Mon 2010-09-20 10:14 EDT

Mish's Global Economic Trend Analysis: Fictional Reserve Lending And The Myth Of Excess Reserves

...1) Lending comes first and what little reserves there are (if any) come later. 2) There really are no excess reserves. 3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional". 4) Banks are capital constrained not reserve constrained. 5) Banks aren't lending because there are few credit worthy borrowers worth the risk. ...concern that excess reserves will lead to lending and inflation is totally unfounded in theory and practice. Fractional Reserve Lending is really Fictional Reserve Lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans.

excess reserves; Fictional Reserve Lending; Mish's Global Economic Trend Analysis; myth.

Clusterstock Sat 2010-09-04 11:16 EDT

Your Textbooks Lied To You: The Money Multiplier Is A Myth

The following comes from an excellent new paper from the Fed. The paper describes the myth of the money multiplier and is an absolute must read for anyone who is trying to fully understand the current environment. It turns much of textbook economics on its head and describes in large part why the bank rescue plan and the idea of banks being reserve constrained is entirely wrong: ``Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons...bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks...''

ClusterStock; Money Multiplier; myth; textbook lying.

Money Game Wed 2010-09-01 10:53 EDT

Why Ben Bernanke's Next Round Of Quantitative Easing Will Be Another Huge Flop

There is perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing [QE]. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation...The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset...The theory behind QE is that the Fed can reduce interest rates via asset purchases (which supposedly creates demand for debt) while also strengthening the bank balance sheet (which entices them to lend). Unfortunately, we've lived thru this scenario before and history shows us that neither is actually true. Banks are never reserve constrained and a private sector that is deeply indebted will not likely be enticed to borrow regardless of the rate of interest...The most glaring example of failed QE is in Japan in 2001. Richard Koo refers to this event as the ``greatest monetary non-event''...Since Ben Bernanke initiated his great monetarist gaffe in 2008 there has been almost no sign of a sustainable private sector recovery. Mr. Bernanke's new form of trickle down economics has surely fixed the banking sector (or at least bought some time), but the recovery ended there. ..The hyperventilating hyperinflationists and those investors calling for inevitable US default are now clinging to this QE story as their inflation or default thesis crumbles before their very eyes...With the government merely swapping assets they are not actually ``printing'' any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits...now that the banks are flush with excess reserves this policy response would in fact be deflationary - not inflationary...

Ben Bernanke's; Huge Flop; Money game; Quantitative Easing.

Mish's Global Economic Trend Analysis Mon 2009-12-21 19:32 EST

Fictional Reserve Lending And The Myth Of Excess Reserves

Michael Shedlock

...The chart shows an unprecedented amount of excess reserves, almost $1.2 trillion. According to Money Multiplier Theory (MMT) and Fractional Reserve Lending, this amount may be lent out as much as 10 times over and when it does, massive inflation will result. The above hypotheses regarding "Excess Reserves" are wrong for five reasons. 1) Lending comes first and what little reserves there are (if any) come later. 2) There really are no excess reserves. 3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional". 4) Banks are capital constrained not reserve constrained. 5) Banks aren't lending because there are few credit worthy borrowers worth the risk.

excess reserves; Fictional Reserve Lending; Mish's Global Economic Trend Analysis; myth.