to explain but its not problem.
If however, and this was what the Bromsgrove video was trying to get across, : you are saying there is a missing vital thing in the “Reserves” : “That they don’t mix with current accounts” – whatever than means – then its a dead end …and if Steve could add this to his presentations… ! I happen to know that these guys are past masters at doing this, so strongly advise not to take any notice or you’ll end up “understanding” things that are plain wrong.
If there was no Central Bank at all then, in the good times, Bank A and Bank B
would balance up their books with Inter-Bank Loans and commercial paper – which at 0.882 % Reserve Ratio is pretty much what did happen. If we didn’t have a Central Bank and we had the crisis we now do then Quantitative Easing could be done just by the Commercial Banks buying Gilts directly from the Pension Companies and then selling them Bank Issued Debt Securities as before. So instead of the Bank of England’s Asset Fund Company owning £198 Billion of Gilts the Commercial Banks the will own this directly and instead of looking like this after Quantitative Easing:
Commercial Banks :
Dr Reserves £198 Billion
Cr Debt Securities Issued (£198) Billion
They’ll look like this :
Commercial Banks :
Dr Gilts £198 Billion
Cr Debt Securities Issued (£198) Billion
the Pension Companies will look the same, with or without a Central Bank :
Pension companies :
Dr Gilts £700 Billion
Dr Bank Issued Debt Securities £198 Billion
Cr Pensions owed (£ 898 Billion)
You don’t need a Central Bank, you don’t need Reserves, they are not vital they are just a technical convenience.
If a customer wants a loan, and a commercial bank wants to isse the loan then the Commercial bank makes up the money – real money – from nothing by the Entry :
Dr Loan $100
Cr Current Account (100)
A large percentage of the Current Account will end up in another bank and Bank A will have to get hold of Inter-Bank loans or sell Debt securities to balance it’s balance sheet – the reserves are just a technical convenience in the middle – not a missing link.
Hi Mahaish,
I’ve just had a look at the links you put in.
For me the problem from a maths perspective is about Costs and Prices – and prices – the money business takes off people needs to be higher than costs – the money business pay to people. Interest is just another cost, when lent to a company. I don’t think the English language is good enough to discuss this topic, I do thing that the language of accountancy is. If they could re-do their articles using schedules and balnce sheets then a) It would be very clear what they were saying and b) I think they’d go “Oh I forgot about the debit to that credit I talked about if I include this then that’ll mean what I’m saying isn’t correct”
hi damo,
i think the proposition you are making that bank financing and lending drives the process , and reserves follow suite, knowone on this blog would have a problem with.
the monetary base lags movements in m1 etc.
but , never the less we need a central bank to either implicitely or explicitely gaurantee the deposit base and the payment system.
the banking system as a whole has inelasticity of demand for funds. that is a individual bank may be able to predict its daily demand for reserves, but the banking system as a whole cannot, particularly given the large transactions undertaken by government enterprises.
central bankers spend every second of every day trying to predict system wide demand to ensure a smooth flow of payments.
so arguing that a central bank is peripheral is a step too far.
we dont have to go too far back in time to understand what a real payments crisis looks like.
liquidity in the inter bank lending market is a psychological animal.
post lehmans crash, liquidity dried up not for the lack of funds but bankers did not trust each other. there was no market at any price.
the fed had to step in to make a market . otheriwse the whole system would have crashed. thats basically what qe1 was.
restoring psychology by the fed providing infinite liquidity and guaranteeing everyone gets paid by backing the collatoral and assetts that were being put up by the private banking system.
read more mmt or neo chartalist stuff damo,
they are very much accountancy and balance sheet orientated in their thinking.
scot fullwiler and his colleagues definately take a accountancy perspective .
http://neweconomicperspectives.org/
cheers
Professor Keen,
RE: Fields Institute Video2 or Fields Institute presentation series – video 2
Your statement quoted bellow is very succinct.
@ time 2:03
“Lets talk about dynamic modeling. [pause] You’d never model a dynamic structure by starting at, where all the rates of changes are zero. Yea.”