Krugman gets it right

[Joe Leote]

In the PS of this post:

http://krugman.blogs.nytimes.com/2012/04/12/more-on-safe-assets/

Paul Krugman links to a paper he thinks is fantastic:

http://delong.typepad.com/20120411-russell-sage-delong-paper.pdf

which is a very good discussion of bank failure modes and depressions in
economic history.

Joe

[helge nome]

I think that the behavior of markets depend on the rules that govern those markets.
Therefore, those that set the rules effectively control the markets.
And those markets have been, and are, manipulated to transfer real assets into the hands of the
market manipulators by way of artificially created market bubbles.
It is a pretty simple game, really.
Helge

> Date: Fri, 13 Apr 2012 17:42:27 -0400
> From: tech_a...@verizon.net
> To: understan...@googlegroups.com
> Subject: Krugman gets it right

[Tom Paine II]

Banks do not create money.  To say so is silly.

The Fed does limit the amount of currency – (except for QE) the Fed won’t provide more currency than it receives in valuable collateral.

That’s the inelastic limit.

 

Fractional banking is an inherently risky fraud on the majority of people.

The small minority who understand the process are not entitled to call it a process of creating good money, simply because it is used as though it was real money by the tricked majority, nor because there are laws that set a limit to the risk by a the fraud per a dilution ratio.

 

Saying banks create money not only legitimates the bankers’ shallow business model, of risking of other people’s assets.

It strokes bankers’ bloated egos.

 

Saying that they create money because they don’t check their reserve ratio first, knowing that they have enough credit to reset a reserve ratio before close of business, is as meaningless as signing a teller’s receipt before the teller hands you your withdrawn cash.

 

When banks can’t post due collateral, they must either sink into formally disallowed depths of fraud, or fold.

 

Banks risk lending more money than they have, and by and large get away with it, and it can even be tolerated, except the scam goes to their heads and we all get screwed.

Except for them.

Period.

 

I have to get this out of my system.  You can’t imagine how hard it is to keep in my mind two tallies, when following MMT discussions.

One in terms of real money (currency, the monetary base).

One in terms of what MMT calls money, and tries to get me to agree is money (else I’m a stupid throw-back), but is in reality fractionally (or worse) diluted money, riskily used as though currency.

 

Having said which, I will try to return to bottling up the ongoing translations I perform in my mind, in order to garnish the true relational substance that I construe from MMT, while not losing sight of the governing bright-line, of who controls whom and how.

[Joe Leote]

Money broadly defined is the customary means of payment in trade (for
goods and services) and for the settlement of debts.

Banks create money broadly defined.

Joe

[John Hermann]

On 16/04/2012 9:57 AM, Tom Paine II wrote:

Banks do not create money.  To say so is silly.

It all depends on what you mean by money Tom.  And to say that banks create money is not a silly statement at all. because the credit money which appears in depository accounts has all been created by commercial banking institutions.  The reason why such deposits are recognized as money is because they have come to be accepted and used as a medium of exchange by the broader community, and because they are recognized by the central bank as forming the major component of the money supply M1.  They satisfy all the requirements of the definition of money ( and in the modern world money does not need to possess a tangible or physical form).  If we cannot agree on this basic point then there is little point in proceeding any further with the discussion.

John Hermann

[William Hummel]

From: Tom Paine II

To: understan...@googlegroups.com

Sent: Sunday, April 15, 2012 5:27 PM

Subject: Krugman gets it right

Saying banks create money not only legitimates the bankers’ shallow business model, of risking of other people’s assets.

It strokes bankers’ bloated egos.

 

 

When banks lend, they risk their own money (reserves), not other people's assets.    

[helge nome]

I guess the assumption is that if a bank goes belly up (shut down by the government), depositors will be covered by the FDIC
and have their deposits refunded. Aren't there some qualifiers here?
Helge

---

From: wfhu...@ca.rr.com
To: understan...@googlegroups.com
Subject: Re: Krugman gets it right
Date: Sun, 15 Apr 2012 19:10:02 -0700

[Tom Paine II]

Hmmm...that doesn’t quite jive with my understanding of underwater mortgagees.   Or of the source of recent bailout-cum-FDIC refunding.

 

But I do get your point.

I just get so frustrated when the label of money creation is used in such a definitive fashion as sanctifies the practice of lending what is generally thought to be ready cash as though it were ready cash when the readiness is at best tainted.

