Dan Kervick: Reserve Balance Misconceptions

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Yves here. While it may seem a bit unfair to make an example of Mark Thoma, since the statement he makes about bank reserves is conventional, Kervick’s post is a useful reminder of why this sort of thinking is misleading.

By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives

Mark Thoma, writing in the Fiscal Times, has called for the Federal Reserve to take “bold, creative moves” to alleviate unemployment. Thoma’s suggestions contain nothing novel, and I suspect Thoma is fully aware that what our economy really needs is a fiscal expansion from the federal government. But perhaps these tired calls for additional central bank string-pushing deserve some sympathy. Many have concluded that the attempt to get Congress and the White House to act to increase government spending are futile, since the elected branches of our government seem unwilling to do what needs to be done out of some combination of incompetence, iniquity, ignorance, ideology and insanity.

But Thoma’s argument contains a few puzzling passages that repeat and reinforce some common misconceptions about the relationships among spending, bank lending and bank reserves; and it is worth spending a few words to challenge these misconceptions once again, because to the extent that they still have wide currency they stand in the way of a clear grasp of the nature and limits of monetary policy options. Thoma first makes the following claims about bank reserves:

One of the main ways the Fed stimulates the demand for goods and services is by giving the banks more money to lend through what are known as open market operations. But if this money simply piles up in banks as excess reserves instead of being used to make new loans to consumers and businesses, it won’t have any effect on the demand for goods and services and it won’t cause prices to rise.

Excess reserves are, in fact, piling up in banks –– from near zero before the recession to around $1.75 trillion today –– instead of flowing into the economy and offsetting the fall in demand from the recession. Because of this, demand is too low, unemployment is too high, and inflation has consistently been running below the Fed’s two percent target.

He then goes on to suggest that the Fed should impose a negative rate of interest on excess reserves:

But now, when unemployment is the problem, the Fed seems unwilling to push the limits to the same degree. For example, the Fed could charge banks for holding excess reserves instead of paying them interest on those reserves as it does now. With such a penalty in place banks would have a much larger incentive to make loans, and some of the piled up reserves would leave banks and turn into new demand for goods and services. That’s just what the economy needs.

Let’s set aside for now the questions of whether the Fed can do anything in the present environment to stimulate demand and hiring, and whether setting a negative interest rate on excess reserve balances would help accomplish those ends. Those have been persistently controversial questions. But what should not be controversial is that the picture Thoma paints of excess reserves piling up in reserve accounts instead of “leaving” the banks and “flowing into” the economy is very inaccurate. This is easy to see by considering a few hypothetical examples.

Suppose Maple Valley Bank makes a new $100,000 loan to Granite Construction. The bank creates a new demand deposit account for the construction company, and credits $100,000 to that account. In exchange, it receives from Granite Construction a promissory note promising the return of the $100,000 plus a certain amount of interest to be paid over a defined period of time. At this point Maple Valley bank’s total reserves have not changed at all.

Now suppose Granite Construction begins to spend the $100,000 it has been loaned, mainly by writing checks against the new account. Some of those checks are written to other companies and individuals who also bank at Maple Valley Bank. When those checks are deposited back at Maple Valley Bank, and the payments are settled and cleared, the result is that the deposit accounts of the payees are credited by the appropriate amounts and the deposit account of Granite Construction is debited by exactly equal amounts. Again, there is no change in Maple Valley Bank’s reserves.

However, some of those checks will go to companies and individuals who bank at other banks. Suppose Granite Construction issues one check to Seacoast Cinder Blocks for $25,000, and another check to Rob Handy, a temporary day laborer, for $200; and suppose that both of these payment recipients bank at Ridge Bank, another local bank, where they deposit their checks. This time, when the payments are settled and cleared, a payment has to be made from Maple Valley Bank to Ridge Bank for $25,200. At the regional Federal Reserve Bank where both banks hold their reserve accounts, the reserve account of Maple Valley Bank is debited by $25,200 and the account of Ridge Bank is credited by $25,200. But note that while the reserve balances of the two banks have changed, this operation obviously does not reduce the total reserves of the banking system at all.

Now, some of the total reserves held by banks are held in the form of vault cash, and it is possible for those reserves to temporarily leave the banking system entirely. For example, Rob Handy now has $200 more in his account at Ridge Bank. Suppose he withdraws $40 in cash to meet his out of pocket expenses. The total reserves of Ridge Bank have been reduced by $40. Over the next few days, Rob buys some doughnuts at the Donut Kettle, a couple of lunches at the Sally’s Sandwich Nook and few groceries at Biddleford’s Supermarket. Those local businesses collect the cash payments and deposit them the next day at their banks, where the money goes right back into bank reserves as part of vault cash.

So cash withdrawals made for the purpose of spending also do not change the level of bank reserves, since that cash is continually flowing both out of some bank vaults and into other bank vaults as the spending takes place. Now, it is always possible that Rob puts the cash under his mattress or leaves it on top of his dresser for an extended period of time. To the extent that this might happen on a widespread basis over some period of time, it is possible that aggregate bank reserves might be reduced for that period of time. But then the expansion of lending would be having no effect on spending. If an increase in lending actually stimulates spending, cash withdrawals are always making their way back into bank cash reserves in very short order.

So even if some bolder form of monetary policy can be effective in stimulating more lending and spending, one should not expect to see the impact of that stimulatory policy show up in the form of overall reductions in bank reserves, with excess reserves flowing out of reserve accounts and bank vaults and “into” the economy. And by the same token, one should not look at the phenomenon of bank reserves “piling up” as evidence of the failure of monetary policy to cause those reserves to be loaned out. Reserves in the aggregate are not loaned out. Apart from relatively small fluctuations in the amount of physical cash being held by the public, bank reserves don’t leave the banking system.

I really think it is important here for pundits and informed members of the public not to lose hope about the possibility of fiscal expansion. We have had four years of confusion and time-wasting debate about various misguided austerity theories, but those theories are now in the process of crashing and burning. We have yet to see what can happen if economists, economics bloggers and the public begin to mobilize a call for intense political pressure on Washington (and other governments) to reverse the austerity push and expand spending.

The US government is an extremely large public enterprise, and a tremendously important part of our national economy. It produces a great number of public goods and services and employs millions of people, and it also helps fund state and local governments. It is a consumer, investor and employer. But throughout the Obama administration, and especially following the election of the reactionary Republican Congress in 2010, we have seen a massive decrease in government consumption and gross investment, and unprecedented reductions in government employment. Public enterprise is collapsing at a time when we need it most, both to help stabilize the economy and to drive the next stage of national development and progress. The best way for government to stimulate demand is to expand its role as a demander. The largest potential customer in the known universe – the United States government – has to step up its purchases, step up its hiring and step up its leadership role in the economy.

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  1. Chris Engel

    This article is wrong on a number of levels. Kervick immediately jumps at the opportunity to twist Thoma’s discussion on excess reserves as some misunderstanding of how central banking and loan creation works.

    Thoma is referring to NEGATIVE RATES ON EXCESS RESERVES, this is extremely different from negative rates on all reserves, and there’s a difference between excess reserves piling up and “reserves” piling up.

    Kervick strawmans Thoma by ignoring the nuance that Thoma is suggesting we disincentivize EXCESS reserve hoarding by taxing them (instead of paying IOER) — to encourage the banks to lend money which DOES reduce excess reserves (but won’t reduce total bank reserves in the system of course).

    Lending money doesn’t reduce reserve balances in the system (the central bank controls reserves), but if you disincentivize holding of EXCESS reserves, by taxing them (not ALL reserves, just in excess of statutory req) then you may encourage banks to create loans which would turn some “excess” reserves into, well, just normal reserves not in excess of statutory requirements :) (by the way, on the negative rate front, Denmark has shown that this isn’t a crazy idea after all, and this includes negative deposit rate! — http://ftalphaville.ft.com/?p=1488492 )

    Kervick writes:

    “But note that while the reserve balances of the two banks have changed, this operation obviously does not reduce the total reserves of the banking system at all.”


    “one should not expect to see the impact of that stimulatory policy show up in the form of overall reductions in bank reserves”

    This is fine, except Thoma said nothing of reductions in bank reserves, merely EXCESS reserves. He was specifically addressing excess reserves and how to mobilize them (taxing them so they aren’t hoarded, incentivizing loan creation that “mobilizes” excess reserves by letting them serve as a loan base instead of in excess reserve accounts)

    Reducing “excess reserves” means that loans have been created that increase required reserves in the system and turn those “excess reserves” into normal reserves.

    And again:

    “And by the same token, one should not look at the phenomenon of bank reserves “piling up” as evidence of the failure of monetary policy to cause those reserves to be loaned out.”

    The part of Thoma’s article you’re referencing is about excess reserves piling up, which (again) is not the same as reserves piling up. We know that the central bank controls the amount of reserves in the system, but EXCESS reserves do pile up, depending on how many loans are created that occupy reserves within the statutory limit. He’s writing for a broader audience and it’s actually not incorrect to say that

    Here’s the quote exactly from Thoma:

    “With such a penalty in place banks would have a much larger incentive to make loans, and some of the piled up reserves would leave banks and turn into new demand for goods and services. That’s just what the economy needs.”

    Keep in mind, this is written for a wider audience — this is perhaps the only controversial thing he wrote. Because technically it’s not correct (the excess reserves aren’t “leaving” banks…), but in principle it is correct. How are excess reserves mobilized into the economy? Well, currently, the Fed just pays banks interest on them and that flows into the bottom line of banks which is still the real economy. BUT, what Thoma is saying is that when banks create loans it’s a form of mobilizing those excess reserves (which suddenly become normal reserves when more loans are created, ceteris paribus). This is actually correct, and not misleading for a non-technical actor.

    The points made by Kervick are fine, it’s just inappropriate to misconstrue Thoma as making an argument about total reserves when he’s clearly addressing the issue of excess reserves, which do pile up (through Fed creation of them, and through banks not creating loans that would reduce excess reserves), and which CAN be reduced through private bank loan creation WITHOUT the Fed doing a damn thing.

