tag:blogger.com,1999:blog-5362801348602268473.post3903436319193251337..comments2023-11-22T00:49:32.887-08:00Comments on Reflections on Monetary Economics: Bank Lending and the Use of DepositsNick Edmondshttp://www.blogger.com/profile/15342983814699700396noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-5362801348602268473.post-27571204087890412962015-04-20T11:21:43.332-07:002015-04-20T11:21:43.332-07:00Thanks. And yes, that would be very much my view t...Thanks. And yes, that would be very much my view too. Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-63137081738827467872015-04-20T08:17:06.394-07:002015-04-20T08:17:06.394-07:00This is a good post. In general, we should be tran...This is a good post. In general, we should be translating any statement about quantities of money into a statement about the liquidity position of balance sheets as a whole. This is not always easy to do, I think.<br />JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-77585305573898639012015-03-19T04:52:42.333-07:002015-03-19T04:52:42.333-07:00This comment has been removed by the author.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-57596058678363514742015-03-19T04:11:35.966-07:002015-03-19T04:11:35.966-07:00Interest rates that attract deposit holders to len...Interest rates that attract deposit holders to lend the deposits do reduce the lenders spending on consumption or spending on other investments.<br /> That is why banks as intermediaries models are wrong and endogenous models are correct. Credit creation and banks have to be modeled differently from non banks.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-79786393807113174032015-03-18T09:17:20.230-07:002015-03-18T09:17:20.230-07:00I certainly believe increased lending can lead to ...I certainly believe increased lending can lead to higher asset prices. In fact, this is a feature of my UK macro model. But that model does not include banks and makes no distinction between lending by banks and lending by non-banks. What I have called household monetary assets (and I admit have labelled "deposits" in the balance sheet) is just a measure of total household financial assets excluding equity and pension rights.<br /><br />In my opinion both types of lending would tend to lead to higher asset prices. For example, I am pretty sure that the expansion of lending through shadow banking contributed to the rise in house prices pre-crisis.<br /><br />But I would not go so far as to say that bank lending and non-bank lending were equivalent. This old post of mine may be what you are getting at. http://monetaryreflections.blogspot.co.uk/2013/09/banks-non-banks-and-interest-rate-effect.htmlNick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-80761649882425721672015-03-18T08:01:33.984-07:002015-03-18T08:01:33.984-07:00Nick, I wouldn't dare to say that X is constan...Nick, I wouldn't dare to say that X is constant. The point I tried to make is that if:<br />- net bank lending leads to the creation of extra deposits (contrary to net non-bank lending),<br />- deposit owners have limited control over the amount of deposits (hot potato effect),<br />- deposit owners prefer to hold a certain (variable) fraction of their portfolio in deposits, <br />- this (variable) fraction is not (significantly) related to the propensity of banks/lenders to create loans/deposits,<br />that deposit owners, when confronted with an increasing fraction of deposit in their portfolio (due to increased bank lending), may start buying assets with these deposits, which may lead to higher asset prices.<br /><br />In fact, thinking about it somewhat more, I could even imagine that in case of very high net non-bank lending relative to net bank lending, the opposite could possibly happen: the fraction of deposits in aggregate non-bank ownership goes down, which could induce asset holders to sell asset to increase their deposits fraction, which may lead to lower asset prices. <br /><br />And Ramanan, thank you for your link. I am already a frequent visitor of your website!<br /><br />AntonAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-41136488699956355242015-03-18T01:50:25.870-07:002015-03-18T01:50:25.870-07:00"..they would like to have X% of their financ..."..they would like to have X% of their financial assets in deposits.."<br /><br />That analysis assumes X is fixed and part of what I've been trying to say here is why I think that in reality X can be very variable, because there are very close substitutes for most bank liabilities. People sometimes think bank liabilities are special because they are money, but the vast majority of these liabilities are not in transaction accounts. My last post on market-based finance was very much to do with changing portfolio preferences. Although there will be examples where the ratios remain stable, one of the key characteristics of the crisis was the relative growth rates of traditional bank lending and alternatives (see e.g. Gallin, J (2013) Shadow Banking and the Funding of the Nonfinancial Sector)<br /><br />If you assume X is fixed then you can directly link total lending to bank lending, because they will stay in strict proportion. But that is then another case where you may not need to (explicitly) model banks because you can deduce bank lending from total lending, just as you can the reverse.<br /><br />I notice that I commented on that Steve Waldman post (comment 33), and my comment was broadly in line with what I've been saying in these last posts.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-47189061121677728302015-03-18T01:18:43.939-07:002015-03-18T01:18:43.939-07:00Hi,
