Monday, 30 June 2014

If Banks Don't Lend Reserves, What Do They Lend?



There have been a few more blog posts of late on the old issue of whether banks lend reserves, including from Nick Rowe and Brian Romanchuk.

I prefer to say that banks do not lend reserves.  However, this raises another question.  If they do not lend reserves, what is it that they do lend?  This question is a useful one to ask, because it forces us to think a bit deeper about loans and money.

The essential features of any loan from A to B, is that A agrees to transfer value in some form to B, and B agrees to transfer value back to A, in equivalent form, at a later date.  There may be other terms, most notably payment of interest, but these are incidental.  A simple example is a loan of A's car.  A agrees to transfer possession of the car to B and B agrees to transfer back possession of the same car at some point in the future.

It's similar with a loan of securities.  A transfers securities to B, and B agrees to transfer back equivalent securities on the later date.  One difference compared with the car loan, is that we are not generally specifying exactly the same securities.  The securities merely need to be of the same type.  It's usually not possible to separately identify securities anyway, but the point is that if B chooses to sell the borrowed securities to C, he does not need to get them back from C in order to meet his obligation to A - he can instead buy equivalent securities from D, say.

In both these cases, the transfer of value involves an actual transfer of property from A to B: either physical possession of the car, or title to the security (a chose in possession in the first case and a chose in action in the second).  Loans of dollars are different.  With a dollar loan, A agrees to transfer value by making a payment to the order of B (or procuring that such a payment is made) and B agrees to reciprocate at a later date.  In this case, there is no actual transfer of property.

To some extent, however, we can interpret this as being a loan of money from A to be B.  After all, in many cases, the result of the initial transfer will be that A's money balances will be reduced and B's will be correspondingly increased, with the position reversed at the end.  This interpretation is popular with economists as many of them like to think of money as an enduring thing that is passed from hand to hand.  And in some cases, such as if we lend cash, there is an actual identifiable transfer of property.

However, this is only an interpretation and it does not work well in all circumstances, particularly if we have certain contracts between A and B where we want to treat the actual contracts themselves as being money, such as if either A or B is a bank.

The fact is that a loan does not have to a loan of anything.  Some loans can easily be treated as being a loan of something, such as a loan of a car.  But dollar loans are not in general a loan of something, even if we feel a desperate urge to think of them as such.  They are in fact just bilateral agreements to procure accounting entries.

For many purposes, it is fine to think of dollar loans as being loans of money.  But we should be careful not to fool ourselves into thinking that is what they actually are, because we need to understand how things work when that interpretation no longer fits.

53 comments:

  1. Isn't is possible to simply say that banks do not lend reserves, but claims on reserves. Thus when people pay with bank money, they pay with claims on reserves.

    Anton

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    1. Again, sometimes it is OK to say something like that. But the fact is that such a loan does not involve a transfer of a claim on reserves, nor does payment really involve a transfer of a claim on reserves. Even if you want to call a bank deposit a claim on reserves (and I think that is problematic in itself), there is no transfer of a deposit or part of a deposit, when a payment is made. If I make a payment, what actually happens is that I allow the bank to debit my account, in exchange for which the bank agrees to credit somewhere else to fulfill my instruction. That part of my deposit hasn't been transferred - it's been cancelled.

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  2. It's interesting to compare to other contracts like futures contracts, and let's assume either financial or physical settlement. If I buy commodity X at price Y for settlement in the future, am I loaning money? Does it depend whether I choose physical or financial settlement? In other words, is there something special about loans denominated in the settlement media (reserves), that implies reserves are loaned? My gut says what is "loaned" or the liability that one incurs (i.e. you're loaning your balance sheet) is how the contract is settled.

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    1. Why do you say the settlement media is reserves? On the whole, I don't think payments on most loans are settled through reserve accounts, and I wouldn't expect them to be specified that way. The agreement would normally just specify an account to be paid to or credited and that wouldn't be a reserve account.

      Normally a futures contract wouldn't be considered a loan, even where one leg is prepaid, but it's just convention really. We can construct financial contracts to say what we like, and sometimes what we've constructed doesn't have a name, so we have to decide if we want to call it a loan or something else. And sometimes loans and other things can look very similar. Once any initial transfer has taken place, a secured loan, a repo and a forward purchase contract all look remarkably similar.