    1. Chris Engel

      Oh there was one more thing I forgot.

      I really think it is important here for pundits and informed members of the public not to lose hope about the possibility of fiscal expansion.

      Let’s talk facts, basic mechanics here for a second.

      House = Owned by teahadists, with no real centrists or stragglers who would help get any fiscal stimulus bill passed (and all appropriations run through the House, this isn’t a technicality). This situation won’t change until 2016, unless 2014 becomes some huge reversal against the GOP.

      Senate = Filibustered out. Again, Republicans who helped get ARRA for example won’t be there to pass another stimulus beyond the 60 vote threshold, and the Senate can’t do anything spending-wise without House agreement.

      Obama = an extremely weak president, unable to mobilize his own agenda, and publicly express helplessness at the obstinance of the opposition party and congressional gridlock. Romer gave him a blueprint for a $1.9 trillion stimulus, which Summers beat down, and Obama negotiated with himself again because only a handful of republicans helped get it passed who would have voted anyway without concessions!

      But, leaving aside the wishy-washy democrats, we’ve got half the country deadset on cutting spending and destroying the economy — and the other half too skittish to stand up for stimulus and the middle class.

      I think most informed individuals and pundits have given up on the idea of fiscal stimulus, that’s why we’re seeing Krugman push for a higher inflation target (4% instead of 5% — i’ve pushed for 4-5% for a while now, or ideally NGDP level targeting) — most people realize only the Fed can fix this given the political quagmire going on. So on the fiscal front, the issue is more preventing any more cuts from going through. It’s hard enough to prevent the sequester, but can you imagine getting through a stimulus spending plan? Not possible. I don’t think there is much reason to think this is something worth hoping for with the vague chance of economics bloggers revolting to demand a new deal.

    2. Ben Johannson

      The central bank controls quantitites of reserves only at the zero lower boundary. Otherwise the Fed has less control than anybody.

    3. jake chase

      The last time I looked, the Fed was paying 3% on reserves (or possibly on excess reserves). Meanwhile, in the so called real economy, interest obtainable by savers hovers around 0.1%, mortgages to ‘qualified’ borrowers approximate 2.5% fixed, so no bank in its right mind would go out looking for loan business, apart from financing commodity and stock speculators against very substantial margin. Even better for the megabanks (what someone quite properly called the ‘maggot banks’), they can continue selling worthless assets to the FED and piling up these excess reserves, until Ben calls a halt to QE, which any sensible person knows isn’t ever going to happen, because if it did happen the entire speculative bubble (and the Empire it now sustains) would collapse.

      If the Congress and the Executive Branch were not the cancer on our society which they clearly are, aggressive fiscal policy could not only reinvigorate the real economy but also begin coming to grips with the physical deterioration of the infrastructure and the absence of a coherent peak oil energy policy. What the existence of this cancer guarantees, however, is that any fiscal iniatives will be engineered for the exclusive benefit of our predatory corporations and their loot obsessed executives, so we face the classic Catch 22 situation, which is why my suggestion for what it’s worth remains sauve qui peut.

      1. from Mexico

        jake chase says:

        What the existence of this cancer guarantees, however, is that any fiscal iniatives will be engineered for the exclusive benefit of our predatory corporations and their loot obsessed executives…


        A similar sentiment is expressed by Kevin Phillips:

        No previous leading world economic power has enjoyed a full-fledged manufacturing renaissance after becoming unduly enamored of finance.

        –KEVIN PHILLIPS, Bad Money

        Other people who study history, however, are more optimistic. Take Peter Turchin, for example. He argues that once what he calls “imperiogenisis” wanes and “imperiopathosis” sets it, that the possibility exists that the empire can cure itself. Thus, he concludes: “A life cycle of a typical imperial nation extends over the course of two, three, or even four secular cycles.” Furthermore, he is not nearly so deterministic: “The dynamics of real human societies cannot be accurately predicted far in the future because of the nature of chaotic behavior, free will, and natural disasters.”

        Bryan Ward-Perkins is also less deterministic in his thinking:

        All empires have, sooner or later, come to an end; so it is a reasonable assumption that the Roman empire was destined at some point to fall or to disintegrate. But this does not mean that the fall of the West had to occur during the fifth century; indeed, at a number of points along the line, things might have gone differently, and the Roman position might have improved, rather than worsened. Bad luck, or bad judgment, played a very important part in what actually happened.

        –BRYAN WARD-PERKINS, The Fall of Rome and the End of Civilization

        Those staking out the opposite extreme of you and Phillips include Martin Luther King:

        Finally, the method of nonviolence is based on the conviction that the universe is on the side of justice. It is this deep faith in the future that causes the nonviolent resister to accept suffering without retaliation. He knows that in his struggle for justice he has cosmic companionship. This belief that God is on the side of truth and justice comes down to us from the long tradition of our Christian faith… So in Montgomery we can walk and never get weary, because we know that there will be a great camp meeting in the promised land of freedom and justice.

        MARTIN LUTHER KING, “Nonviolence and racial justice”

        Also on the opposite pole of you and Phillips we find the Positivists, the philsosphy which informs both Marxism and market fundamentalism. John Gray explains:

        There are many ways of being modern, some of them monstrous. Yet the belief that there is only one way and that it is always good has deep roots. From the eighteenth century onwards, it came to be believed that the growth of scientific knowledge and the emancipation of mankind marched hand in hand. This Enlightenment faith — for it soon acquired the trappings of religion — was most clearly expressed in an exotic, sometimes grostesque but vastly and enduring influential early nineteenth-century intellecutal movement that called itself Positivism.

        The Positivists believed that as societies came to be based on science they were bound to become more alike. Scientific knowledge would engender a universal morality in which the aim of society was as much production as possible. Through the use of technology, humanity would extend its power over the Earth’s resources and overcome the worst forms of natural scarcity. Poverty and war could be abolished. Through the power given it by science, humanity would be able to create a new world.

        There has always been disagreement about the nature of this new world. For Marx and Lenin, it would be a classless egalitarian anarchy, for Fukuyama and the neo-liberals a universal free market. These views of a future founded on science are very different; but that has in no way weakened the hold of the faith they express.

        Through their deep influence on Marx, Positivist ideas inspired the disastrous Soviet experiment in central econmic planning. When the Soviet system collapsed, they re-emerged in the cult of the free market. It came to be believed that only American-style ‘democratic capitalism’ is truly modern, and that it is determined to spread everywhere. As it does, a universal civilisation will come into being, and history will come to an end.

        This may seem like a fantastical creed, and so it is. What is more fantastic is that it is still universally believed. It shapes the programmes of mainstream political parties throughout the world. It guides the policies of agencies such as the International Monetary Fund. It animates the ‘war on terror’…

        [M]arxists and neo-liberals…are convinced they can remake the human condition. If there is a uniquely modern myth, this is it.

        –JOHN GRAY, Al Qaeda and What It Means to Be Modern

        The evolutionary biologist David Sloan Wilson asserts that secular “stealth religions” such as Positivism, which has reemerged in its present-day fundamentalist reincarnations such as “New Atheism” (i.e., Richard Dawkins, Daniel Dennett, Sam Harris, Christopher Hitchens) and market fundamentalism, are far more dangerous than traditional religions:

        STEALTH RELIGION: A belief system that departs from factual reality to motivate a given suite of behaviors without invoking supernatural agents.

        The absense of supernatural agents…is just detail. And surely when most people complain about religion, what they’re really complaining about are departures from factual reality… That infused Dan [Dennett’s] talk. And so if we’re worried about that for religions, we really have to worry about it for stealth religions, because after all they do a much better job of masquerading for reality than a real religion, in which they’re so dopey to the nonbeliever that you immediately know they are departures from factual reality.


        1. jake chase

          Mexico, your academic virtuosity is impressive, but experience suggests this kind of thing adds up to bullshit and platitudes.

          Unless you are independently wealthy, I suggest selling or mortgaging the old books and using the money to buy tools.

          1. PaulArt

            You mean everyone should conform to the Libtard BS you contribute all the time? I have discovered veritable treasure troves due to the links and info that Mexico has provided. If you have nothing positive to say, why don’t you go spend some time on Rand Paul’s website or re-read Atlas Shrugged again?

        2. Lexington

          You read much but still lack understanding.

          The arguments you quote by Peter Turchin and Bryan Ward-Perkins are tautologies. Turchin’s depends on how one defines a “secular cycle” and Ward-Perkins’ claim that the Western Roman Empire didn’t HAVE to fall when it did could be made about absolutely any historical event that happened anywhere.

          Martin Luther King’s argument is that we should derive strength from faith in God. Again, that’s a tautology as applied to Christians and irrelevant to non Christians. Also, it is not in any case an argument against the “inevitability” of imperial decline.

          I have no quarrel with John Gray and David Sloan’s points about positivism, but again they aren’t directly relevant to issue Kevin Phillips is addressing.

          The bottom line is that it is very difficult to find a historical example of an empire that has actually reversed its own decline. There are plenty of good reasons for this including, to name a couple off the top of my head, the insulation of entrenched elites from popular sentiment that makes them slow to perceive the consequences of decline long after it has overtaken many of those lower down on the socio economic ladder, and the unwillingness of those elites to adopt reforms that would impinge on their own authority and perquisites. Sound like anyone you know in Washington?

          One classic symptom of decline I find particularly interesting: the retreat into religious orthodoxy, assertion that decline is “God’s punishment” for lack of faith, and advocacy of renewed religiosity as the only path to salvation. This would merely be curious if it didn’t often result in religion serving as a distraction from dealing with substantive problems. It happened in the Ottoman Empire in the 16th century and it’s happening in America today. Why worry about global warming when the imminence of the Rapture makes getting right with Jesus the only priority?

        3. Chris Engel

          How is new atheism a stealth religion? I don’t buy this argument that it’s a “departure from factual reality”…I’d say it’s the complete opposite.

