- 16 Sep 2018 19:00
#14946834
As you-all should know I have been converted by the logic to become a MMTer.
This means I have read the MMT take on how the US banking system works.
This means I accept that banks create new dollars when they make loans.
Now, the Fed. Res. requires banks to keep on hand a certain amount of “reserves” so they can meet any reasonable one day's withdrawals.
Many people think this keeps banks from lending too much, but it doesn't. It doesn't because when the bank makes a new loan it deposits that amount into an account at that bank. It takes at least a day or the borrower to move the money to another bank. So, the deposit the bank made automatically covers the reserve requirement for at least one night. After that, the bank can always borrow at a very low rate in the inter-bank overnight system to get dollars to meet its reserve requirement on all future nights.
Thus the reserve requirement doesn't limit banks from making loans. As long as the borrower is creditworthy and the interest rate is high enough to make a profit over the cost of borrowing to meet the reserve requirement to loan will be good for the bank.
So, the US is awash in private debt. Prof. Steve Keen says that it was private debt that caused the GFC/2008. Not Gov. debt, it was private debt. Since 2008 the US has returned to its old ways and we have run up the private debt to very dangerous levels.
I'm asking you-all if this is a possible solution to slow this down?
Would it work to institute a new rule that all new loans are deducted from the cash on hand (which I think is the same as “reserves”) for some time [maybe 28 days]? So, bank A loans guy B $50,000 on Monday. That night the bank needs to have reserves to cover that amount. But, whatever amount of reserves it has at closing will be reduced by $50,000. so, that 1st night the bank has the $50,000 but it must deduct $50,000. This will continue for 4 weeks until a Monday 4 weeks later. So, when the borrower spends or moves the money, the bank will NOT have the $50,000 deposited and it will have to deduct $50,000 from its cash on hand. If this is not enough it will have to borrow reserves on the overnight market.
. . . Would this brake be effective in keeping banks from lending too much?
I know that some of you are worried about the ability of banks to create dollars like this. In practice, these new bank created dollars can not be distinguished from dollars created when the US Gov. deficit spends. This is why bank deposits are counted in the main M# that measures the US money supply. Dr. Keen agrees with the worriers that this can be a problem. So, would this be enough?
A second idea to solve an unrelated bank problem is ---
Would it be a good idea to institute a rule that the lending institution must split every loan in half and keep half on its books as an asset until it is paid off?
. . . This is intended to make the lenders care more about “how likely is it that the borrower can pay the loan back?” IIRC, one part of the problem in 2008 was that the lenders were selling the loans they make to suckers who didn't realize that it was a “liars loan”. They hid the truth by bundling the loans with other loans and selling small parts of them to many suckers. And then guaranteed them with “credit default slips” that were not fully funded insurance policies. When the shit hit the fan, the credit default slips became just more worthless pieces of paper.
.
This means I have read the MMT take on how the US banking system works.
This means I accept that banks create new dollars when they make loans.
Now, the Fed. Res. requires banks to keep on hand a certain amount of “reserves” so they can meet any reasonable one day's withdrawals.
Many people think this keeps banks from lending too much, but it doesn't. It doesn't because when the bank makes a new loan it deposits that amount into an account at that bank. It takes at least a day or the borrower to move the money to another bank. So, the deposit the bank made automatically covers the reserve requirement for at least one night. After that, the bank can always borrow at a very low rate in the inter-bank overnight system to get dollars to meet its reserve requirement on all future nights.
Thus the reserve requirement doesn't limit banks from making loans. As long as the borrower is creditworthy and the interest rate is high enough to make a profit over the cost of borrowing to meet the reserve requirement to loan will be good for the bank.
So, the US is awash in private debt. Prof. Steve Keen says that it was private debt that caused the GFC/2008. Not Gov. debt, it was private debt. Since 2008 the US has returned to its old ways and we have run up the private debt to very dangerous levels.
I'm asking you-all if this is a possible solution to slow this down?
Would it work to institute a new rule that all new loans are deducted from the cash on hand (which I think is the same as “reserves”) for some time [maybe 28 days]? So, bank A loans guy B $50,000 on Monday. That night the bank needs to have reserves to cover that amount. But, whatever amount of reserves it has at closing will be reduced by $50,000. so, that 1st night the bank has the $50,000 but it must deduct $50,000. This will continue for 4 weeks until a Monday 4 weeks later. So, when the borrower spends or moves the money, the bank will NOT have the $50,000 deposited and it will have to deduct $50,000 from its cash on hand. If this is not enough it will have to borrow reserves on the overnight market.
. . . Would this brake be effective in keeping banks from lending too much?
I know that some of you are worried about the ability of banks to create dollars like this. In practice, these new bank created dollars can not be distinguished from dollars created when the US Gov. deficit spends. This is why bank deposits are counted in the main M# that measures the US money supply. Dr. Keen agrees with the worriers that this can be a problem. So, would this be enough?
A second idea to solve an unrelated bank problem is ---
Would it be a good idea to institute a rule that the lending institution must split every loan in half and keep half on its books as an asset until it is paid off?
. . . This is intended to make the lenders care more about “how likely is it that the borrower can pay the loan back?” IIRC, one part of the problem in 2008 was that the lenders were selling the loans they make to suckers who didn't realize that it was a “liars loan”. They hid the truth by bundling the loans with other loans and selling small parts of them to many suckers. And then guaranteed them with “credit default slips” that were not fully funded insurance policies. When the shit hit the fan, the credit default slips became just more worthless pieces of paper.
.