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    2. "Why do you say the settlement media is reserves?" I'm thinking of the most general case, where the payments to the the debtor of Bank A (who pays interest on the loan for example) come from Bank B, which involves interbank settlement. But, you're right, all payments within one bank do not require interbank settlement.

      "a futures contract wouldn't be considered a loan". Agree, I was thinking in terms of general balance sheet liability. That futures contract involves real cash flow stress on the balance sheet (eg margin call) or accounting treatment (mark-to-market impact on income). The question is whether these can be considered explicit or implicit settlement in the unit of the account (reserves). Perhaps this goes back to the general question of balance sheet changes and implications for current and future cash flows.

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    3. Even most interbank settlement doesn't involve reserve movements, as far as I know, because it's mainly dealt with through intra-day clearing. Reserve movements are only for uncleared end-of-day balances. But this be different in different jurisdictions.

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  3. As I sit here looking at a green Federal Reserve Note, I remember that this note arrived here at the result of a trade of something, either my labor or property for this tiny piece of paper. It does not bother me much that a bank may have traded a government bond to the Federal Reserve before trading the note to me, nor does it bother me much to know that I have several more electronic versions of nearly identical notes on storage at the bank.

    On the contrary, it gives me considerable comfort to know that I have a few of these notes in bank storage because I do not need to have a large inventory of food, clothing or any other near term anticipated supply immediately at hand. I take comfort in knowing that I can trade my past earned, bank stored money for property. Money-in-the-bank is a good substitute for property-on-hand and offers much more flexibility.

    I am troubled that I do not know exactly the money/property ratio that I might find when finally I do make a trade. I know that generally, over the last fifty years or more, the ratio has been increasing which is a problem for money holders.

    While I like to get interest on stored money, I am much more interested in being sure that I get the money back from the bank when I want it. That makes government debt much more attractive than private debt so, if the bank wants to use my stored money, I would prefer that it be loaned to government. Maybe a foolish decision when government is far into debt but, so long as I have a share of the national pie equally large as others, I should be OK in the long run.

    It is all right to think of money as accounting abstractions but daily decisions are based on expectations of direct deposit-for-property trades.

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    1. It's problematic to think of banks as storing notes on your behalf, if for no other reason than that the amount of notes they actually hold is very small compared with the amount of deposits. Instead, try imagining that when you deposit your notes, you are in fact buying something from the bank. What you are buying is the agreement from the bank to credit your account, from which they then agree on your behalf as you request, but the important point is you have bought and paid for it and the notes belong to the bank now.

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  4. "For many purposes, it is fine to think of dollar loans as being loans of money."

    Not quite sure if I understand that thought. Or do you define bank deposits not as money?

    I think what makes bank loans special is that a bank can lend even with a balance sheet of zero. Anyone else can only lend when they have a positive asset (car, money etc.). A bank creates a deposit and a bond at the same time. While the phrase "Banks don't lend reserves." makes for a nice slogan it is a bit misleading. I'd rather prefer: "A bank does not consider its reserve position when making a loan."

    In regards to convertibility in currency: I think cash notes are just the physical sign that the government will protect the bank's customers (creditors). Deposit insurance has pretty much replaced the need for currency. On the other hand, I am sure that the CBs keep a stack of emergency notes at hand in case of a bank run.

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    1. I think the problem is that we use the term money in different ways, but the difference is quite subtle and we often don't notice it. I think it's OK to think of dollar loans as loans of money and to think of deposits as being money, but dollar loans are really not loans of deposits. At least not in the sense that deposits get transferred from one person to the next. If I make you a loan, you don't get part of my deposit. What happens is I "cash in" part of my deposit in return for the bank agreeing to make a payment as directed by you.

      So I think the more important "specialness" here is that of loans of money rather than loans of things, although I agree there are ways in which bank loans are special as well.

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    2. I agree that the term "money" seems not to have a generally accepted definition even in economics which hampers these discussions quite a bit. Nevertheless, I think your distinction between deposits and money feels to subtle to me:
      " If I make you a loan, you don't get part of my deposit. What happens is I "cash in" part of my deposit in return for the bank agreeing to make a payment as directed by you."
      If several farmers pool their corn in one giant store and then one lends another two tons by simple bookkeeping entry would you also say that the corn would not be transferred from one person to another?