        4. Calgacus

          From these passages, Mr. Gray does not evince a Cliff Notes level of knowledge of 19th century philosophers. Marx was a self-proclaimed, when it was unfashionable, pupil of Mr. Mighty Thinker, Hegel. True, through and through. Marx opposed positivists of all stripes, not greatly influenced by them. (The defects ascribed belong to some “Marxists”, and not Marx at all – he had his own defects. But not these.)

          See Herbert Marcuse’s Reason and Revolution: Hegel and the Rise of Social Theory for thoughtful, informed exploration.

          Its first words: This book was written in the hope that it would make a small contribution to the revival, not of Hegel, but of a mental faculty which is in danger of being obliterated: the power of negative thinking. As Hegel defines it: “Thinking is indeed, essentially the negation of that which is immediately before us”. …

          Marx, Hegel were Negativists (and proud to be!), not Positivists!


          Gray’s and Sloan Wilson’s are on target against bumptious moderns – I find them detestable, even when they are often enough right, like Dennett. But Sloan Wilson’s repeated “factual reality” and “departures from factual reality”. If he knoweth so easily just what is “factual reality” and what departeth from it – well, it would be nice if he told the rest of us. I always thought that finding a few pebbles on its vast beach, after great effort, was the dream of all Science, all Philosophy.

          1. jake chase

            Dear PaulArt,

            I never argue with idiots, particularly when they have no idea what I mean. You might as well expose yourself in Times Square as to write this kind of thing.

            But I enjoy hearing from your type. Keep it coming.

      2. Dan Kervick

        The Fed currently pays ONE QUARTER of ONE PERCENT interest on excess reserves and required reserves. The idea that that miniscule amount is causing some kind of credit crunch is silly on its face.

    4. Dan Kervick

      Sorry it’s take me so long to reply here, but I was away at a graduation all weekend.

      Chris Engel’s point is interesting, and other commenters have also claimed that what Thoma was really meant in proposing negative interest on excess reserves is that a negative rate of interest on excess reserves will prompt more lending which will as a result cause some reserves that currently count as excess reserves to become re-classified as required reserves.

      But here is what I had to go on in Thoma’s piece:

      Excess reserves are, in fact, piling up in banks –– from near zero before the recession to around $1.75 trillion today –– instead of flowing into the economy and offsetting the fall in demand from the recession. Because of this, demand is too low, unemployment is too high, and inflation has consistently been running below the Fed’s two percent target.

      I think it is very charitable to read “flowing into the economy” as meaning only, “flowing from banks’ excess reserve acounts at the Fed, into their required reserve accounts.” Certainly the impression conveyed is that those excess reserves would flow out of reserve accounts altogether. And this first impression is supported two paragraphs later when Thoma says:

      But now, when unemployment is the problem, the Fed seems unwilling to push the limits to the same degree. For example, the Fed could charge banks for holding excess reserves instead of paying them interest on those reserves as it does now. With such a penalty in place banks would have a much larger incentive to make loans, and some of the piled up reserves would leave banks and turn into new demand for goods and services. That’s just what the economy needs.

      Here he is explicitly says negative interest on excess reserves will cause reserves to “leave banks” and turn inot demand.

      This is an issue that has been debated and clarified for three years. Is it too much to ask at this late date that people either get this stuff right, or if they alreay know better that they stop creating these misleading impressions of the transmission mechanisms of bank and central bank operations?

      There is a trendous amount of confusion out there about banking operations and the institutional role of the central bank. This confusion leads to outlandish claims (sometimes presented optimistically, sometimes pessimistically) about the impact of central bank actions on the economy. For instance there are still many people who preset QE as a pure “money injection”, ignoring the fact that QE consists of purchases of financial assets that has the result of extracting over time about as much mony from the economy as it injects.

      This is very important because we have had to endure year upon year of all the bright, prominent pros fixating on various froms of central bank string pushing – one lame tactic after another to little effect. And most of these policies are sold with crude and vague pictures of central banking.

      1. Chris Engel

        You’re spot on regarding the nuance, and technical readers will appreciate the distinction.

        But I must loop back to the point that his article was written to a wider audience of people who will fully understand our banking and monetary system.

        Given that, I believe Thoma’s oversimplification should be forgiven, in that it may help the lay-reader conceptualize the issue of excess reserves better (the downside is of course that it’s somewhat of a fib), than if he bombarded readers with a summary of MMT.

        But if I may, let’s put the nuance and technical correctness of terminology and description of the institutions for a moment.

        I’m aware that you’re in favor of fiscal expansion and monetary systemic reform in that sense as a solution. But given the constraints of our political climate, and that the Fed is the only tool we have right now that can actually do something (let’s put aside also your optimism for a fiscal stimulus somehow passing the Republican-controlled House) — I’m curious what your solutions are. Is a 4% target good? or NGDP targeting preferred (as a backdoor to negative rates/higher inflation acceptance)? Do you think taxing excess reserves will at least marginally spur loan/deposit creation (I didn’t see you comment on the merit or potential effectiveness of Thoma’s idea)? What purely monetary policy solutions would you have that is actually realistic? Can the Fed claim exigent circumstances and buy up unsecured debt issued by individuals to help alleviate unemployment, deflation, and stagnant growth?

        I’m a big fan of NEP and the work you and others do there. But I fear that too much of the specific solutions provided are impractical within the current political environment. I’ve noticed Kelton is trying to win smaller battles now — like a permanent payroll tax holiday and stuff. But what about all these ideas that are out there that can be implemented without revolution and a mass awakening or enlightenment?

        1. Dan Kervick

          I don’t think these kinds of misrepresentations of the monetary system are just a failure of nuance, C.E., or that they can be justified as an acceptable simplification for the sake of public consumption. Promoting the erroneous picture of banks “lending out” their reserves leads to a lot of bad thinking about the ways in which, and the degree to which, the Fed influences economic activity.

          Following the collapse of the Rogoff-Reinhart model, and with European opinion leaders finally beginning to challenge the reign of austerity, there was a wonderful opportunity for a new fiscal push. But remarkably, after a couple of weeks of that there has been a very noticeable effort in the US economic pundit-sphere to change the subject, and look again for some monetary policy fix to bail out the politicians.

          Companies are already sitting on mountains of highly liquid assets. There is no credit crunch. There is no credit-side fix.

          1. Nathanael

            I’m not sure about that. If banks started lending to ACTUAL HUMANS at 0% interest, that might actuallly constitute a credit-side fix.

            But they won’t, even if the Federal Reserve lends to banks at 0% interest.

            This is an important point: when the Fed makes it easier for banks to borrow money, the banks just give the money to their CEOs or use it to manipulate their account statements.

            The banks have decided on their own how much to lend, and right now they are not constrained in lending by Federal Reserve access, but by their own choice.

            FDR got around this problem by starting his OWN banks, which he ORDERED to lend money. That would work.

  2. Bruce Wilder

    Mark Thoma, writing in the Fiscal Times . . .

    I suspect Thoma is fully aware that what our economy really needs is a fiscal expansion from the federal government . . .

    We have yet to see what can happen if economists, economics bloggers and the public begin to mobilize . . . intense political pressure . . . to reverse the austerity push and expand spending.

    I don’t think it is unfair to Mark Thoma. He’s a perfect example of the ineffective liberal economist, the useful (to the plutocracy) idiot. Why does Kervick have to “suspect” that Thoma thinks fiscal stimulus spending is required? Why is Thoma writing in Pete Peterson’s Fiscal Times, a news syndicate dedicated to destroying Social Security and promoting . . . (wait for it) austerity?

    Liberals are not making a main case. Kervick clearly knows that the main case is fiscal policy: increased spending and public investment. But, what’s his argument? Geeky points about the role of bank reserves?

    The problem with Mark Thoma’s argument is that it is crap: It is not good public policy to increase the pressure on a dysfunctional banking system to make loans. Maybe, someone should wonder why Bernanke is funneling free money to a dysfunctional banking system, with interest on excess reserves, but neither Kervick nor Thoma focus attention on that small scandal, with their remarks.

    It is not good public policy to let public goods investment to languish, and an already decrepit infrastructure deteriorate. It is not good public policy to ignore peak oil in favor of fracking fever. It is not good policy to ignore global warming.

    Liberals masturbating over geeky slogans and jargon they don’t understand and, about MMT or targeting nGDP, is self-defeating. Krugman has a measure of integrity; he’s a decent person and very smart. And, he’s a conventional neoliberal, not the messiah. His arguments are not persuading anyone in power, and would not do much good, even if they did persuade someone, because his policy preferences are neoliberal!

    Why are Krugman and Thoma supporters of Bernanke? What does that tell you?

    There are two useful things a liberal or social democrat with some genuine expertise in economics could do, that are not being done nearly enough.

    One is to make the impossible-dream case straight-on, and keep on making it, so that people everywhere understand just how destructive and evil the politicians in Washington are. Making highly technical arguments for technical variations on otherwise bad policy is not going to do much good in the short-run and will be massively destructive in the long-run, because the crisis will come, and no one will know what to do. Again.

    Two is to explain, not the mechanics of reserve banking, or how policy could be marginally “improved”, but how policy is rationally adapted to the actual goals and considerations of the policymakers. Why and how is Bernanke a ripe bastard? Why and how is Obama a ripe bastard? How do we make sense of policy in a way that makes policymakers clearly accountable for the consequences.

    The economy is akin to the weather for the conservatives, and the weather gods can be appeased by sacrifice and prayer business confidence. If the Left is to counter that, it has to be with a realistic vision of the economy as something we all do, an entirely artifactual product of human effort and design. If you want democracy to work, then the voters have to know the bastards are bastards, who have a choice and choose to serve the People, badly. It is OK to say that it is complicated; it is not OK to explain how complicated, in lieu of a clear vision of what a well-run political economy looks like, or a political system, which, yes, makes choices.

    1. Chris Engel

      You make a lot of good, uncomfortable points. I particularly like the analogy of how conservatives view the economy as if it’s the weather — relevant on many levels.

      But I think you give Bernanke too little credit.

      The true power here comes with the direct, fiscal intervention in the economy.

