I gather that some of the impetus behind Regulation Q was as part of the "financial repression" after WW II. Specifically, the federal government had a huge pile of debt to work off, so regulations were biased to make it hard for savers to get full market interest rates, making it cheaper for the government to finance the debt.
apparent typo: "Since the price of gold was $21 dollars an ounce, the only way for gold to become more expensive in real terms is for the price of everything else."
I am a complete amateur at all this, trying to make some sense of competing incompatible explanations. But I thought...banks don't actually lend out reserves—instead, they create new money when they make loans. Which is it?
It is totally irrelevant which they do. They both equally describe the world.
The reason some people are insistent upon banks creating money is because they wish to deny the efficacy of monetary policy. Once you say that monetary policy doesn’t affect the money supply, all you have left is fiscal policy. It is, in short, a stalking horse for various government interventions, which is why this view is most popular amongst a certain sort of British Marxist.
Thank you for the quick response, and again I must profess my ignorance/naiveté here, although I read as much I can manage about it. Still confused! Maybe by deliberate action from some quarters.
How can they both describe the world? If it's reserves, they can run out, right? Whereas if it's double-entry bookkeeping, no constraints. And are there (menaingful) reserve requirements or no?
But it if it's not reserves, why _don't_ they just make all the loans they want, which they obviously don't.
I know part of the answer here is, "go read a book or take a class" but I would sort of think there could be a ELI5 non-polemical explanation here, and it bothers me that one typically gets a "those other guys are idiots" explanation from both sides.
The way I see it is that a bank makes loans out, and takes deposits (loans) in. I think it is unimportant which order they take the steps — at the end of the day, in and out have to balance.
The summary is that banks create money by making loans. The reason they can't make all the loans they want is that they need to remain solvent in order for their deposits to have value. In principle depositors could assess their solvency through reputation or direct accounting of their books, but in practice the government insures the banks both directly (FDIC) and implicitly (SVB), and wants to manage systemic risk, so the government forces them to be solvent through regulation.
It's helpful to imagine yourself creating money. Suppose you lend your friend $100 but instead of giving them cash you gave them a piece of paper that says you will give $100 to the holder of the paper. You just created $100! As long as everyone knows you have at least $100, your friend can buy goods and services with the piece of paper. The whole thing breaks down if you issue more pieces of paper than you can pay back (or people think that you can pay back).
1) the idea that “.. by reducing the amount available to banks, many otherwise profitable loans are unable to be made.”
Can only be the case if banks are ~leverage constrained~ which *can* be caused by deposit depletion. But this is not necessarily true. So long as a bank is not leverage constrained it can continue to make loans wherever it sees opportunities. Deposits do not “fund” banks, as the author suggests (in the current fiat era)
2) Some of the most conservative economists are proponents of what you call “British Marxism”
There are very serious thinkers who’s work is being worked into the mainstream who have made the exact claim that monetary policy cannot dictate the price level, it can only dictate how smooth the rise in prices are, for example.
I feel like I'm still possibly misunderstanding things, but after thinking about this on my own for several years, I feel like I can simplify it down to "Fountain pen money is just fractional reserve banking but with less steps".
i.e. the usual Fractional Reserve Banking story you hear is that if you deposit $100 at the bank, and the fractional reserve ratio is 10%, then the bank can loan out $90 to the next person. That money eventually winds up back at the bank (well, *a* bank), which can now loan out $81 to the next person. That money eventually winds up in another bank that loans it out, adding $72.90 to the equation. This keeps going until you eventually reach $1000 worth of "bank money" from $100 of paper money.
There's just 2 problems with that:
1. It takes an infinite number of steps to go from $100 to $1000.
2. If someone wants a loan for $900, they can't get it, the first bank in the chain can only loan out $90 at once, even if taken together all the banks can loan out $900.
Fountain pen money is the idea that, "Well, what if the first bank can just write down $900 for its loan? What if we complete the chain in just one step, and to boot the guy can get a $900 loan?". You get the same results -- $1000 from $100, $900 in loans total -- but you get it faster and simpler, and with more flexibility to handle the big $900 loan. It's a strict improvement.
>The bank had lent out the money to do tasks which would take a longer time to complete than its depositors could accept.
What if we didnt do that? IE, you would deposit money for a fixed amount of time, and the bank cant lend it out for longer. If you need the money sooner, you need to borrow - usually quite easily, with your deposit as a security. How big are the costs during non-crash times, and does it actually solve the problem or just shift it? I think at the very least youd get rid of the discontinuity with a bank run.
To some degree, banks already do that -- the longer the time you have the deposit locked up for, the longer the loan the bank can issue. (IIUC, usually the "length" of a loan is actually the amount of notice the bank has to give when it calls the loan from the borrower.)
But the real problem is that borrowers want the money with a longer time horizon than depositors want to commit the money. Statistically, that's safe to support, because the sum of all deposits is steadier over time than any single depositor's account.
