Talk:Fractional-reserve banking/Archive 12

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Do Federal Reserve member banks hold the exclusive right to create money by “lending”?

Some sources (e.g. http://www.publicbankinginstitute.org) imply that any bank, be it a member of the Federal Reserve system or not, has the right to create US$ denominated loans. This is a subject that I believe deserves discussion in this Wikipedia topic. If this is true there are significant implications for the economy. I am not an expert or a degreed economist--simply a scientist affected by economic crashes such as that of 1929 or that of 2008. I have studied the Federal Reserve system mainly using the Chicago Fed’s Modern Money Mechanics booklet.

For example, if state chartered banks are allowed to use fractional reserve lending, it would seem that such banks would have to be regulated by the Federal Reserve. Otherwise, expansion of the money supply of the US is not determined by the Federal Reserve. This is just one question that needs to be addressed.

If the privilege of fractional reserve lending of US$ denominated money is reserved strictly for member banks of the Federal Reserve at least a mention of this regulation should be made, IMO. --Lobdillj (talk) 00:06, 28 December 2016 (UTC)

This is already covered in the very beginning of the article. "A bank" means just what it says: "A bank." That obviously includes banks that are not member banks in the Federal Reserve System. Famspear (talk) 00:34, 28 December 2016 (UTC)

PS: The rules are complicated with exceptions, but I believe the general rule is that a state chartered bank can indeed be subject to the reserve requirements of Regulation D of the Federal Reserve System, even if that bank is not a member bank in the Federal Reserve System. See generally 12 USC sections 1813(a)(1), 1813(c)(1), 1813(h), 1813(l), and 1815, and very specifically the "eligible to apply to become an insured bank" language in Regulation D, at 12 CFR section 204.1(c)(1)(i). Essentially, a state chartered bank that is "eligible" to "apply" to be an "insured bank" is subject to Regulation D -- whether that bank actually applies or not, and whether that bank is an insured bank or not. Famspear (talk) 03:23, 28 December 2016 (UTC)

Time to change which theory gets prominence? - Summary

This page previously contained a debate about the "money multiplier" vs "The BoE paper" which was closed (perhaps rightly) after it become overly long. However, I don't believe the discussion should be buried because A) those in favour of the BoE paper were in a majority of four to (at most) three and B) there was actually some consensus beginning to emerge that perhaps there was no need for the main page to contradict anything in the BoE paper. Nobody at any point in the entire (lengthy) discussion had a single criticism of the BoE paper. So it appears that edits to the main page reflecting the BoE position should be allowed.

The addition of this summary section is not intended to instigate a whole new debate but rather as a reference.

For anyone that missed the opening statement from the original thread, here it is again:

There are two competing theories about how the monetary system works presented on the main page. The "money multiplier" theory and the "endogenous money" theory. Up until now the "money multiplier" model has been presented prominently with the "endogenous money" scarcely mentioned or being presented as "alternative" or "heterodox". There have been many peer reviewed papers suggesting that the endogenous money theory is the one that actually corresponds to reality, but as some wiki editors pointed out (perhaps rightly) have been in rather small journals and have been paid little attention by the mainstream. However this all changed at the start of 2014 when McLeay et al published "Money creation in the modern economy" in the Bank of England Quarterly Bulletin, arguably the most authoritative journal on the workings of the monetary system that exists. This paper has since had 230 citations. Correct me if I'm wrong but I do not know of any academic papers that have challenged the paper and defended the money multiplier. At what point should wikipedia acknowledge that the endogenous money theory has become the new consensus? Now perhaps?

Indeed former Deputy Governor of the Bank of Canada, William R White seems to think the consensus changed already, when in 2002 he said: "Some decades ago, the academic literature would have emphasised the importance of the reserves supplied by the central bank to the banking system, and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances." — Preceding unsigned comment added by Reissgo (talk • contribs)

I'm not sure that this re-addition summary section is needed on this talk page "as a reference." I do agree with Reissgo that there is no need for a "whole new debate."