      What more did you want Bernanke to do, given the legal constraints? Would you want him to claim exigent circumstances clause of the FRA and buy up unsecured bonds issued by unemployed people, artists, entrepreneurs? I think NGDP targeting would have been nice, or a higher inflation target, right at the onset of the crisis (while the opportunity was ripe) — that’s a fairly concrete solution. But issues of inequality and such are solved not on the monetary policy side but in fiscal policy, especially the broken taxation system (and also regulatory issues).

      But there’s still a practical issue here being ignored — Republicans control the House and they won’t raise a dollar in tax (the internet thing may be an exception in the name of so-called fairness) or increase a dollar worth of spending — and that kind of stone wall in the legislative process makes real solutions short of revolution really hard.

      1. Bruce Wilder

        I want Bernanke to go to Congress, and with all the magisterial authority he can muster as Fed Chief and a Princeton economist with conservative Republican credentials, to ask for a massive program of fiscal stimulus spending. To say, “that is the technocratic imperative, the (nonpartisan) right thing to do in our circumstances”.

        I want Bernanke, as chief regulator of the banking system, to break up the TBTF universal banks, and, with or without Congress, or the Treasury’s Comptroller of the Currency, to push banking in the direction of greater integrity and less predation.

        Realistically, he cannot do the latter, without the shelter of massive fiscal spending, because the financial sector would shrink as a percentage of the economy, disemploying a fair number of people. And, a lot of debt would have to be written off, and organizations dismantled. But, the latter he can do, and should do. So, he needs Congress to know its duty, so he should tell them.

        I think Quantitative Easing is, in the long-run, insanely bad policy. Free money for usurers is no way to run an economy.

        nGDP targeting is just another bright shiny abstraction, which only seems attractive, as long as it remains an abstraction. In Scott Sumner’s crazy-ass telling of the tale, Bernanke did not see the crisis coming, but the reality was that Bernanke was quietly flooding the world with dollar liquidity in 2007, in anticipation, and the consequence was the commodity price spikes, which triggered the Great Recession. There’s a phase change involved, in the transition from money driving real output growth and money driving inflation — there’s no homogenized flow of nGDP — there’s a concept but no such thing-in-the-world as nGDP — which will smoothly transition from real output growth to inflation, as needed. In 2008, Bernanke found that out, as the price of commodities from oil to rice to wheat to copper to rare earths spiked, setting up the inevitability of a brief, but fatal deflation on the lee side of the spike. Bernanke is not an idiot; he didn’t intend even that brief deflation — just the opposite. But, once it happened, anything like nGDP targeting ceased to be a possibility or “alternative”. Again, no way to run an economy.

        I think the Left needs to get more concrete and realistic about a lot of things, and their relation to the Great Recession. Telling the truth about income and wealth inequality, and the underlying predation and parasitism, is going to feel like pursuing the impossible dream, in the face of a Republican Congress — but the electoral base of the Tea Party — not its leaders or funders, of course, but the followers — are economic egalitarians and idealists. Effective populist framing could well light a fire in the House, though it might require exposing Obama’s corrupt tendencies, instead of doing knee-jerk defense. The corrupt and complacent center — and that includes Obama — is more a political obstacle than the Republican radicals. The Republican radicals want revolution; that’s a good thing, because revolution is what is needed — what kind of revolution can be open to discussion.

        And, I think the Left needs to get realistic about the increasing seriousness of global resource limits. They are a significant constraint on economic policy, and particularly, monetary policy. The U.S. currency has to lose its exclusive reserve currency status, or the U.S. will lose policy effectiveness and independence. And, that means some major international institution-building, in cooperation with China and the others (BRI & Europe). China is heading into crisis, and a major reason is the underdevelopment of its banking and financial system, and dependence on manipulating exchange rates with Europe and the U.S. The Euro is a spiraling disaster; the Cyprus intervention lit a fuse on a potentially very big bomb.

        1. jake chase

          Apart from the last paragraph I think you have nailed the problem perfectly, but I do not especially favor holding hands with a China which needs nothing from the United States apart from time and access to our vital technologies, which we seem to be hell bent on giving them, and consequences be damned.

          At this point in history, China remains weak and befuddled and corrupt and leaderless and crony infested and stuck with a mountain of potentially worthless Treasury bonds it is largely prevented from converting to strategic US assets. My suggestion would be to draw back from China, disincentivize offshoring, tax accumulated individual and corporate wealth at the rates imposed after WWII, repeal payroll taxes, increase minimum wages, stop blowing bubbles and rebuild the country before it is entirely too late.

          Contrary to popular wisdom, we do not need the ultra rich and we do not need business school dynamos flim flaming their way to obscene wealth at labor’s expense. We face an engineering problem and nothing more. Finance is a cancerous tail on a potentially healthy dog. Just cut the tail off. Thankfully, we still have the oceans on each important side.

          1. from Mexico

            jake chase says:

            Apart from the last paragraph I think you have nailed the problem perfectly…

            Ah ha! Did I catch you in a contradiction?

            How do you square Wilder’s first paragraph:

            I want Bernanke to go to Congress, and with all the magisterial authority he can muster as Fed Chief and a Princeton economist with conservative Republican credentials, to ask for a massive program of fiscal stimulus spending.

            With this from your above comment?

            What the existence of this cancer guarantees, however, is that any fiscal iniatives will be engineered for the exclusive benefit of our predatory corporations and their loot obsessed executives…

          2. Bruce Wilder

            I’m not sure why you would object to my last paragraph, as I find I’m largely with you on the points you make.

            I’d like to see the U.S. adopt a more populist and nationalist political frame, as it seeks an architecture for reformed domestic and international financial systems. It would be a needed antidote to the now rank corruption of “free trade” globalization.

          3. jake chase

            Mexico, I cannot answer you directly since replies to a reply at that level are forbidden. My approbation was addressed to Bruce’s initial comment rather than his second one.

            Bernanke goes to Congress as a public relations man and nothing more. He can stand on his head there and spit nickels, but nothing will happen except a stampede of Congresscritters to vacuum them up.

        2. charles sereno

          Bruce, your useful comment would be more helpful to late readers if you clarified the antecedents of “the latter” in your 3rd paragraph. It makes no sense as it stands.

        3. Bruce Wilder

          Per request for clarification on “the latter” in paragraph 3

          Bernanke cannot undertake financial reforms, which would shrink the financial sector, without the shelter of strong financial stimulus spending, because shrinking the financial sector would increase unemployment in the short-run, as labor and other resources exited the sector.

  3. Simon

    The back and forth arguments of ‘spend vs don’t spend’ brings to mind the old (I believe) Aboriginal saying (something like) ‘arguing over who owns the land is like two fleas arguing over who owns the dog’.

    Technicalities are not the issue, Krugman has much less intellectual honesty than many of his fans think. The only person I have seen recently who has the stones to speak up is Sachs, of course Black has been doing so for years, as has Hudson.

    The rest of the economic brain trust are like the philosophers debating how many angels can dance on the head of a pin.

    1. Bruce Wilder

      I wouldn’t question Krugman’s integrity (or Mark Thoma’s or Brad DeLong’s or young Noah Smith). They’re sincere in trying to present a point-of-view honestly, which they believe to be consistent with objective fact, and responsible about verifying facts, at least in outline.

      That they do not usually engage seriously with anyone to their Left is a problem, as is the habit of engaging altogether too often and too respectfully, with folks to their Right, who lack basic integrity. Who one chooses as an interlocutor, and how respectful one is in that relation, is going to shape views and their expression. “Lie down with dogs, get up with fleas”, was my grandmother’s expression. Tyler Cowen is not the liberal’s friend; nor is Greg Mankiw.

      To me, Krugman’s great fault is the people he selects as honorable opponents, and the kind of respect, or non-respect, he shows them. The vast majority of his readers don’t understand the “technical” issues, even in outline; they just read the moral tone. And, Krugman’s moral tone is often about how stubbornly stupid other people are, and how simple and well-vindicated his own opinion is. It is not an enlightening or informative dialectic.

      One gets an impression of Krugman as more to the left than he actually is, and one must wonder why so many smart people in powerful positions are acting so foolishly. (Of course, many of them are very smart, and acting with strategic insight about what will benefit their patrons, information that might be useful in a democracy.)

      I wish he would find a way to argue more with people to his left (or right), who are not hacks or greedheads, so that his readers could see a more nuanced range of lefty opinion on economic policy, and one less constrained by the partisan imperatives of the moment, which require supporting Dems and attacking Reps, pretty much no matter what is said. His exchange with David Stockman was sad; the exchange with Michael Kinsley sadder still; his exchange with Steve Keen a while back, disappointing (some of that was Keen’s fault for being unprepared to be anything but a gadfly).

      1. sd

        It may sound like an over simplification or perhaps just an excuse as to why things are the way they are but ultimately sociopaths are very good at deception. And what we have is a government filled with sociopaths who enjoy inflicting pain on others.

        What we need is to derail the sociopath train which can only be accomplished by promoting empathy.

        1. randy mcmillan

          Ladies and Gents,

          Your arguments are sound..To my brain the issue is that a bunch of QANTS are running the economy. They have no feelings. QANTS who are good in math are poor at feelings. That there is a problem. We need feeling people running things. Not QANTS..

          1. Nathanael

            I’ve met some quants. They’re decent, caring people. They have well-paid jobs and they aren’t going to turn up their noses at well-paid jobs… would you?…

            And they often think their bosses are both stupid and dangerous.

            The quants are servants. Don’t forget this. The quants will warn their bosses that their mathematical model only applies under certain circumstances, and that under other circumstances it will crash the market and bankrupt the company.

            Their bosses don’t care. That’s too much detail. They don’t want to hear it. Actually understanding what their hedge fund is doing — that’s for the little people!

            The bosses are the problem. The bosses have the attitude described in Veblen’s “Theory of the Leisure Class”. They are bad at BOTH math AND feelings — and they think they can just hire people to handle the math (quants) and the feelings (Public Relations). They are crazy in a dangerous way.

        2. from Mexico

          sd said:

          What we need is to derail the sociopath train which can only be accomplished by promoting empathy.