Just trying to make sure I understand your model, in your proposal if everybody wants cash at once the bank lends to the ones it can lend to, and tells the rest that it doesn't feel like lending anymore, so it doesn't default, and the ones who weren't first in line just have to wait till the bank is ready to start lending out cash again?
I think the banks would lend at higher interest rates in such a scenario, until supply and demand for lending are equal. Still not great obviously, but better than leaving a few entirely hanging. And you do get everything back, on the due date, which means no reason to get it out if you dont need it during that time. The people who do need money now have reason to be first only to the extent to which they predict better than the bank that many will need money soon. These should mostly eliminate self-fulfilling-prophecy bankruns.
Also because the bank wont actually go bankrupt, its not dangerous for other banks to lend to them.
I don't get how the credit card stuff follows, at least in terms of significance. How big would the effect of nuking credit cards be? My intuition is that it would not effect growth very much, so would be trivial.
Like yeah there's some level at which people with credit card debit are making rational choices about their discount rate and present consumption, but it doesn't seem like credit cards are facing much competition to have lower interest rates, and there's a substantial gotcha component with people not understanding how credit cards work
There’s quite a bit of competition, at least in the US. There’s a credit cards subreddit, half of which is obsessed with finding the optimal card for rewards, the other half of which tries to identify a set of cards with 0% interest promotions, so by rolling over the balance every six months you can finance your lifestyle interest-free.
There’s a million different credit cards but my understanding is that the payment networks are a duopoly, visa, mc takes the majority of. We need a more competitive system and laws protecting people from de banking because it is really necessary to make a living
The large majority of credit card processing fees accrue to the issuing banks (who assume most of the risk), not the payment networks. Also, in the US at least, Discover and Amex are accepted virtually everywhere, so I'd say it's more a big four than a duopoly. Plus there's PayPal for digital transactions.
But I absolutely agree that greater competition would be better to protect individuals. However, note that the most egregious case of de-banking of which I'm familiar (of people that weren't terrorists/criminals) was initiated by the Canadian government. I think governments remain the greatest risk to individual freedoms.
Yes I forgot about discover. As far as debanking yes there was the government initiated blocking in Canada but it’s not uncommon for companies to block people or companies they simply dislike, like the kiwi farms being denied by stripe. This should be illegal. Kiwi farms is not a terrorist group, they just didn’t like Josh
I gather that some of the impetus behind Regulation Q was as part of the "financial repression" after WW II. Specifically, the federal government had a huge pile of debt to work off, so regulations were biased to make it hard for savers to get full market interest rates, making it cheaper for the government to finance the debt.
apparent typo: "Since the price of gold was $21 dollars an ounce, the only way for gold to become more expensive in real terms is for the price of everything else."
I am a complete amateur at all this, trying to make some sense of competing incompatible explanations. But I thought...banks don't actually lend out reserves—instead, they create new money when they make loans. Which is it?
It is totally irrelevant which they do. They both equally describe the world.
The reason some people are insistent upon banks creating money is because they wish to deny the efficacy of monetary policy. Once you say that monetary policy doesn’t affect the money supply, all you have left is fiscal policy. It is, in short, a stalking horse for various government interventions, which is why this view is most popular amongst a certain sort of British Marxist.
Thank you for the quick response, and again I must profess my ignorance/naiveté here, although I read as much I can manage about it. Still confused! Maybe by deliberate action from some quarters.
How can they both describe the world? If it's reserves, they can run out, right? Whereas if it's double-entry bookkeeping, no constraints. And are there (menaingful) reserve requirements or no?
But it if it's not reserves, why _don't_ they just make all the loans they want, which they obviously don't.
I know part of the answer here is, "go read a book or take a class" but I would sort of think there could be a ELI5 non-polemical explanation here, and it bothers me that one typically gets a "those other guys are idiots" explanation from both sides.
The way I see it is that a bank makes loans out, and takes deposits (loans) in. I think it is unimportant which order they take the steps — at the end of the day, in and out have to balance.
This is as close to an ELI5 non-polemical explanation I've seen:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
The summary is that banks create money by making loans. The reason they can't make all the loans they want is that they need to remain solvent in order for their deposits to have value. In principle depositors could assess their solvency through reputation or direct accounting of their books, but in practice the government insures the banks both directly (FDIC) and implicitly (SVB), and wants to manage systemic risk, so the government forces them to be solvent through regulation.
It's helpful to imagine yourself creating money. Suppose you lend your friend $100 but instead of giving them cash you gave them a piece of paper that says you will give $100 to the holder of the paper. You just created $100! As long as everyone knows you have at least $100, your friend can buy goods and services with the piece of paper. The whole thing breaks down if you issue more pieces of paper than you can pay back (or people think that you can pay back).
1) the idea that “.. by reducing the amount available to banks, many otherwise profitable loans are unable to be made.”
