Comment: Yeah I tried to get through to this guy

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Yeah I tried to get through to this guy

……but he won’t listen. What he is really talking about is over leveraged financial institutions maintaining their reserve requirement on the “margin”…….that’s margin in utility…….not borrowing as in stock margin. He hears antidotal evidence like the huge amount of excess reserves without any new loans being created by the banking system and jumps to the conclusion because loans are not being created…… it must be because of bank discretion. When in reality the regulators have increased lending standard which has dried up the comstomer pool. The people that can qualify for a loan don’t need one and the people that want a loan can’t get one. This is the reason the banks are sitting on the reserves and therefore reserves don’t look like they have much to do with loan creation.…..he also concluded because of the lack of loan creation that the money multiplier doesn’t exist and therefore will not or cannot create inflation or hyperinflation. When I saw this happening I knew it would only be a matter of time before this hypothesis came bubbling up. I commend him for having a good understanding of the Fed Fund System, buts that a far cry from understanding the entire banking system. This would be like having a fatal accident occur on the interstate and a very young naive accident investigator arriving at the scene of his first investigation. He does all the work he has been taught to do by his professors at accident investigator school and sees an engine that has been ripped from the car still running laying on the road. Because he has a complete understanding of the combustion engine he concludes that the engine is want caused the accident and by default all accidents on all interstate is caused by the combustion engine. During his investigation he failed to interview the three expert eyewitnesses standing on the side of the road that happen to be retired accident investigators…….because what they know does not matter because they only have knowledge and experience and wisdom to offer……like Murray Rothbard and Tom Woods and quite frankly me.

Bill only wants to want to looks at the antidotal evidence (although he claims there is empirical evidence but never supplies it) of what is happening in the system right now and what his professor taught him while dismissing all the people that have been around all these years looking at how the system was created.

Bill’s professor

My first point was to state the context of the “reserve” idea at the point of the banks creation:

The reserves requirements are a way to curtail leveraging up the banks’ balance sheet with(assets) loans. Reserves do lag loan creation, but not for the purposed you stated. In a 100% reserve system…..a bank could not make a loan. In a 50% reserve system a bank could make a loan while maintaining 50% for their reserves…..that loan would be deposited at another bank and that bank could only make a loan of 50% of that deposit. So there is a money multiplier in the form of loans in any factional reserve system.

Therefore his original premises false:

There is no money multiplier. Reserves don't lead to loans, they are provided with a lag to keep up with bank money creation.

Don’t the last three words in fact contradict the first five words? Just say’in?

Then I provided this, which he has yet to challenge, because if he tried to explain the system…..he will have to admit by definition a “factional reserves system”…….in deed has to have….. reserves for the bank liabilities.

If “A” is a true axiom, than all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must be true.
The antitheists of this logic is if “A” is false then everything that follows “A” is false.

I did offer an explanation to the antidotal evidence Bill hears about…..but he ignored it and told me I didn’t know the difference between capital reserves and reserves requirements (which are the reserves of this discussion, capital reserves are held on the banks’ balance sheet as “loan loss reserves” but they are reserves none the less held either in cash or cash like instruments)

Here are the points I made:
You are right that the banks do have trillions in excess reserves right not, but the reason is far from what you stated. The reason this is happening is because the Fed is giving the banks time to heal their balance sheets. By buying toxic assets, to the tune of about 3 trillion dollars.The Fed has taken bonds off the banks’ balance sheets that was technically making them insolvent and put cash (FRN) on their balance sheet……or tier one capital, which also carries a lower reserve requirements but that not the point…….cash is dead weight to a banks. They are getting it free of charge but it’s not earning them anything. So the Fed wanted to speed up the healing process so for the first time ever in their 100 year history, The Fed decided to pay interest on reserves. This is part of “quantitative easing” few understand.

This was his rebutal:

You are right that the banks do have trillions in excess reserves right not, but the reason is far from what you stated.<<
I didn't state a reason
When I said there's no money multiplier, I mean that a dollar of reserves/base money does not lead to 9 or 10 dollars in bank money, as the myth goes that T. Woods repeated.

But I found this footnote from a “white paper” Bill referenced that points at what I am saying.

Keister and McAndrews (2009), while conceding that both the unprecedented growth in banks‘ excess reserve holdings and the related collapse of the money multiplier were consequences of the Fed‘s October 2008 ―policy initiatives, including its decision to begin paying interest on reserves, also insist that ―concerns about high levels of reserves are largely unwarranted on the grounds that the reserve buildup ―says little or nothing about the programs‘ effects on bank lending or on the economy more broadly. Perhaps: but bank lending and nominal GDP data do say something about the programs‘ broader effects, and what they say is that, taken together, the programs were in fact severely contractionary.

But on the margin… an over leveraged system……excess reserves can lead to loans, but it’s like pushing on a string……it’s doesn’t have to happen but it certainly can and this would lead to the money multiplier effect. After the banks heal from the effects of the credit bubble the Fed will and has talked at length of an exit strategy. If the system was all about reserves as you say….the people that would know is the Fed……why are they consistently talking about this exit strategy? The Fed has continued the bubble by taking the toxic assets on to their banks balance sheet at “par” and will need the private banks to be healthy and vibrant when the bond bubble burst…..that is the motive.

Bill the axiom remains

If “A” is a true axiom, than all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must be true.
The antitheists of this logic is if “A” is false then everything that follows “A” is false.