 

But perhaps I can express my conceptual strictness re the definition more intellectually in the fashion of a monetary Turing standard.

 

Would it be creating money, for a non-banker to insinuate (spend/loan) into circulation of counterfeits that no-one has the capacity to distinguish?

Is a counterfeit money unless and until it is taken out of circulation?

 

Doesn’t MMT say yes? 

I try to say no.

 

From: William Hummel

Sent: Sunday, April 15, 2012 7:10 PM

To: understan...@googlegroups.com

Subject: Re: Krugman gets it right

 

From: Tom Paine II

[Tom Paine II]

I have no problem with calling it “credit-money,” although maybe “discredited-money” would be as apt.

 

From: John Hermann

Sent: Sunday, April 15, 2012 6:08 PM

To: understan...@googlegroups.com

Subject: Re: Krugman gets it right

 

[helge nome]

I think "credit" could be called "money" until it meets its cousin, "debit".
Then it ain't money no more. Zap!
Helge

---

From: t...@tompainetoo.com

To: understan...@googlegroups.com
Subject: Re: Krugman gets it right

Date: Sun, 15 Apr 2012 22:17:49 -0700

[Jean Erick]

      Do you have a definition of money?  I see M1 as a conflation of the distinct entities of money and debt and therefore a basis of confusion, at leat in teaching economics.

It's non sensical.  Reserves are "base money".  Money.  Yet they are not part of M1.  And M1 is, again, composed of money and debt.

My definition:

     Money is the Intangilbe Concept of Generic good whose Tangible Expressions may be exchanged for any other specific real good.  Money liberates, debt demands.

 

 BTW I've refigured.  Banks lend reserves, deposits are reserves, therefore banks lend deposits.  The counter to your point that deposits do not diminish is that there is no money there, it is simply the banks accounting of what they owe depositors.  I am seeing it now as serial intermediary lending.  No letter of credit quality.

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Sunday, April 15, 2012 6:08 PM

Subject: Re: Krugman gets it right

[Jean Erick]

     $250,000 limit.  Amount quickly increased at the time.  And, there is no qualifying a bubble.

 

James

[Jean Erick]

----- Original Message -----

From: Tom Paine II

To: understan...@googlegroups.com

Sent: Sunday, April 15, 2012 5:27 PM

Subject: Krugman gets it right

Banks do not create money.  To say so is silly.

 

     Confusion from the top down ("Modern Money Mechanics")

 

The Fed does limit the amount of currency – (except for QE) the Fed won’t provide more currency than it receives in valuable collateral.

That’s the inelastic limit.

 

     No.  The FED creates or destroys money by a net buy/sell ratio, which increases/decreases bank's reserve accounts.  The FED will replace as much account tallies

with curency as the public takes out of the bank.  The FED choses how much account money to create and meets the demand of the public for changing that account money to currency.  Or course, I'm thinking about my own ideas of how money is really created.

 

Fractional banking is an inherently risky fraud on the majority of people.

The small minority who understand the process are not entitled to call it a process of creating good money, simply because it is used as though it was real money by the tricked majority, nor because there are laws that set a limit to the risk by a the fraud per a dilution ratio.

 

     Fractional banking is not a fraudualent system.  the way it was de regulated made it fraudulent.

 

Saying banks create money not only legitimates the bankers’ shallow business model, of risking of other people’s assets.

It strokes bankers’ bloated egos.

 

Saying that they create money because they don’t check their reserve ratio first, knowing that they have enough credit to reset a reserve ratio before close of business, is as meaningless as signing a teller’s receipt before the teller hands you your withdrawn cash.

 

When banks can’t post due collateral, they must either sink into formally disallowed depths of fraud, or fold.

 

Banks risk lending more money than they have, and by and large get away with it, and it can even be tolerated, except the scam goes to their heads and we all get screwed.

Except for them.

Period.

 

I have to get this out of my system.  You can’t imagine how hard it is to keep in my mind two tallies, when following MMT discussions.

One in terms of real money (currency, the monetary base).

One in terms of what MMT calls money, and tries to get me to agree is money (else I’m a stupid throw-back), but is in reality fractionally (or worse) diluted money, riskily used as though currency.

 

     The distinction between money and debt creates confusion.  I agree currency and the monetary base is real money.  But going directly to "money supply" which is compsed of dbt and money, withou emphasizing that it does not mean "supply of money" confuses.  The economic nomenclature needs improving.  Economics, like the law, seems to be built on experience, not logic.