          The initial strategy of the “sociopaths” was to deny the existence of empathy.

          Recent findings concerning the existence and distribution of the ability to feel empathy within the human population, as explained in these two lectures by V.S. Ramachandran and Paul Zak, however, have made this empirical claim untenable:



          Richard Dawkins roles out the new rhetorical strategy of the “sociopaths” in the following lecture, where he argues that empathy is a “mistake,”, a “bi-product” and a “misfiring” since “under ancestral conditions it would have enahnced survival,” but it is no longer adaptive in present-day society. His discussion of this subject begins at minute 46:20


          1. Nathanael

            Claims that something is “no longer adaptive” are often wrong. It’s what’s known as the “teleology fallacy” in biology, and even famous biologists are rather prone to it.

            The *fact* is that you can only tell what *was* adaptive in the past — you can never tell for sure what *will be* adaptive in the future. It can only be identified *retrospectively* — anything else is really extremely speculative guesswork.

            If, after the gigantic evolutionary bottleneck caused by global warming, we look back and go “OK, who survived?” we may then be able to identify what was adapative.

            I’m going to guess that those people with no “type 1” empathy will have been more likely to have died, which would mean that “type 1” empathy was adaptive for the current environmental bottleneck…. but see below for why I say “type 1” empathy.

            It’s worth noting when reading discussions of “empathy”, that it’s used in the literature for two entirely different, and frankly unrelated, concepts. One meaning
            (type 1) is “caring about others’ emotions, sharing their emotions once you have identified their emotions”, which is probably beneficial.

            The other (type 2) is “looking out and spontaneously, subconsciously concluding that you are seeing an emotion”, which is likely to NOT be beneficial. This is why people think that rocks are angry at them. This is what causes fights over nothing at all, as people decide that they’re looking at anger and hostility when they’re not. This causes endless confusion, because most people are actually terrible at this “silent reading” but act like they have the magical power to read emotions perfectly. *THIS* is what autistic people do not generally do.

            Dawkins is most likely talking about this “silent emotional reading” business, not about the former definition of “empathy”. I suspect you have completely misread Dawkins, “from Mexico”, and I think it’s because you didn’t know that there are two different meanings of “empathy” in the literature. I suggest you go back and check.

            (Looking at the other definition, autistic people have more empathy than average: autistic people usually care extremely strongly about other people’s feelings, and are generally more compassionate than average neurotypical people are. Autistic sociopaths are very, very rare.)

      2. jake chase

        You have to question either their integrity or their intelligence, or both. They are foozlers to a man, busy rearranging the Titanic deck chairs.

        Never lose sight of the fact that their very secure and generous gigs depend upon not rocking the boat.

        The Left died in America with Debs, and its intellectual support died with Veblen. Replacing Andrew Mellon with Harry Dexter White (and Keynes) bought the system another sixty years, but finance and usury have regained the saddle and will not be unseated by tinkering with bank reserves or interest rates or leaf raking either.

        1. from Mexico

          I tend to agree. All the guys Wilder lists are just paid liars and bumsuckers for the bankers, playing their role in the old bad-cop good-cop routine. As Lawrence Goodwyn put it, the bankers’ rule over the United States has been uncontested since 1896 when William Jennings Bryan won the nomination as Democratic Party candidate:

          When the long Republican reign came to an end in 1932, the alternatives envisioned by the Democrats of the New Deal unconsciously reflected the shrunken vistas that remained culturally permissible. Aspirations for financial reform on a scale imagined by greenbackers had expired, even among those who thought of themselves as reformers. Inevitably, such reformers had lost the possiblity of understanding how the system worked. Structural reform of American banking no longer existed as an issue in America. The ultimate cultural victory being not merely to win an argument but to remove the subject from the agenda of future contention, the consolidation of values that so succesffuly submerged the “financial question” beyond the purview of succeeding generations was self-sustaining and largely invisible.

          -LAWRENCE GOODWYN, The Populist Moment

          What will it take to end the bankers’ dictatorship? Jack Goldstone had this to say:

          It is a profound and repeated finding that there mere facts of poverty and inequality or even increases in these conditions, do not lead to political or ehtnic violence. In order for popular discontnet or distress to create large-scale conflicts, there must be some elite leadership to mobilize popular groups and to create linkages between them. There must also be some vulnerability of the state in the form of internal divisions and economic or political reversals. Otherwise, popular discontnet is unvoiced, and popular oppositon is simply suppressed.

          –JACK GLADSTONE, Revolution: Theoretical, comparative, and historical studies

          1. jake chase

            Mexico, it will take nothing more or less than a monumental crash in which financial assets vaporize. The smart money thinks this can’t happen, that usury can go on forever, that student loans have created a reserve army of indentured surfs who will prove grateful for any job that permits them to continue watching ESPN and enjoy Miller Time once or twice a month and car pool in one of those pathetic toy cars now leased at $82 per month. Unfortunately, the smart money is not content to just keep collecting interest and rent. It wants MORE. It wants capital gains. It wants leverage. It cannot wait to drive every market sky high despite all the evidence of unsustainability. The question isn’t whether there will be a crash, but only when it will occur and what the Fed will do about it then. How large can the balance sheet grow? $100 trillion; $500 trillion; whatever comes after $999 trillion?

          2. Nathanael

            “Unfortunately, the smart money is not content to just keep collecting interest and rent. It wants MORE”

            This isn’t the “smart money”.

            This is what you might call the “stupid powerful money”, or what Veblen called the “leisure class”, or what I usually call the “psychopaths”.

            There’s something wrong with their brains which causes them to be unable to be satisfied. Veblen’s analysis was that they got their kicks from stealing, and from cheating people, basically. The money only exists, to them, for purposes of keeping score of how many people they’ve stolen from.

            If they’re fundamentally motivated by the rush from getting a “score”, meaning fleecing someone, then they are really threats to society. We can’t have those people in power. Power won’t satisfy them. Money won’t satisfy them. Only cheating and stealing from people will satisfy them.

            While people with a lust for power can potentially be satisfied in a functioning society — give them power and train them to use it wisely for the benefit of others — people with a lust for theft really cannot be satisfied in a functioning society. They are fundamentally antisocial.

        2. Nathanael

          Jake, there is an entire intellectual tradition descended from Veblen. Ever read Adolf Berle? How about John Kenneth Galbraith?

      3. Eric Patton

        That they do not usually engage seriously with anyone to their Left is a problem

        NO ONE ever engages with anyone to his or her left. Ever. Unless forced to.

        1. Bruce Wilder

          Very few, who identify as Left ever engage seriously, period.

          It has occurred to me that that might be part of the problem.

  4. Sammy Jones

    “Maple Valley Bank makes a new $100,000 loan to Granite Construction” knowing full well that Granite will never pay the loan back, so as usual, the set up is insured….etc

  5. Jim Haygood

    ‘The bank creates a new demand deposit account for the construction company, and credits $100,000 to that account … [the] bank’s total reserves have not changed at all.’

    Flat wrong. Read the first sentence of the Federal Reserve’s explanation of reserve requirements:

    ‘Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.’


    When a new deposit is created to fund a loan (as in Kervick’s example), the applicable reserve requirement applies to that new deposit. This is elementary stuff.

    1. F. Beard

      Banks can always borrow reserves as needed from other banks or from the Fed. And the chronology is that banks typically create deposits first and borrow later (Why borrow if you don’t have to?)

      Bottom line: Banks are not reserve constrained; they are capital constrained – and very little constrained at that.

      Bottomest line: Banks are a government-backed counterfeiting cartel that could scarcely exist in a true free market.

      1. H. Alexander Ivey

        F. Beard, glad to see you back. Even better, glad for your comment, which is closer to reality than most on this posting.

        What irks me is Kervick’s convoluted discussion on debts and credits. I understand the argument, which is more or less correct, but I can tell you most people eyes’ glaze over with it. And bankers will snow you even more when you ask them about reserves. The best way to argue that banks are not fractionally reserve constraint is to point out the difference between cash / fiat money and credit money. They both are “money”, both can be used in many identical places to obtain identical things, and both are found in banks; but their origin, their circulation, and the effect of their destruction is different. My tiny keypad prevents a more detailed discussion, but next time you talk to a banker, ask them to explain this difference.

    2. Elbridge Spaulding

      It’ true that the reserve requirement relates to the new loan/deposit being made, perhaps having an effect on the required / excess status of the bank’s reserves.
      But the quote used …
      ” the bank’s total reserves have not changed at all.’
      says nothing about the reserve “requirement”, simply that the loan/deposit does not affect the reserve position of the lender.
      Which is true.

  6. Cranky this morning

    What shocks me is that the behaviour of banks since the bailout, including their excess reserves, is interpreted as a condition that could be fixed if those reserves were lent out.

    The fact of the matter is that neoliberalism, of which the bailout was an essential part along with austerity, has utterly failed as an economic philosophy for modern democracies. (It has succeeded brilliantly as a return to primitive accumulation and a reversion to pre-democratic government.)

    Neoliberalism, among other things a reaction against the success of Keynesianism, is totally bankrupt.

    “Trickle down,” “TINA,” “austerity,” and “bail out the banks and anything that calls itself a bank” are all versions of “economic shortcomings are caused by too many constraints on capital.”

    This is now a self-evidently false premise. The disasterous — even for the rich — policies of the past 40 years (which had been muttered about since Roosevelt) are now PROVEN beyond all reasonable doubt to be the planet-wide destructive force normal people predicted they would be.

    Lesson learned: capital MUST be democratically managed. All corporate executives have a conflict of interest and thus are inherently too corrupt to be trusted.

    Democratic accountability and ultimately democratic control is the ONLY way out of this crisis.

    Too bad our billionaires are too crooked and/or too stupid to care that everything they do is wrong.

    “We are many, they are few.”

    1. F. Beard

      Lesson learned: capital MUST be democratically managed. Cranky this morning

      Exactly! And that’s what would have happened without the government-backed counterfeiting cartel, the banking system. Instead of stealing their workers’ and the general population’s purchasing power, business would have been forced by competitive pressure to “share” wealth and power by using their own common stock to purchase labor and other assets.

