You're confusing what happens on an individual level (wherein a bank can make a loan and "create the money in the bank account") with how the economic activity works. Essentially when the bank "creates the money in a bank account" its doing precisely the textbook money creation activity but skipping the part where they actually hand the guy the currency and he turns around and puts it in a bank account. Would it be and different if banks required that they handed the guy the money first before they required him to create his account? (I.E. the way "some textbooks are wrong") No it would not be.
Importantly, to determine if they really do create money and so money, on a macro level is really endogenous, we have to determine whether or not their decision making is constrained by their reserve levels. If you do not do this you will make the mistake in saying that banks create money because you will not see the mechanisms by which they're ruled. Your statement is akin to saying that consumers set GDP because they can always just spend, while ignoring that their spending is limited by their income and their income is limited by their productivity(or prior capital accumulation). The power of banks to create money, just like the power of people to move GDP depends on the key binding constraint no longer being binding.
So, are banks constrained by their reserve levels? Yes, absolutely they are statutorily constrained. The reserve levels of banks consistently are near the statutory limit. The LIBOR actually has an effect on the economy because when banks are near the statutory limit they must lend between themselves (or from the BoE) just as the fed rate has the same effect. We know they do both because we observe the markets and because if it was not so then the fed rate and LIBOR would have no effects on the market at all (which we know that they do)
Making the statement then, that money is endogenous even when banks are constrained by their reserve limits and that the mechanism to create money actually lies within them, and not within the monetary authority which controls the supply and leverage limits implies that banks are not sensitive to interest rates which is the largest load of bunk to have ever bunked bunk.
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timeasmymeasure
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Date: 2014-04-20 09:38 pm (UTC)Importantly, to determine if they really do create money and so money, on a macro level is really endogenous, we have to determine whether or not their decision making is constrained by their reserve levels. If you do not do this you will make the mistake in saying that banks create money because you will not see the mechanisms by which they're ruled. Your statement is akin to saying that consumers set GDP because they can always just spend, while ignoring that their spending is limited by their income and their income is limited by their productivity(or prior capital accumulation). The power of banks to create money, just like the power of people to move GDP depends on the key binding constraint no longer being binding.
So, are banks constrained by their reserve levels? Yes, absolutely they are statutorily constrained. The reserve levels of banks consistently are near the statutory limit. The LIBOR actually has an effect on the economy because when banks are near the statutory limit they must lend between themselves (or from the BoE) just as the fed rate has the same effect. We know they do both because we observe the markets and because if it was not so then the fed rate and LIBOR would have no effects on the market at all (which we know that they do)
Making the statement then, that money is endogenous even when banks are constrained by their reserve limits and that the mechanism to create money actually lies within them, and not within the monetary authority which controls the supply and leverage limits implies that banks are not sensitive to interest rates which is the largest load of bunk to have ever bunked bunk.