Playing with fire – a very disappointing and factually incorrect Mises article about money – MishTalk

The Mises Institute has a shockingly poor assessment of how money is created.

Please consider “playing with fire.”

But before I waste 39 minutes, I recommend reading my opinion on the video first. You may not want to bother with it.

A very bad start

At 2:40: Jonathan Newman, a Mises economist wrongly explains: “Fractional reserve banking is the idea that banks hold a fraction of deposits in reserve so that someone comes along and makes a deposit. What she [the banks] In fact, they take that money and use it to finance loans that they make to other people, business loans, mortgages.”

At the 2:58 mark, Joseph Salerno, professor emeritus at Pace University, responds to Newman: “Let’s say they lend 90 percent. They like to keep a dollar for every ten dollars people deposit. So you can write checks up to $1,000 on this check deposit. At the same time, there are $900 more in circulation than before the deposit.”

No reserves on deposits

The paragraphs above are shockingly bad and completely wrong.

First of all, there is no reserve requirement for deposits. None.

Notional reserve lending is the new official policy

Without much fanfare or media coverage, the Fed made this announcement about reserves.

As announced on March 15, 2020, the Board reduced reserve requirements to zero percent effective March 26, 2020. This measure eliminated reserve requirements for all depository institutions.

I discussed the above on March 27, 2020 Notional reserve lending is the new official policy

Fundamentally, neither Salerno nor Newman understand how money is created.

Banks do not lend deposits. Rather, loans are the result of deposits. [I said banks never lent deposits. If you go back long enough they did.]

I commented:

Amusingly, another article appeared a few days ago that explains how the Money Multiplier works. The example goes like this: Someone deposits $10,000 and a bank loans out $9,000, and then the $9,000 is deposited back and 90% of the amount is loaned out, and so on.

The performance was potty. This is nowhere near the way loans are given.

What has changed in lending?

Essentially nothing.

The announcement has just officially admitted that the denominator of reserves for loans is zero.

When do banks issue loans?

1. They meet the capital requirements
2. You believe you have a creditworthy borrower
3. Creditworthy borrowers want to take out loans

Point two is worth discussing.

Banks may not have a creditworthy borrower, they just have to believe it, or they have an alternative belief that is true. In 2007, banks knew full well that they were making mortgage loans.

So why did banks give liar loans?

Because the banks accepted the idea, property prices would not fall. If property prices rose, the banks were protected.

BIS Working Papers No. 292 Unconventional Monetary Policy

In 2009 I referred to BIS Working Paper No. 292 “Unconventional Monetary”.

The article addresses two misconceptions

Proposal #1: Expanding bank reserves gives banks additional resources for lending

Thesis #2: There is something uniquely inflationary about financing bank reserves

From the BIS

The underlying premise of the first proposal is that bank reserves are required for banks to make loans. An extreme version of this view is the textbook notion of a stable money multiplier.

In fact, the amount of reserves hardly plays a role in banks’ lending decisions. The amount of outstanding loans is determined by banks’ willingness to lend based on perceived risk-return trade-offs and by the demand for these loans.

The most important exogenous constraint on credit expansion is minimum capital requirements.

Read these points over and over again until they become tangible. I reviewed this article in 2009 and again in 2020.

The fact is that loans create deposits and not the other way around.

Yet here we are, with zero reserves on deposits (not that any were ever needed, even if there were reserve requirements), discussing the absurd money multiplier theory.

I started flipping through the video and found some applicable statements from Jim Grant.

The rest is spotty. At 9:30 a.m., consider this amusing but wrong idea: “1971 [the Fed] may have done other things, like increase the price of gold.”

The comment referred to Nixon ending the redeemability of gold.

The video authors seem somehow not to be aware that you cannot set the price of gold. Rather, money should represent a fixed amount of gold, rather than gold whose value is expressed in dollars.

At 12:30 we see some intelligent commentary about who the loser is. “The average professional pays the price during the boom and bust cycle.”

But many of us have been making this comment for decades. Mises.Org didn’t offer anything new.

Starting at 27:00, the video contains a fair discussion about the risks of central bank digital currencies.

Stop the madness

At 30:00 Mises supposedly discusses how to stop the madness. But for five minutes the video droned on with an obvious why discussion rather than a how discussion.

At minute 35:00 there is a discussion about ending the Fed. Finally, at 37:35, Ron Paul explained: “Economically speaking, if you want healthy money and a healthy economy, you just have to get rid of the Fed.”

That was it. There is nothing more.

Diploma

For decades I’ve been saying we need to end the Fed and let the market set interest rates. My fear is that we will abolish the Fed and let politicians control the money supply.

Trump, who appointed Jerome Powell, now wants to fire him. Trump said he personally could do a better job.

Trump would be worse. Even if Trump were no worse, what about the next president?

The idea that a group of central planners can manage the economy is proven false by the increasing amplitude of boom-bust cycles over time.

But the idea that a politician or a congressman whose main goal is re-election could do a better job is ridiculous.

We must abolish the Fed, but only if we replace the Fed with nothing instead of politicians. The free market can set prices well.

Not only was the video full of factual errors, it also offered no discussion of how to end the Fed or what the consequences would be.

The Fed controls interest rates, but politicians control deficit spending. This key idea was not mentioned in the video.

Now, has there been any discussion (other than false) about how banks create money? If we had a dollar that was 100 percent backed by gold, a lot of things would have to change.

There was no discussion about this critical idea. That couldn’t be the case either. The authors have no idea how money is created.

Class F