 

Having said which, I will try to return to bottling up the ongoing translations I perform in my mind, in order to garnish the true relational substance that I construe from MMT, while not losing sight of the governing bright-line, of who controls whom and how.

 

     I'm looking at fractional banking in several ways.  Remember that the creation of the credit part of what was intermediary lending doesn't take place until a second bank is involved.  That is the point where they are lending what has been lent them.  Maybee it's jsut serial intermediary, not letter of credit.

 

James

[Jean Erick]

     I think you mis thought.  Deposits are part of bank reserves.  The lender, either bank or public, lists their loans as assets.  The bank lends reserves, which are composed of deposits (money lent to them by the public), risks other peoples assets.

 

James

 

----- Original Message -----

From: William Hummel

To: understan...@googlegroups.com

Sent: Sunday, April 15, 2012 7:10 PM

Subject: Re: Krugman gets it right

[William Hummel]

I think you are confusing the noun deposit with the verb deposit.  A deposit (n) an asset of the depositor but a liability of the bank. Reserves are an asset of the bank.  Deposits (n) and reserves are on opposite sides of the bank's balance sheet.

 

When someone deposits (v) money in a bank, its reserves increase by the amount of the deposit.  When a bank issues a loan, it creates a new deposit (n), but its reserves remain unchanged.

 

Bank never lends reserves to the public. They remain on the books of the Fed and move between the accounts of banks when the checks written by depositors are cleared.

     

If a bank doesn't have enough reserves to cover the deposit (n) it creates by a loan, it must borrow the reserves for the check to clear.  It does so in the money market or from the Fed itself.

 

If the borrower defaults on the loan, the lending bank takes the hit.  If the bank becomes bankrupt, none of its depositors take the hit, only the lenders to the bank. 

[Mark Bachmann]

William,

 

When a bank fails, depositors can and do take hits to the extent the size of individual deposits exceeds the FDIC limit. The FDIC always has the option to waive the limit, but there have been cases when it has chosen not to do so and large depositors have lost money. This, of course, does not contradict your statements about how bank lending works.

 

   Mark Bachmann

[Tom Paine II]

 

 

From: Jean Erick

Sent: Tuesday, April 17, 2012 11:32 AM

To: understan...@googlegroups.com

Subject: Re: Krugman gets it right

 

----- Original Message -----

From: Tom Paine II

To: understan...@googlegroups.com

Sent: Sunday, April 15, 2012 5:27 PM

Subject: Krugman gets it right

 

Banks do not create money.  To say so is silly.

 

     Confusion from the top down ("Modern Money Mechanics")

 

Modern Money Mechanics incorrectly equates bank-credit-money with real money/currency.  It actually says they are the same, because one can always change the former for the latter, which is untrue when a bank fails.  And if one has more than $250,000, one does not get it back, and if one does get it back it might have to come from public taxes.

 

The Fed does limit the amount of currency – (except for QE) the Fed won’t provide more currency than it receives in valuable collateral.

That’s the inelastic limit.

 

     No.  The FED creates or destroys money by a net buy/sell ratio, which increases/decreases bank's reserve accounts.  The FED will replace as much account tallies

with curency as the public takes out of the bank.  The FED choses how much account money to create and meets the demand of the public for changing that account money to currency.  Or course, I'm thinking about my own ideas of how money is really created.

 

Of course.  But maybe you or someone can clarify this for me. 

I have thought the Fed did NOT supply currency in excess of reserves posted by a bank for valuable collateral.  

 

And that only in the aggregate does the FED “inject reserves,” that it does so only to target the interbank rate(s), and that it “injects” the reserves by OMO sales, in exchange for collateral – so that even in this aggregate sense the limit I claim exists.

 

Fractional banking is an inherently risky fraud on the majority of people.

The small minority who understand the process are not entitled to call it a process of creating good money, simply because it is used as though it was real money by the tricked majority, nor because there are laws that set a limit to the risk by a the fraud per a dilution ratio.

 

     Fractional banking is not a fraudualent system.  the way it was de regulated made it fraudulent.

 

The majority of borrowers believe that banks are lending them real money, not pretending to lend it in hopes all people don’t ask for it at once.  And that equivalence is fraudulently claimed in Modern Money Mechanics, as above.

 

I was listening to a banking presentation when a return of 35% per year was given as a typical example.  Everyone thought the speaker was mad until the fact that the money was lent many times over was explained.  Then everyone became mad except the speaker.