      1. Susan the other

        Easier said than done. Factoids: The Centennial Expo of 1886 – had as its logo a stock certificate all engraved and filagreed with Washington on one side and General Grant on the other, with a token recognition for the variety of the population to imply everyone owned a stock in America. That didn’t turn out well. By the Chicago Columbia Expo in 1893 greed had taken over; the pavilions were a tribute to classical architecture, progress was represented by a sculpture that looked like Pirates of the Caribbean. I kid you not. The Gilded Age had taken over. We need a set of laws that prevent the corruption of economic democracy. Somehow.

        1. F. Beard

          It’s not that hard. We need:

          1) Restitution with new fiat for the entire population.
          2) The elimination of all privileges for the banks.

          Then business will have no option but to “share” or at least pay honest interest rates to borrow money.

        2. Nathanael

          Susan: I believe the problem is, quite simply, the people who Veblen spent a book describing in _Theory of the Leisure Class_.

          The people who are motivated by the unquenchable desire to steal and cheat, who get their kicks from “putting one over” on the other guy. They are probably mostly psychopaths, because this requires a complete disregard for the long-term consequences of their actions, as well as a disregard for other people’s feelings. The successful ones also have to be highly charismatic.

          These people will rise to the top by “working the system” in practically any system, and when they get there they will corrupt the system. It’s what they DO.

          There is some evidence that they then create a warped social environment — call it the “corporate board” environment — in which they use their charisma to encourage everyone else around them to behave like psychopaths (situational psychopaths) even though the other people aren’t actual psychopaths.

          So, you have to design a system which systematically identifies, squelches, and crushes these people. They probably need to be executed (killed), because prison is unlikely to work: the ones smart enough to get to the top can also “work the system” to get out of prison and back into power.

          I don’t think anyone has designed a successful system for identifying and killing these people yet — but people have been trying for thousands of years.

          It’s possible, of course, that we will identify a medical cure for this brain disease (which causes the unquenchable desire to steal) at some point, which would allow us to fix these people without killing them, but we haven’t identified one for most causes of antisocial psychopathy yet.

  7. kris

    Do not bother with theory. I can tell you what reserves are:

    Reserves are …whatever authorities…want them to be at any given time.

    All reserve related discussion assume that there is a rule of law. Well…there isn’t. Eric Holder said it himself, he ain’t prosecuting big banks.

    Don’t bother much theorizing, again:

    1. Elbridge Spaulding

      And, may I add, the whole concept of holding reserves against currency in circulation is a throwback to the gold standard.
      Absent such standard, reserves are meaningless to managing the currency, and only hold any validity today within a debt-based and fractionally-reserved banking and money system.
      Move to full reserves and the path is open to non-reserve based and debt-free money.
      Rather than dwell upon ‘what are reserves?’, ‘what is money?’.

      1. F. Beard

        Move to full reserves Elbridge Spaulding

        Yes! Or at least all government privileges, both explicit and implicit, for the banks should be abolished.

        and the path is open to non-reserve based and debt-free money. Elbridge Spaulding

        Correct! No truly ethical private money form can compete with a government-backed counterfeiting cartel, which the banks are.

        Some will dispute the possibility of “debt-free” money but I can think of two examples:

        1) If the monetary sovereign NEVER runs budget surpluses and SOMETIMES runs budget deficits (but without borrowing) then debt-free fiat will accumulate in the economy equal to the sum of those deficits. (I ignore central bank machinations since cb’s should not even exist!)

        2) If common stock is used as private money, I fail to see any unpaid debt since common stock is part-ownership of the issuing company. Of course, the issuing company would be wise to offer goods and services in exchange for its common stock (plus some fiat in order to pay taxes) but that’s not a debt; it’s a value-adding feature.

        1. kris

          Sovereign never runs out of money it can create by itself, but sovereign often runs out of goods to spend that money on.

          In communism back in Europe, we never ran out of money, we ran out of food.

          1. Susan the other

            Stalinism didn’t have a corner on corruption. In the 1930s here in the USA the irony often spoken about was that here in the land of wheat up to our knees, we had to invent bread lines. Capital goes on strike just like unions it seems.

          2. kris

            It was not about financial capital at all.

            The process of making food products start at the field and ends up at the grocery store involving many many middlemen and processes in between.

            There was a lot of grain, but not of a lot of fuel to power machines, not a lot of machines and there was a world wide protectionist epidemic which killed world trade.

            That’s why WW1 and WW2 occurred. World trade diminished and people started suffering.

          3. F. Beard

            Sovereign money should be de jure and de facto legal tender for government debts ONLY, though people could voluntarily use it for private debts too.

            Private money would only be acceptable for private debts, never government debts, assuming people would voluntarily accept it.

            There would be any number of private monies with floating exchange rates amongst themselves and between themselves and fiat.

            Thus, government money mismanagement would not necessarily harm the private sector and vice versa.

        2. Jamie

          I have real rouble getting my head around “debt-free money” since I came into my interest in monetary matters through MMT. The very first thing I read was that money is debt. Every asset is also a liability. After some reflection, I accept this as incontrovertible. Within that framework, however, the phrase “debt-free money” is complete nonsense. So could you explain, please, what you mean by “debt-free money”?

          1. F. Beard

            I gave two examples of what is for all practical purposes “debt-free” money. Take it or leave it.

            But if we ever have a true free market in private money creation and not the current government-backed credit cartel, banks will discover that merely probable redemption of bank credit with reserves won’t cut it.

            If the conventional definition of money as debt worked then so would “free banking” but it doesn’t. Instead banking requires government deposit insurance and a government-provided lender of last resort in our so-called “free-market economy.” The hypocrisy is glaring and won’t stand for much longer.

          2. F. Beard

            Moreover, “money-as-equity” would work just fine and is perfectly ethical too.

            But why “share” when one can steal instead?

          3. kris

            There’s no such thing as debt free money.
            Only barter is debt free money.

            Each time you convert your output into money and do not spend it immediately, there is a time lag, hence TIME VALUE OF MONEY

          4. F. Beard

            hence TIME VALUE OF MONEY kris

            The “time value of money” assumes a single, monopoly money supply that everyone must use. But why should anyone “rent” your money supply, if they can create their own money supply, assuming they have the capital to back it?

            In other words, why should real capital have to wait on mere money?

          5. kris

            And no, it does not assume a single money.
            Even in DELAYED BARTER, let’s say I give 10 chicken but you do NOT give me on the spot 10 kg of wheat, but give that to me 3 months later, then the transaction has a time lag.

            Time lag = You give 3 months later 11 kgs of wheat
            That was interest = time value of money

          6. F. Beard

            “Agree” assumes freedom but instead of freedom, I see a government-privileged credit cartel.

          7. F. Beard

            No. That’s the time value of wheat, not money. Money, except fiat, a legitimate monopoly, should have no time value since anyone with real capital should be able to create it at anytime.

          8. Calgacus

            Jamie, you have it right. Keep on the road you’re on! Money is nothing but debt, always was, always will be. There are a lot of people propagating their own confused versions of MMT. Believe, take seriously (esp on philosophical matters) ONLY what the academic MMTers – Wray (above all imho), Kelton, Fullwiler, Forstater, Kregel, Tcherneva etc and the intellectual forebears they name – Mitchell-Innes (#1 guy to read), Keynes, Lerner, Minsky, Commons, Veblen, Dillard, Kalecki, Marx etc say. (Geoffrey Ingham & Geoffrey Gardiner are really great, reliable, deep contemporary thinkers too.) Not the frequently half-baked interpreters whose “interpretations” often amount to eviscerating the theory.

            The half-baked interpreters have not read enough, or read carefully enough, MMT to find the refutations of their half-baked interpretations, but the refutations of their sometimes subtle errors ARE there. Sad to say, on these most philosophical, important and central matters, this group definitely includes Dan Kervick.

            “Debt-free Money” is pure unadulterated oxymoronic and moronic nonsense. People just mean by it, money like dollar bills in your pocket, that can IMMEDIATELY be used as standard credit. As opposed to oh-so-evil bonds – which are just dollar bills with a date in the future printed on them, like tomorrow. This OBVIOUSLY makes them completely utterly transcendentally mystically magically different from holy debt-free current currency “ready money”. OBVIOUSLY, a postdated government check is “debt”, but a currently dated government check is “real money”. If you believe that, you are insane, you believe something that wouldn’t deceive a 6 year old. But most people do.

          9. F. Beard


            Common stock is clearly valuable, clearly backed by assets and clearly can be used as money.

            Now tell me, where is the debt if common stock is used as private money?

          10. Jamie

            Common stock is clearly valuable, clearly backed by assets and clearly can be used as money.

            Now tell me, where is the debt if common stock is used as private money?

            I am not saying you are wrong… I do not understand the matter deeply enough to say that. I am truly just trying to understand you and you have my full attention and respect. But from what I have read, I would say that common stock is not just backed by assets, it is itself an asset. When you say it could be used as money, sure… but that just means one asset can be exchanged for another. If you mean to draw a distinction between real wealth (a house, a factory, a patent… whatever else might be considered to be owned by one with a share of common stock) and the symbolic representation of that real wealth as stock or currency, I can understand the importance of that distinction. But I’m not at all sure that is what you are talking about.

          11. F. Beard

            But I’m not at all sure that is what you are talking about. Jamie

            I’m simply pointing out a counter-example to: “Money is nothing but debt, always was, always will be.” – one that “shares” wealth and power while at the same time consolidating them for economies of scale.

            So there’s really no excuse for the present system of a government-backed usury for stolen purchasing power cartel since common stock is an ethical form of endogenous private money.

          12. Jamie

            a postdated government check is “debt”, but a currently dated government check is “real money”

            So the encumbrance on less liquid assets as opposed to more liquid assets is what is being called “debt”?