      However, you seem more to question the ability of banks to "lend" something they don't posses already. Let me suggest the following:
      "Banks lend current income for future income. Incomes are strictly dominated in currency units." (I am a bit torn about using the term "income" as a bank loan would strictly speaking not be income. Still, someone needs income to pay back the loan.)
      What appears strange is that the banks do not have the income yet but generate it when a borrower comes in. But I think there is a close non-banking analogy: Think of a farmer who goes to a smith asking him to make a hoe by promising several bags of grain later. What they exchange is current labor for future labor. The hoe will only be made after the farmer promised payment. Payment will only be made after the farmer received the hoe. The difference comes in that at the end when the liabilities get resolved the hoe and grain remain whereas with bank deposits and bonds they get extinguished. In effect, the smith and the farmer will each end up with a positive asset. IMHO, the reason is we don't write the matter and the labor used for generating those assets on the liability side.

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    3. Your corn storage analogy is a useful one to consider. There are two possibilities here: 1) the farmers actually own the corn and the book-keeping records their ownership; or 2) the depository owns the corn and the farmers own rights under contractual arrangements with the depository. In the first case, farmers can transfer their corn. In the second case they can transfer their contractual rights. But in the second case, they can also amend their contractual rights through an agreement in which the depository agrees to also grant additional contractual rights to someone else. This is the closest to what happens with payments between bank accounts.

      It's not that I have a problem with banks lending something they don't own already. It's just that I see it like this. There are all sorts of contracts where A agrees to do something and B agrees to do something. Some of these contracts we would consider to be loans. Some of these contracts involve temporary transfer of an asset. But not all the contracts in the first set are in the second set.

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  5. Nick,

    "However, this is only an interpretation and it does not work well in all circumstances, particularly if we have certain contracts between A and B where we want to treat the actual contracts themselves as being money, such as if either A or B is a bank."

    A bank deposit is a loan from the depositor to the bank. The thing loaned to the bank is base money.

    Bank deposits are themselves used as a form of money by depositors, but this doesn't change the legal status of a bank deposit: a loan from depositor to bank.

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    1. I'm fine with the idea that a bank deposit is a form of loan. I find the idea that it is a loan of base money more problematic.

      I don't think the fact that the repayment obligation is determined by reference to the unit in which base money is measured makes it a loan of base money. If I make you a loan, where the repayment amount is calculated by reference to the price of Microsoft stock, that does not make it a loan of stock. A bank deposit is not generally repaid by delivery of base money (although it can be), but through the making of a payment under direction of the depositor.

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    2. A bank deposit is a promise to pay base money, either to the depositor or on their behalf. It's not a promise to pay anything else.

      "If I make you a loan, where the repayment amount is calculated by reference to the price of Microsoft stock, that does not make it a loan of stock"

      A bank loan is to be repaid with base money. However, if you have a loan to the bank outstanding (a deposit), both loans can cancel each other out, meaning repayment in base money is not required. Instead the bank just debits your deposit. This is completely different to your example above.

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    3. If you pay from your deposit to someone else at the same bank, the bank is not obviously paying base money on your behalf, so I'm not sure that's generally true. Nor if a payment on your behalf is covered by a movement in your bank's balance at the recipient bank. However, I am sure that you could map any payment made in dollars to a notional transfer of base money (including those within the same bank), by using hypothetical reserve sub-accounts for all bank customers and ignoring any netting. So, for example, if A paid B and they both banked with the same bank, it would go something like: credit A's reserve sub-account / debit A's regular account; credit B's reserve sub-account / debit A's reserve sub-account; debit B's reserve sub-account / credit B's regular account, with the second step being the transfer of base money. You could construct something similar to show notional transfers of base money at the start and finish of any bank loan and you could use that to say that it is the base money that is being loaned.

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    4. "If you pay from your deposit to someone else at the same bank, the bank is not obviously paying base money on your behalf, so I'm not sure that's generally true"

      The bank is borrowing from the other depositor. Instead of paying cash to them, which would settle the payment and the bank's debt, the bank borrows from them, by crediting a deposit to their account. So all that happens is that the bank shifts its debt to you over to another customer.

      "Nor if a payment on your behalf is covered by a movement in your bank's balance at the recipient bank"

      Same principle as above. Instead of paying reserves to the other bank, your bank simply cancels debts owed by that other bank to your bank.