We have already demonstrated that the Wikipedia article, as currently written, already reflects an essential substance of the Bank of England article as to how demand deposit liabilities normally are created. We have also demonstrated that the money multiplier, as properly described in the Wikipedia article and in textbooks such as the Horvitz text, is not a description of how demand deposit liabilities are usually created, but is instead a description of a way to estimate something. Further, the Wikipedia article also already includes references, with citations, to various critiques of the money multiplier.

There are not "two competing theories" about "how the money system works" on the "main page" Wikipedia article -- at least not in the sense that Reissgo apparently means. The Wikipedia article correctly describes how loans are made by creating deposit liabilities. The article also correctly describes how the money multiplier is used to compute a particular estimate of the amount of money at a given point in time. These are not two "competing" theories of the same thing; they are two descriptions of two different things. Famspear (talk) 14:49, 24 November 2016 (UTC)

How about integrating anything that's new in the Bank of England article or clarifying what has already been described? Wikipedia isn't about facts but information from reliable sources, of which the BoE is certainly one when it comes to banking. --JamesPoulson (talk) 05:29, 2 December 2016 (UTC)

I agree the article is misleading and "Money creation in the modern economy" is actually the most up-to-date and complete explanation. There are two important papers: Money creation in the modern economy and Money in the modern economy: an introduction. You also find the corresponding video https://www.youtube.com/watch?v=CvRAqR2pAgw and https://www.youtube.com/watch?v=ziTE32hiWdk. I don't understand why those papers are not used for citations in the article but only in external links. --Gagarine (talk) 12:57, 30 December 2016 (UTC)

You would need to be specific. Which line in the Wikipedia article is "misleading"? Also, you would need to be specific as to why you don't "understand why those [Bank of England] papers are not used for citations in the article". What specific statements in the Bank of England papers should be used as sources for material to be added to the article, and what specific wording would you like to see added to the article? Famspear (talk) 15:05, 30 December 2016 (UTC)

Money multiplier equation: Additional detail added - then removed as claimed "SYNTH"

In the section on the money multiplier equation, I added extra confirmation that the formula was not applicable in the real world with the text:

Indeed the Deutsche Bundesbank have stated "a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal". Ref: here

SPECIFICO undid the edit with the claim that it is SYNTH. Would SPECIFICO like to give an explanation? Or perhaps a third editor care to comment? Reissgo (talk) 16:57, 21 May 2017 (UTC)

It's disruptive for you to misrepresent my comment. SYNTH using a primary source. We are bound to WP policy when we choose to edit here. SPECIFICO talk 17:26, 21 May 2017 (UTC)

I have no idea how it is SYNTH, please explain. Reissgo (talk) 17:36, 21 May 2017 (UTC)

It's kind of axiomatic that bad edits may come from editors who "have no idea" -- read WP site policies. These things have been explained to you many times and you don't get command performances from other editors. SPECIFICO talk 18:27, 21 May 2017 (UTC)

Dear Reissgo: I think you pretty much gave the game away. You're saying that you added the quote as "confirmation" that the "formula" (the money multiplier equation) is "not applicable in the real world." But, that's not what the quoted Deutsche Bundesbank material says, and apparently that's not what the authors of the quoted Deutsche Bundesbank material mean. You quoted from page 13 of the Monthly Operating Report for April 2017 (Vol. 69, No. 4) from Deutsche Bundesbank. Your text, as added to the article (and then removed by editor SPECIFICO) was:

”Indeed, the Deutsche Bundesbank have stated "a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal.” “ (quoting from the April 2017 report).

This was a reference to excess reserves, not to the money multiplier. However, you inserted that material in a section on the money multiplier. Inserting that material in that way – without showing context – might leave the reader with the idea that you are trying to use that quote to imply that the Deutsche Bundesbank was saying something supporting your own complaints about what the money multiplier effect is, and how the money multiplier does or does not work in the real world. If that’s what you’re trying to do, that might be a prohibited synthesis under Wikipedia rules: quoting from a source and implying that the source material means something other than what the source author means.