          13. Jamie

            I’m simply pointing out a counter-example

            The counter-example being common stock, if I am understanding you. I can’t prove it, but I think it is probably true that the concentration of common stock, the concentration of real wealth and the concentration of currency are all pretty well correlated. So I don’t understand how common stock can share wealth and power to a greater degree than real wealth or currency. I don’t see why currency is debt while stock is not. They are both assets to one party and liabilities to a second party. I agree that wealth and power are not well distributed and I also agree that common stock provides a mechanism for distributed ownership of accumulated capital, but stock can be mal-distributed just as any other asset. The distribution problem remains the same, whether it is real wealth, currency or stock we are talking about, as far as I can see.
            But I feel I may be missing your point entirely. Can you say simply what is the debt that attaches to money normally that you seek to remove? I am assuming it has something to do with interest or reserve lending. Who owns the debt and who owes it?

          14. F. Beard

            I don’t see why currency is debt while stock is not. They are both assets to one party and liabilities to a second party. Jaime

            Assets = Equity + Liabilities. Therefore Equity is distinct from Liabilities. Therefore new stock issue to buy new assets does not create new Liabilities; it creates new part-owners of the Equity thereby possibly diluting existing part-owners of the Equity though hopefully only temporarily.

          15. F. Beard

            The distribution problem remains the same, whether it is real wealth, currency or stock we are talking about, as far as I can see. Jamie

            No it isn’t. If your boss pays you with currency, you can buy stuff. If he pays you with common stock, then you become part-owner of the company and could, in principle, vote to give yourself a pay-raise, cut your hours, or even fire your boss; you become an owner-worker instead of just a worker. And when you retire, unless you sell or otherwise dispose of all your stock, you remain an owner.

          16. Jamie

            Therefore new stock issue to buy new assets does not create new Liabilities

            You are certainly making me think. Isn’t it true that if new assets are purchased the total value of the company increases? And doesn’t that mean the total equity value increases proportionally? Doesn’t that increase in equity value represent an increase in liabilities? (i.e. a greater amount of value must be distributed among shareholders than before, regardless of how many shares that value is sliced into.) So that an increase in company assets necessarily entails an increase in company liabilities (unless the company owns itself)? It is true that the owner of stock cannot realize that value “on demand” from the company. But the stock owner can sell the company’s stock to other people on an open exchange precisely because it represents a claim against the company and thus has value. The stock is an asset for its owner and a liability for the company (a claim against the value of the company, to be paid out under prescribed circumstances). You’re right that it is false that “money is nothing but debt”. Money is a signifier of a debt/credit relationship. Debt is only half of that relationship. It is just as true (which is to say equally false!) to say “money is nothing but credit.” It is credit or debt depending on who’s point of view one assumes. I will grant that equity may not generally be thought of as a liability. I don’t know how this terminology is typically used. I am just trying to follow the underlying logic.

          17. Jamie

            If your boss pays you with currency, you can buy stuff.
            Including shares of the company. Since currency and stock are fungible, I don’t think it makes any difference what form your payment takes. As far as the distribution problem goes, the only thing that matters is the amount of value that is transfered. One share may give you a right to vote, but it is not going to get you much influence unless there are only a few shares in existence. And unless the boss pays a higher wage in shares than he does in currency, the distribution of wealth and power is the same. You make a good argument for owning stock, and I can see how owner-workers could supplant unions, but it is no clearer to me how stock is (or could be) debt free money.

          18. F. Beard

            But the stock owner can sell the company’s stock to other people on an open exchange precisely because it represents a claim against the company and thus has value. Jaime

            The stockholders OWN the company JOINTLY so common stock is normally non-redeemable. If it were redeemable, the company’s assets could be destroyed. Example: Suppose 3 people own a milk cow jointly. Would it make any sense to allow one of them to chop off 1/3 of the cow? How do you milk a dead cow?

          19. F. Beard

            The stock is an asset for its owner Jaime


            and a liability for the company (a claim against the value of the company, to be paid out under prescribed circumstances). Jaime

            No. Common stock owners are listed under Equity, not Liabilities. That’s why common stock owners are last in line if the company goes bankrupt. They ARE the company!

          20. Jamie

            Well, I’ll have to think some more about what you say. Thank you for taking the time to discuss with me.

          21. Nathanael

            F. Beard — you don’t mean DEBT-free money. The concept you are groping for is probably INTEREST-free money. Interest-free money really exists.

            All money is in some sense debt, but *not all debt charges interest*. This has deep social roots. Think of the laws of Islam: debt is perfectly legal, but interest is forbidden.

          22. Nathanael

            F. Beard: you’re simply wrong about common stock. It actually IS redeemable.

            “If it were redeemable, the company’s assets could be destroyed.”

            My grandmother owned stock in a company which DISSOLVED, and carved each of its assets up proportionally to the stockholders — each stockholder ended up with a 5000/50000000 share in each of eight oil wells. (The paperwork afterwards was hideous.)

            The fact is that yes, companies do dissolve and split their assets up among the stockholders. Stock is, fairly often, reedemable. Yes, splitting up the “going concern” can destroy value sometimes — it happens anyway.

          23. F. Beard

            you don’t mean DEBT-free money. Nathaniel

            Respectfully, I do mean “DEBT-free money”. I see no NECESSARY debt with common stock as private money. And I see no NECESSARY debt with fiat either if:

            1) The monetary sovereign NEVER borrows.
            2) The monetary sovereign NEVER runs budget surpluses.
            3) The monetary sovereign SOMETIMES runs budget deficits.

            Then (ignoring central bank machinations since central banks should not even exist!) non-extinguishable fiat would accumulate in the economy to the sum of the budget deficits. And if that fiat can’t be extinguished, then how is it debt?

          24. F. Beard

            I said “normally not-redeemable”, Nathaniel. Of course, if the company dissolves they carve up the cow. :)

      2. kris

        MONEY is always and at anytime the unit of account of measuring economic activity. Meters used for distance, kg used for weight, dollars/euros etc used for economic activity

        CURRENCY is the LEGAL CONTRACT that a group of people called ‘nation’, has agreed to use as a representation of ALL real goods and services CONVERTED into this AGREED UPON currency, thus avoid barter.

        Conclusion: There is no such a thing as monetary policy.
        What is currently being called as ‘monetary policy’ is the creation of LEGAL CONTRACTS claiming goods and services, WITHOUT creating any.

        This legal contract are first handed to Primary Dealers who can claim somebody’s else real goods and services out of nothing.

        It is this simple

        1. Elbridge Spaulding

          The unit-of-account is one function OF money, but it does not define money. The ‘store-of-value’ is another.
          But they both pale when compared to the economic use of money as a media for exchanging the goods and services produced and consumed in its home economy.
          Recognizing that money is a legal and social construct that provides for a means of exchange of…. wealth brings us to its ultimate power, what it IS and how it is defined.
          As it is denominated in that ‘unit-of-account’ it has the exact purchasing power of the ‘units’ indicated thereon.
          Money represents, therefore, flat-out purchasing power.
          As such, the operational function in the national economy is as a vehicle or tool for distributing the wealth that is created by its use.
          Without a ‘democratizing’ rule, money gravitates upward in the income strata.
          There’s a group of so-called ‘folks’ that have the likes of the old aristocratic privilege of creatiung and distributing the nation’s purchasing power.
          Is it any wonder then, that they end up owning most of it?

          1. kris

            Elbridge Spaulding

            Agree with everything except for with ‘store of value’.
            I don’t think value can be stored.

          2. skippy

            @beard… If Monsanto issued common stock yet – destroyed the environment – would you consider it a store of value?

          3. F. Beard


            The common stock holders own the company so in theory THEY set its environmental policy. Without the counterfeiting cartel, most large companies would be broadly owned so they would be broadly democratic.

            What? Don’t like democracy?

          4. skippy


            History to date refutes your assumption [ecological state of the planet], in addition, power dynamics in corporations is an anathema to democracy.

            I would only add that institutions are only as good as the people in authority, banks, Gov, Churches, etc. PIE society is based on a foundation, seek there.

            skipopy… BTW read Graeber’s book yet or anything that pre-dates your belief, challenges your bias?

          5. F. Beard

            History to date refutes your assumption [ecological state of the planet], in addition, power dynamics in corporations is an anathema to democracy. skippy

            Sure. If the so-called “creditworthy” are allowed to steal the purchasing power of the general population then why wouldn’t they buy up common stock companies and narrowly concentrate ownership?

            As for Graeber’s book, thanks for the reminder. The Bible has my top priority even though I’ve read it all at least once (However, I don’t deny glossing construction details, which bore me) but I’ve just put Debt: The First 5000 Years on my reading table.

          6. skippy


            Information asymmetry has noting to do with credit nor does power dynamics nor how the mind functions.

            Catharsis in the motor cortex: Reward and punishment when observing others’ actions




            Learning through imitation avoids costly trial and error with in a social dynamic thingy.

            Skippy… David’s book is is a bit like JD’s collapse imo, to much data to stuff in one book. So I would recommend following up on the works listed in the index to further flesh out the picture, test the authors views out side their observation[s.

            PS. The priest’s grain silos of Egypt et al remind me of modern day corporations, the priest being the CEO. So much is the same lmao… We can do better methinks… Have fun beard.

          7. Nathanael

            Kris: I’m going to explain “store of value” to you.

            Suppose that I do some nice things for several people. Afterwards, they each ask me “How can I possibly repay you?” And I say “Well, you’ll just owe me a favor — I’ll tell you when I need it.”

            Then I have stored value. The value comes in the loyalty and integrity of the people who owe me favors. That value lasts until they die.

            At its root, money is simply an abstracted version of that. (And it works until people repudiate the money as illegitimate.)

            It’s worth noting that the original version of this — not the money version — is the basis of most feudal societies and one of the most fundmental structures in all of human society. We store value by having other people owe us favors.

        2. Moneta

          Correct. They create the money and assume someone down the road will create some product of service… but no one wants to work. Everyone wants to retire early.

          1. NOC Saturday

            Gee whiz Debbie Downer, those who do not work, neither shall she eat? Humping fabric in a deathtrap or breakin’ asbestos ships, the gall of the entitled American slobs sleeping in cars. You must wait in line at Starbucks before using the rest room for clean up. Hmmph!