      No need for sub-reserve accounts. If you have a bank deposit, that means the bank owes you money. The money they owe you is base money. If you demand to withdraw your money they don't offer to give you oranges of an equivalent value instead.

      A $100 bank deposit simply means the bank owes you $100. It doesn't mean that they have $100 in reserves sitting around with your name on it.


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    5. I have no prolem with any of that, except possibly "The money they owe you is base money". A bank deposit that could only be withdrawn in cash would be of limited use (although I presume that is not what you are suggesting). Instead, I'd expect to withdraw my money, by having freely convertible funds paid to a different account of my designation. It may be that the bank has to transfer base money to someone else to effect that payment, but that is by no means necessarily the case.

      I don't think we disagree on any of the mechanics here, just the interpretation.

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    6. Nick, say you lend me $10 in the form of a $10 note. I owe you $10.

      You could then instruct me to pay the $10 to someone else, rather than repay the $10 to you.

      But rather than giving that other person a $10 note, I could give them an IOU for $10. In other words I could borrow $10 from them. They might accept the IOU in place of the $10 note. What I am describing is how a bank works. The reason you can instruct a bank to make payments to other people is because the bank owes you money. People accept bank IOUs, i.e. deposits in place of base money because bank IOUs are promises to pay base money. If bank deposits were not promises to pay base money, they would be a quasi-currency like bitcoin.

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    7. Again, I don't disagree with anything you're saying on the mechanical side. Banks will also allow you to make payments by granting you credit, even where they don't owe you money, so you don't need the $10 note in this story. I also think there's more to why people are prepared to hold bank deposits than the possibility of receiving base money, even if we only interpret that as meaning that the last depositor gets the base money at the end of the world. But I'm not sure any of that's relevant to the question here. As I said, I think you could indeed describe a system in which each loan was a loan of notional base money and it would map to what actually happens, but I don't think it's a very useful interpretation, particularly if we want to consider how real base money matters.

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    8. Nick, do you agree that a bank deposit is a bank debt? Do you agree that the depositor is a creditor and the bank is a debtor?

      If so, what is the bank borrowing from the depositor? What thing settles the debt that it owes to the depositor?

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    9. "do you agree that a bank deposit is a bank debt? Do you agree that the depositor is a creditor and the bank is a debtor?"

      Yes.


      "If so, what is the bank borrowing from the depositor?"

      This is what I've tried to address in the post. Put another way, there are all sorts of contracts between A and B where A agrees to do something and B agrees to do something. Some of these contracts we would categorise as loans (although there is no precise dividing line between what is and what isn't). Some of these contracts involve temporary transfer of an asset, either in the actual sense of a transfer of legal or equitable title, or in simply in the sense of granting temporary use of the asset (really a sort of lease). But not everything in the first set has to be in the second set.

      "What thing settles the debt that it owes to the depositor?"

      The deposit contract is settled by the deposit taking fulfilling his obligations under the contract, which need not necessarily involve the transfer of an asset.

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  6. If Banks Don't Lend Reserves, What Do They Lend?

    They lend the power of their balance sheet.

    As they have more assets than the deposits written against them, they can absorb the loss in the possible event of the borrower defaulting on their loan contract. In that way vendors of goods and services more readily accept a bank deposit written against an IOU than they would accept that same IOU if it were issued by the borrower directly to them. And so the bank is lending its Financial credibility to the borrower who uses it to supplement their pledge to honor their loan document. This is functionally realized in the borrower having more spending power with a deposit than they would with a personal IOU.

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    1. I think this interpretation is fine, but it doesn't help us with what is the actual thing they are lending. Banks can lend securities as well as dollars. In that case they may also be lending their balance sheet but they are also definitely lending securities.

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    2. What banks lend is not contentious. They temporarily lend the backing provided by their capital.

      See the book A Mitchelle Innes -What is money

      If by "the actual thing the banks are lending" you mean what is the the value of what they are lending then the answer is the value of the good or service sold the borrower in the process of redeeming their loan

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    4. Banks do not lend dollars. What the lending process entails is that they write an abstract accounting entry that is denominated in dollars against real loan documents on a T account.

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    5. If we consider a securities loan made by a bank, then we can ask the question "what is the actual thing the bank is lending" and the answer will be "Microsoft stock" or something like that. That's not a question about the value of what is loaned. It also doesn't mean that is incorrect to say that they lend their balance sheet. It's just taking the same question in a different context. The point is that it is not obvious what the equivalent of the Microsoft stock is when we consider a dollar loan.