Can only be the case if banks are ~leverage constrained~ which *can* be caused by deposit depletion. But this is not necessarily true. So long as a bank is not leverage constrained it can continue to make loans wherever it sees opportunities. Deposits do not “fund” banks, as the author suggests (in the current fiat era)
2) Some of the most conservative economists are proponents of what you call “British Marxism”
There are very serious thinkers who’s work is being worked into the mainstream who have made the exact claim that monetary policy cannot dictate the price level, it can only dictate how smooth the rise in prices are, for example.
I feel like I'm still possibly misunderstanding things, but after thinking about this on my own for several years, I feel like I can simplify it down to "Fountain pen money is just fractional reserve banking but with less steps".
i.e. the usual Fractional Reserve Banking story you hear is that if you deposit $100 at the bank, and the fractional reserve ratio is 10%, then the bank can loan out $90 to the next person. That money eventually winds up back at the bank (well, *a* bank), which can now loan out $81 to the next person. That money eventually winds up in another bank that loans it out, adding $72.90 to the equation. This keeps going until you eventually reach $1000 worth of "bank money" from $100 of paper money.
There's just 2 problems with that:
1. It takes an infinite number of steps to go from $100 to $1000.
2. If someone wants a loan for $900, they can't get it, the first bank in the chain can only loan out $90 at once, even if taken together all the banks can loan out $900.
Fountain pen money is the idea that, "Well, what if the first bank can just write down $900 for its loan? What if we complete the chain in just one step, and to boot the guy can get a $900 loan?". You get the same results -- $1000 from $100, $900 in loans total -- but you get it faster and simpler, and with more flexibility to handle the big $900 loan. It's a strict improvement.
>The bank had lent out the money to do tasks which would take a longer time to complete than its depositors could accept.
What if we didnt do that? IE, you would deposit money for a fixed amount of time, and the bank cant lend it out for longer. If you need the money sooner, you need to borrow - usually quite easily, with your deposit as a security. How big are the costs during non-crash times, and does it actually solve the problem or just shift it? I think at the very least youd get rid of the discontinuity with a bank run.
To some degree, banks already do that -- the longer the time you have the deposit locked up for, the longer the loan the bank can issue. (IIUC, usually the "length" of a loan is actually the amount of notice the bank has to give when it calls the loan from the borrower.)
But the real problem is that borrowers want the money with a longer time horizon than depositors want to commit the money. Statistically, that's safe to support, because the sum of all deposits is steadier over time than any single depositor's account.
>But the real problem is that borrowers want the money with a longer time horizon than depositors want to commit the money.
Yes. The question was, *how big* of a loss would it be?
Just trying to make sure I understand your model, in your proposal if everybody wants cash at once the bank lends to the ones it can lend to, and tells the rest that it doesn't feel like lending anymore, so it doesn't default, and the ones who weren't first in line just have to wait till the bank is ready to start lending out cash again?
I think the banks would lend at higher interest rates in such a scenario, until supply and demand for lending are equal. Still not great obviously, but better than leaving a few entirely hanging. And you do get everything back, on the due date, which means no reason to get it out if you dont need it during that time. The people who do need money now have reason to be first only to the extent to which they predict better than the bank that many will need money soon. These should mostly eliminate self-fulfilling-prophecy bankruns.
Also because the bank wont actually go bankrupt, its not dangerous for other banks to lend to them.
I don't get how the credit card stuff follows, at least in terms of significance. How big would the effect of nuking credit cards be? My intuition is that it would not effect growth very much, so would be trivial.
https://bfi.uchicago.edu/working-papers/credit-card-entrepeneurs/
Quite relevant, small businesses absolutely need credit cards.
Like yeah there's some level at which people with credit card debit are making rational choices about their discount rate and present consumption, but it doesn't seem like credit cards are facing much competition to have lower interest rates, and there's a substantial gotcha component with people not understanding how credit cards work
There’s quite a bit of competition, at least in the US. There’s a credit cards subreddit, half of which is obsessed with finding the optimal card for rewards, the other half of which tries to identify a set of cards with 0% interest promotions, so by rolling over the balance every six months you can finance your lifestyle interest-free.
There’s a million different credit cards but my understanding is that the payment networks are a duopoly, visa, mc takes the majority of. We need a more competitive system and laws protecting people from de banking because it is really necessary to make a living
The large majority of credit card processing fees accrue to the issuing banks (who assume most of the risk), not the payment networks. Also, in the US at least, Discover and Amex are accepted virtually everywhere, so I'd say it's more a big four than a duopoly. Plus there's PayPal for digital transactions.
But I absolutely agree that greater competition would be better to protect individuals. However, note that the most egregious case of de-banking of which I'm familiar (of people that weren't terrorists/criminals) was initiated by the Canadian government. I think governments remain the greatest risk to individual freedoms.
Yes I forgot about discover. As far as debanking yes there was the government initiated blocking in Canada but it’s not uncommon for companies to block people or companies they simply dislike, like the kiwi farms being denied by stripe. This should be illegal. Kiwi farms is not a terrorist group, they just didn’t like Josh