          2. F. Beard

            I work but mostly the work I wish to do – constrained by my resources. With additional resources, such as land, I could do even more work that I enjoyed.

            So instead of a JG, we should make sure that the unemployed have sufficient resources (including a BIG) to do the work they wish to do.

    2. from Mexico

      ‘I don’t know what you mean by “glory,”’ Alice said.

      Humpty Dumpty smiled contemptuously. ‘Of course you don’t— till I tell you. I meant “there’s a nice knockdown argument for you!”’

      ‘But “glory” doesn’t mean “a nice knock-down argument,”’ Alice objected.

      ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean— neither more nor less.’

      ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

      ‘The question is,’ said Humpty Dumpty, ‘which is to be master – – that’s all.’



  8. allcoppedout

    I don’t believe we can fiddle with the standard spreadsheets anymore. I can remember reading 67 awful pages of the Harvard Law Review on the collapse of the legal-commercial paradigm as in a state of Lakatosian decadence in 1974. Amazing what you’ll get up to for distraction as a cop on observations! The intellectual stuff is mostly air, something explained to me by a bunch of Norwegian Bruisers who made one-off furniture at high prices, explaining the mark-up was justified by ‘the air in the chair’. I don’t see this kind of economics or even debunking it as much more.
    The underlying ‘posture’ is probably deficit theory – if only we could educate on the facts people would come round to our point of view stuff – and I’ve spent too long in education and reflection on it to believe this. Even Habermas defended his form of this – communicative rationality – as an ideal type.
    We are somehow prevented from belief in the rational allocation of resources, including human work, for good purposes. Even if capable of such belief, it can become the control fraud (Soviet Paradise) and even some early Nazis wanted a Eurasian union of free workers. Fine words can be used by anyone for malevolent purpose.
    Remembering we humans descend from the ‘middlemen’ of a distant planet whose other inhabitants got rid of us through a scare story and later died because our telephone cleaning skills were actually essential to their survival (Hitch-hikers’ Guide), we have to address the Jabberwock issue. We once survived without finance and could again. The analysis we lack concerns what we are scared of, including fear of admitting to fear, that keeps most of us in a miserable animal hierarchy, denied politics by economics.

    The Jabberwock is the financial services industry that has captured democratic politics. We are so scared of it our criticisms take the form of supplication that is variation on the tune of the master. I’ve never understood what ‘whistling Dixie’ was as a Brit, but suspect this stuff is it.

    1. from Mexico

      allcoppedout says:

      The underlying ‘posture’ is probably deficit theory – if only we could educate on the facts people would come round to our point of view stuff – and I’ve spent too long in education and reflection on it to believe this.

      Yep. Here’s how Daniel Yankelovich put it:

      Many years ago I had ceased to be a stranger to the phenomenon of people’s reistance to facts. I had learned that the facts do not speak for themselves. If the facts happen to run counter to people’s deeply ingrained prejudices or interests or emotional commitments, then so much the worse for the facts.

      Reinhold Niebuhr believed we were moving in the right direction, but not fast enough: “The growing intelligence of mankind seems not to be growing rapidly enough to achieve mastery over the social problems, which the advances of technology creates.”

      He believed, though, that we set ourselves up for failure due to unrealistic expectations:

      The belief that the growth of human intelligence would automatically eliminate social jsutice really dates from the eighteenth century and the Enlightenment. The Age of Reason saw social justice and medieval traditions and superstitions so intimately related to each other, that it was natural to conclude that the elimination of the one would result in the aboliton of the other. Condorcet, one of the most fervent apostles of the Age of Reason, expressed the faith of his generation, when he declared that universal education and the development of the printing press would inevitably result in an ideal society in which the sun would shine “on an earth of none but freemen, with no masters save reason; for tyrants and slaves, priests and thier hypocritical tools will all have disappeared.”

      This faith of the Enlightenment is still the creed of the educators of our day and is shared more or less by philosophers, psychologists and social scientists. The sorry plight of our civilisation has qualified it only in the slightest degree. The traditions and superstitions which seemed to the eighteenth century to be the very root of injustice, have been eliminated, without checking the constant growth of social injustice. Yet the men of learning persist in their hope that more intelligence will solve the social problem. They may view present realities quite realistically; but they cling to their hope that an adequate pedagogical technique will finally produce the “socialised man” and thus solve the problem of society.

      Since there are always unrealised potentialities in human life, which remain undeveloped, if hope does not encourage their development, the optimism of the rationalists and educators is not without value…. Education can no doubt solve many problems of society, and can increase the capacity of men to envisage the needs of their fellows and to live in harmonious and equitable relations with them. In individual relations a great confidence in the undeveloped potentilities of the human spirit may be the means of developing them.

      –REINHOLD NIEBUHR, Moral Man & Immoral Society

      1. Susan the other

        I’d like to see a more complex form of accounting. So that productivity was actually put on the liability side of any balance sheet because each company must account for its rake on productivity because it was gaming all the rest of the companies which inevitably leads to a dysfunctional economy because it destroys demand, etc. etc. If everyone is forced to stop that nonsense the combined bottom line would reflect less “productivity” and a more equitable distribution of profits. Maintaining a minimum demand, etc. The government can do this with a minimum wage of $20 or so. But there no laws against gaming the system. So loopholes will appear out of nowhere.

      2. jake chase

        And if nothing else, more education will improve the conversation and perspective of those dispensing donuts, tacos, hamburgers, coffee, etc., while grinding away all day in those penal colony uniforms, although it is unlikely to leave them feeling all that fulfilled and indeed will make a good many of them feel homicidal IMHO.

    2. jake chase

      Just reading 67 pages in the Harvard Law Review should have been enough to get you tenure. Can you prove you did it?

      It took me ten years to overcome the three years I wasted there, and it was only thirty years later that I realized I was right in refusing to engage all that crap on its own terms.

  9. Anonymous

    “combination of incompetence, iniquity, ignorance, ideology and insanity.”

    You should also add the word “stupidity” to the list.

  10. Moneta

    Credit spreads are so low that rare are the companies that are having trouble raising capital. Investors are gorging on overpriced corporate debt. So which are those companies that the banks could fund?

    SMEs? Wouldn’t some rules need to get changed more than a penalty on excess reserves to get banks to lend to these?

  11. Chauncey Gardiner

    Thank you for an informative article, Dan Kervick. However, both the precise role of the Primary Dealers and the raw mechanics of how QE funds from FED purchases of US Treasury debt and MBS from the Primary Dealers flow into the financial markets remains unclear to me, as well as exactly how decisions are made as to which financial assets that QE Cash is to be directed into, or if the Cash is just being added to the Primary Dealers’ Reserve Accounts at the Fed.

    How do the Primary Dealers get the U.S. Treasury bonds to sell to the Fed in the first place. Are they acting as agents for the U.S. Treasury? If so, why are the Primary Dealers necessary intermediaries at this point, particularly since I believe some are foreign entities?

    The growth of both the Reserve Account balance and the FED’s balance sheet since September 2008 has been extraordinary. Why?… and why is it continuing?… really.


    1. jake chase

      The primary dealers get the bonds they sell to the Fed by buying them from those who own them. They buy from the banks, from the hedge funds, from rich Uncle Julius, from the Chinese Central Bank. They answer the phone at 10:30 when the Fed calls, chow down a few basis points of profit on a few billion, and head to the Racquet Club for lunch.

      Nice work if you can get it, but you can’t.

      1. Chauncey Gardiner

        Thanks, Jake. But as Tweety Bird asked, “Is it twue, is it twue?” Do you have a link you could share? (Seems to be a paucity of verifiable information on this subject publicly available, or maybe I just don’t know where to look.)

        Phone time (presumably on secure lines) you suggested conflicts with past statement I read on another blog that a daily meeting is held at 7am ET in FRBNY offices at 33 Liberty where the PDs receive their marching orders. A 10:30 ET conference call would also seem to conflict with “Risk on/Risk off”, which seems to be established earlier in the trading session, albeit often after a whipsaw or two.

        Thanks. I am not a trader, just want to consider this from a public policy perspective.

        1. jake chase

          You may want to read two excellent books, both somewhat dated:

          The Bankers, by Martin Mayer, and Secrets of the Temple, by William Greider. As I recall both are quite good about Fed open market operations and the role of primary dealers.

          Of course, these days the Fed buys mostly CDOs, and GE Commercial Paper, and other stuff with even less value. They get this drek from the banks, mostly from the biggest one. This used to be illegal, but that was when we had laws and enforced them. These days we have monetary policy instead.

          Whether it goes through the primary dealers or not for the CDOs I have no idea. I think the PDs only exist because the Fed is prohibited from buying directly from the US Treasury. No doubt this is Congress’s idea of protecting the taxpayer. LOL.

          1. kris

            I do not think it matters any longer.
            IMO the Fed is fully under WH orders right now and it is simply advising and executing, but not making any decisions.

            As Nixon’s Fed chairman said:
            If we do not do what the president says, we are going to lose our independence

          2. Chauncey Gardiner

            Thank you both, Jake and Kris. Re your observations about asset quality, Jake: I am wondering to what extent the push for PPPs is being driven by the need for collateral under the current monetary system. Are the next stops revenue producing infrastructure and high quality natural resources? Just a thought.

            I regret that my memory is not serving me well as to where I read that, Kris. Here are a couple of related articles by Lee Adler, who publishes the Wall Street Examiner blog. The first, which is also somewhat dated, includes a paragraph that is on topic. The second draws on the work of Wolf Richter, who occasionally posts at both this website and Lee’s:

            http://ilene.typepad.com/ourfavorites/2011/06/bernankensteins-monster.html ,


            Thank you for the book referrals, Jake.

  12. flow5

    “bank reserves don’t leave the banking system”

    LOL. Neither does money. But lowering the remuneration rate will stimulate the flow of savings thru the non-banks (thereby matching savings with investment). That in a nutshell is the overall economic problem.

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