      Although I talked in my initial reply about banks lending dollars, I agree that that is problematic. That's sort of what this post is about.

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    8. > Nick
      this, on the face of it, it is quite simple, people want to buy things with IOUs , and banks facilitate it.
      ,

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    9. > Nick

      Banks do not lend anything in the sense that you are grasping for. What they do is endorse or underwrite a borrowers pre existing bond. The problem is the semantics of the words that predate the purely credit system of banking that confuses the issue . A borrower does not borrow anything in the conventional sense of the word, but it is still used to describe the issuer of a bond.The deposit that results from a loan agreement is not lent to the borrower it is simply an accounting entry referring to the borrowers bond lodged with the bank., the dollars enumerated in the deposit are an ledger entry referring to the dollars of the customers pledge.

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    10. They are not lent to the customer, - they are derived from the customer

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    11. I think you're making the same point that I made in the post.

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    12. Hi Nick


      Yes, I think I am making the same point as you did in the penultimate paragraph of your post.

      The processes where deposits are created, traded and repaid, can all be endogenouse between a bank and its customers. Reserves are an add on that facilitates transactions between banks, a commercial arrangement , not a fundamental part of the credit process.

      Too much emphasis is put on deposits in these discusions as well. For example It is quite possible in principle to have a functioning credit based money system with no deposits , and no bank notes. Persons issue there own transferable Bonds to buy goods and services and anyone holding a bond can exchange it for goods and services. Bond issuers alleviate themselves of the debt obligation by obtaining another persons bond and presenting it for exchange with the holder of their bonds or providing goods and services to the holder of their bond directly. That scenario works in principle and I think that picturing such a basic scenario helps to identify the role of the accounting terms used in the actual banking system and the framework they are in.

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    13. I would agree with all of that.

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  9. t depends what you mean by money and what you mean by reserves.

    I guess by reserves you mean deposits at the central bank and banknotes in vaults of the bank. This is also called the monetary base. Do you call this money or not? It's certainly not considered "money" by the orthodox economists. M1 does not cover the monetary base. Qualitatively this is a different type of 'money'.

    What banks are lending are promises to deliver paper bills. But that is not a very helpful explanation as to the nature of things.

    To me the shortest and clearest thing to say is that banks are transforming private promises to deliver value into bank promises. Banks "universalise" and "standardise" promises so they can be swapped easily between the economic agents.

    Think of it this way. I promise to delver to you 100 tonnes of steel next year and I write down on paper my promise. You go to a third party, a dealer of promises/trust (i.e. a bank) and that dealer takes my promise and issues to you its one dealer/banker promise that is accepted by a wiser circle people because its done by a professional. The dealer will of course not do this for free, it will discount your steel promise. It will issues to you a more abstract, fungible promise that is equivalent in value to 100 tonnes of steel minus the discount that stays with the dealer.

    The reason the dealer does this is because the dealer trusts me (I am a steel mill). But nit everybody else trusts me. The dealer is widely trusted and when it issues its promises they are accepted by most other entities. So the dealer is a trader of trust.

    That what banks do.

    Central Banks exist to backstop such dealers of trust.

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    1. "it depends what you mean by money"

      Therein lies the source of much confusion in economic discourse.

      Banks do a lot more than factoring trade credit, of course, and in fact that probably accounts for a relative small part of banking. It's not always characterised as lending either, although there are obviously economic similarities. However, I think the same issue applies, in that it is difficult to say that there is anything that the bank is actually lending when it engaes in factoring.

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    2. It is more substantive than only the notional trust in a professional . There is also a real economic quantitative value that the bank lends . Its capital. The pooling of promises made to the bank make the banks promise, drawn against that pool, more tradable than one of the promises that makes up the pool.

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    3. I don't think banks facilitating credit can be a characterized as factoring because , unlikes bank facilitating credit, factoring does not create new spending power in the economy.

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    4. I'm not keen on the term "spending power" or the alternative "purchasing power" in this context, because I think it is the source of much confusion. However, I will say that factoring (when carried out by a bank - which is what Mihail was talking about) does create deposits in the same way lending does. In return for transfer of the receivable, the bank credits a deposit account of the seller.