You may be interested in this post
http://w...Hi,<br /><br />You may be interested in this post <br /><br />http://www.concertedaction.com/2014/03/17/reconciliation-of-the-supply-and-demand-for-money/Ramananhttp://www.concertedaction.comnoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-41383863464974643352015-03-17T15:02:45.439-07:002015-03-17T15:02:45.439-07:00Nick, thank you for writing an entire post in resp...Nick, thank you for writing an entire post in response to my question! But I am afraid that it does not quite cover what I meant, probably because I did not use the correct wording. What I meant is a hot potato effect in terms of portfolio choice, based on a post of Steve Waldman:<br />http://www.interfluidity.com/v2/4522.html<br /><br />Maybe I can explain it best with an example. Assume that people have a certain aggregate portfolio preference, and that they would like to have X% of their financial assets in deposits, and the rest in other financial assets. Furthermore, assume that the people who own these deposits (group B) are generally other people than those who take bank loans (group A), and that the volume of bank loans provided to group A is not related to the preference of group B to hold deposits.<br /><br />In that case, if the volume of bank loans provided to group A increases relative to other financial assets, group B is confronted with an amount of deposits which is larger than they want to hold. And thus they will start using these deposits to buy other types of assets, driving up the price of these other assets in the process, until the relative amount of deposits in their portfolio is back to X%. <br /><br />To us an example from my home country (The Netherlands; private domestic + government sectors):<br />- from 1995 to 2013 the amount of deposits increased a factor 3,4<br />- in the same period, the amount of deposits increased a factor 1,7 relative to GDP<br />- but as a fraction of total financial assets, the amount of deposits remained at approx. 10%<br /><br />Furthermore, I am aware of the fact, as Ramanan and Max point out, that banks can net create/destroy deposits by buying/selling assets.<br /><br />What do you think about this view?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-19802247260862265892015-03-17T08:54:41.825-07:002015-03-17T08:54:41.825-07:00YesYesNick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-46824201429226159682015-03-17T08:54:24.797-07:002015-03-17T08:54:24.797-07:00I think I'd agree with all of that.I think I'd agree with all of that.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-55166963945994746952015-03-17T08:40:14.655-07:002015-03-17T08:40:14.655-07:00A couple other (perhaps too obvious) points:
1) Ba...A couple other (perhaps too obvious) points:<br />1) Banks don't need to originate loans to create deposits (they can buy somebody else's bond)<br />2) Bank loan origination need not increase the supply of deposits (since banks can fund themselves with bonds and equity).<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-59936388959836115482015-03-17T08:37:46.207-07:002015-03-17T08:37:46.207-07:00"purchase of a government bond to a bank"..."purchase of a government bond to a bank"<br /><br />should read:<br /><br />"purchase of a government bond from a bank"Ramananhttp://www.concertedaction.comnoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-60065445219003048412015-03-17T08:34:55.857-07:002015-03-17T08:34:55.857-07:00Nick,
I think the general notion which you quote ...Nick,<br /><br />I think the general notion which you quote from the commenter you quote:<br /><br />"... as deposits cannot be destroyed by people who did not take loans ..." <br /><br />is quite inaccurate as not just loans create deposits and the reverse (destruction), bank bond buys also changes the money stock. Banks are dealers in the government bond markets and many other markets and a simple way for deposits to be destroyed is a purchase of a government bond to a bank who is quoting a bid/ask. I think this is not a minor point as it plays a role in theoretical arguments. (Very few people point out this mechanism). <br /><br />Also, there is a mechanism for people foregoing consumption to make a loan. It can be argued that consumption function can be a function of interest rates and if the interest rate adjusts, some economic units will lend instead of consume and if it adjusts more, more units will consume less to lend more. But it's just that this mechanism has less relevance. A lot of things neoclassical/monetarists say are true, it's just that these things are minor compared to a bigger dynamics at play.<br /><br />So while I obviously don't disagree with you, I think one also has to argue that this "price-mechanism" is wrong intuition: one really needs super-high lending rates for this to have any sizable effect. Ramananhttp://www.concertedaction.comnoreply@blogger.com