Here is the material you quoted in the context of the paragraph in which it is found in the Deutsche Bundesbank report:

”It suffices to look at the creation of (book) money as a set of straightforward accounting entries to grasp that money and credit are created as the result of complex interactions between banks, non-banks and the central bank. And a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal. Instead, various economic and regulatory factors constrain the process of money creation. From the perspective of banks, the creation of money is limited by the need for individual banks to lend profitably and also by micro and macroprudential regulations. Non-banks’ demand for credit and portfolio behaviour likewise act to curtail the creation of money. The central bank influences the money and credit creation process in normal times through its interest rate policy, which affects the financing and portfolio decisions of banks and non-banks through various transmission channels.”

(bolding added).

As you can see, in the same paragraph from which you lifted the quote, Deutsche Bundesbank authors mention “microprudential and macroprudential regulations” as a limiting factor on the ability of a bank to create money. Regarding those microprudential and macroprudential regulations, the same text goes on to provide (in part), on page 22:

”[ . . . ] Elements of such [microprudential and macroprudential] regulation, including liquidity and, in particular, capital standards, have the effect of constraining lending. Capital regulations force banks to hold a certain quantity of capital against their lending, depending on the risks involved. This means that banks’ ability to expand their lending is constrained by the capital at their disposal or by their ability to build up additional capital reserves [ . . .]”.

(bolding added).

Deutsche Bundesbank is saying that capital regulations are a limiting factor for banks. The text is saying that banks must “hold a certain quantity of capital against their lending.” In the United States, for example, that is what the reserve requirements of the Federal Reserve System are about.

From page 17, footnote 14:

”Newly created or newly acquired customer deposits on the bank’s balance sheet imply an additional minimum reserve requirement because the overall volume of customer deposits generally determines how much minimum reserves the bank must maintain. For monetary policy reasons, minimum reserves must be kept on the bank’s account with the central bank; the amount of reserves that need to be maintained for this purpose is just a fraction of the deposits held with the bank, however.”

(bolding added). Notice the word "generally."

From page 24, footnote 35, in part:

The ratio of money over the monetary base (reserves plus currency in circulation) is referred to as the “money multiplier”. This, however, should not be broadly interpreted as a causal relationship between reserves and the money supply. The money multiplier is a reduced form resulting from the interaction of the various sectors when determining the money supply and the monetary base [ . . . ] For certain analytical purposes, the simplification involved here may be useful. For other issues, however, it makes sense to look at the driving forces behind the multiplier.

(bolding added).

Nowhere does the Deutsche Bundesbank report say or imply that money multiplier equation is "not applicable in the real world." They are simply pointing out its limitations. Indeed, to say that the money multiplier is "not applicable in the real world" is to over-state your case and to mis-represent what the source material means. Again, the money multiplier is not a description of an actual physical process. It is a way of estimating a possible effect of a process. If the Deutsche Bundesbank authors thought that money multiplier were not applicable in the real world, they would not have pointed out that it is "useful" as a "simplification" for "analytical purposes."

Economists and accountants use mathematical estimates all the time. An estimate is no less real or useful merely because it is an estimate. Famspear (talk) 21:06, 21 May 2017 (UTC)

Note. The text immediately preceding the material you had inserted reads that the "ceiling implied by the money multiplier does not impose a limit on money creation in practice." The point is that whether that's a true statement or not, and whether the authors of the Deutsche Bundesbank report happen to agree with that statement, the Deutsche Bundesbank quote you added probably was not intended by its authors to mean what you want to imply the quote means. That is, at least in part, why the edit might be considered a prohibited synthesis for purposes of Wikipedia. Famspear (talk) 21:14, 21 May 2017 (UTC)

I can not compete with that level of verbiage - so I give up. Reissgo (talk) 14:27, 22 May 2017 (UTC)