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    5. Oh I see Banks do actually engage in factoring, I thought it was just an illustration by Mihail.
      .
      If the verbs lending and borrowing are avoided along with the nouns lender and borrower what are they to be replaced with. On occasion I have used bond issuer and bond monetizer , but I'm not sure what the consensus is on the definition of monetization, It used to have a very precise meaning but nowadays it seems it is used very casually.

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  10. Nick, O/T: I would have thought that finding plots of the price level, in which a theoretical model of the price level is compared alongside the empirical data would be super easy, but apparently it's not. I mean something like this:

    http://4.bp.blogspot.com/-LnhMz8TjIjo/U7NFZRdL48I/AAAAAAAAFPM/w8tJKBSOciw/s1600/oh+canada+gdp+and+mb.png

    You're a modeler, right? Any idea where one might find other examples? (the author of the above chart can't find any others to compare with: When he uses google he only finds his own.

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    1. I think most empirical models would compare actual and estimates for the inflation rate rather than the price level. It doesn't make much sense to look at a price level estimate unless you have a exogenous nominal time series, and if you do then it's generally going to show a strong correlation to the price level anyway. Rate of change is much more meaningful.

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    2. Cheers, Nick.

      Inflation is a bit easier to do because it eliminates memory-less stochastic process effects (a one-time jump in inflation falls out in the rate as a delta function/spike, while it somewhat permanently impacts the price level):

      http://informationtransfereconomics.blogspot.com/2014/05/out-of-sample-predictions-with.html

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  11. If they do not lend reserves, what is it that they do lend?


    I would go so far as to ask, do banks actually lend anything (of their own)?

    If we think of two types of bank 'loans', we can specify A & B as per your examples above as follows:



    Case 1: Bank finances the purchase of an existing asset, say a house.

    A is the seller of the house whereas B is the recipient of the bank loan which he then exchanges for the house. By doing so, he issues an IOU to the bank that promises to earn, i.e. produce, the equivalent in value of the house (plus some) over the course of the loan. The final value of the agreement is defined by the ability of the borrower to live up to his promise. That also means though, that the value implied in the loan doesn't exist at the time the loan is made. B is borrowing time to create the value of money.


    Case 2: Bank finances the wage bill of a company.

    A in this case are the workers who agree to use their productive capacities in exchange for company B's IOUs up front. The IOUs have been underwritten by the bank wich makes them fungible.

    Both cases are fundamentally different from your example with the car and and somewhat different from your example with the securities. In your examples, there is some real, tangible asset that already exists and that the loan (IOU) can be considered a reference of. Either specifically, in the case of the car, or more abstractly (and more contingent on future events) in the case of securities. But with bank loans, the equivalent real value of the loan does not exist at the time the loan is made and can only be confirmed in retrospect.

    The role of the bank, in both cases, is to assess risk they take on and manage their buffer of capital accordingly, as well as to apply equal lending standards across the industry and across time, so as to guarantee that their liabilities remain a: universally acceptable and fungible and b: stable in value over time. This is not necessary if the real assets already exists, thus there is no need for banks for such types of 'lending'.

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    1. Yes, I would largely agree with this.

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    2. In case 1, I notice that party A, the seller of the house walks away with a money asset that is equivalent to property. In case 2, the workers walk away from the trade with an money asset that is equivalent to property.

      Going back to the original question and title, "If Banks Don't Lend Reserves, What Do They Lend?", my observation is that the banks are lending property. If so, then the banks must first have property to lend but who is the owner of the property to be loaned?

      My simple answer is that the first depositor owns the property. A subsequent loan of the initial deposit results in two claims on the same property.

      Money is often thought of as an obligation of government. I think it is better thought of as a Certificate of Appreciation that has morphed into fiat money.

      In other words, money is first issued in exchange for labor or material. So long as the money exists, it always carries the character of the original exchange. Thus, money always has the character of labor or material that was part of the original transaction that brought the money into existence.

      So, if banks are not lending reserves, then banks are lending "property". Money is always an asset, and assets are always someone's property.


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    3. The value in obtaining and spending credit is the value of the goods and services that are purchased with it , so it is the value of them that is being borrowed. The bank doesn't create the goods and services that are purchased by the IOU issuer with the credit, or the ones due to be sold by the IOU issuer in the process of repayment of the credit , and so the loan is borrowed from the productivity or wealth of the community of people in which the bank operates.

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