 

Saying banks create money not only legitimates the bankers’ shallow business model, of risking of other people’s assets.

It strokes bankers’ bloated egos.

 

Saying that they create money because they don’t check their reserve ratio first, knowing that they have enough credit to reset a reserve ratio before close of business, is as meaningless as signing a teller’s receipt before the teller hands you your withdrawn cash.

 

When banks can’t post due collateral, they must either sink into formally disallowed depths of fraud, or fold.

 

Banks risk lending more money than they have, and by and large get away with it, and it can even be tolerated, except the scam goes to their heads and we all get screwed.

Except for them.

Period.

 

I have to get this out of my system.  You can’t imagine how hard it is to keep in my mind two tallies, when following MMT discussions.

One in terms of real money (currency, the monetary base).

One in terms of what MMT calls money, and tries to get me to agree is money (else I’m a stupid throw-back), but is in reality fractionally (or worse) diluted money, riskily used as though currency.

 

     The distinction between money and debt creates confusion.  I agree currency and the monetary base is real money.  But going directly to "money supply" which is compsed of dbt and money, withou emphasizing that it does not mean "supply of money" confuses.  The economic nomenclature needs improving.  Economics, like the law, seems to be built on experience, not logic.

 

I don’t quarrel when some special xxx-money is used to distinguish non-ready-money.

[Jean Erick]

   As best I can, this is the way I understand it.

Currency:    

You are confusing changes in the ----FORM---- of any amount of money---- with changes in the -----AMOUNT----- of any money.

       Let say you have $100 in reserves.  $10 of those reserves are in cash and the other $90 are in the FED held reserve account.  You want $10 more cash.  The FED gives you the $10 cash and decreases your reserve account by $10.  You've still got $100 in reserves.  Now $20 in cash and $80 in the reserve account.

 

FED injection (or detraction) of the amount of money into the economy: (entirely different issue than above)

       The FED, attempting to ease interest rates, make money more available to lend, creates money "out of thin air".  Now there might be some discussion on the acutal thiness

of the air or it's actual composition but that is neither here nor there     ;-)

     So, you're a bank with  $100 in assets, $10 of that in Treasuries.  The FED creates $10, gives it to you and takes $10 worth of Treasuries.  You've still got $100 in assets.

Now, two issues:

    (1) is the THEORHETICAL:  More money, with products staying equal means that purchasing power unit must contain more nominal dollars.  More nominal dollars in the purchasing power unit still buys the same thing.  The dollar is worth less then when you bought the T's, but you've got more of them.

 

    (2)  is, I think, the "official" explanation.  Inflation lowers the value of the NOMINAL dollar.

 

     In both cases, as the FED Treasuries are redeemed in nominal dollars. You give back less than you paid for them.  Inflation "reveals" the extra financial value and that value is in money.

 

 

James

[Jean Erick]

       I think this is very illuminating and I'm grateful for your efforts.

I still win on the english language, you are very helpful on the economics.

     It is not a difference of nouns and verbs.  Both deposits are nouns, objects which are acted on.  The primary difference is WHO is acting on them (creating them)  and, most importantly (and revelatory of my unbelievable stupidity) the difference, banks side, between an ASSET and a LIABILITY.  A loan deposit is an ASSET, the other a LIABILITY.  Next year, I promice, I will learn to count to THREE.

 

    Reserves, deposits loaned.   A liability deposit is a liability deposit is a liability deposit, by any other name will smell as though it is gone upon bank failure, FDIC excepting.

I completely accept, and am grateful for your explanations of the ACCOUNTING mechanisms.  And, under those mechanisms, it is as you say, and should be taught.  But my position is only accepted if one makes the distinction between money and debt and accept my version of the money supply (similar to Austrian I think)  And I see no agreement on that here.  My position is. I think supported by the law of accounts because it mentioned the tremendous amount of "money" that is flowing realtive to a small amount of reserves supporting it.

     One example of the problem is the ability to present "of course they do not lend deposit money because there is no money in the desposit account to lend, just a recording of what is owed the depositor".  True, but unreavealatory.

 

    One reason I like my mechanism is that it easily goes to looking for unoffical, "real", sources of money creation.  In that the FED buy ratio is an early redmption of debt, creation of money, there is a possbility to entertain that money is created when borrowed money goes into a liability deposit (carry trade?).  You've got to know the difference between a pea and a shell before you can participate in the shell game.  ;-)

 

Thank You