AG Geldordnung und Finanzpolitik/Falsche Multiple Geldschöpfung

Navigation

Organisatorisches: Selbstverständnis der AG | Ziele der AG | Geschäftsordnung | Kommunikationsmittel | Protokolle | Pads | Podcasts
Inhaltliches: Mehrheitsmeinung in der AG | Aufbereitete Themen | Podiumsdiskussionen | Grillfeste | Bildungsveranstaltung | AG-Videos | Abstimmungen und Ergebnisse
Sonstiges: Quellen | Zusammenarbeit mit anderen Gruppen | Blog | Mitglieder

Vorbemerkung: Dies ist eine Meinung, die derzeit von dem Mitglied Alexander Praetorius vertreten wird und spiegelt nur die Meinung einiger Mitglieder der Piratenpartei oder der AG Geldordnung und Finanzpolitik wider. Wer Anmerkungen/Fragen hat schreibt diese bitte auf die Diskussionsseite zu diesem Artikel.

Steve Keen - Debunking Economics

Page 306

"Few concepts are more deserving than the "Money Multiplier" of Henry Mencken's aphorism that "Expanations exist; they have existed for all time; there is always a well-known solution to every human problem - near, plausible, and wrong. [Multiple Geldschöpfung] In this model, money is created in a two-stage process. First, the government creates "fiat" money, say by printing dollar bills and giving them to an individual. The individual then deposits the dollar bills in his bank acocunt. Secondly, the bank keeps a fraction of the deposit as a reserve, and lends out the rest to a borrower. That borrower then deposits this loaned money in another bank account, and the process repeats. Let's say that the amount created by the government in $100, the fraction the banks keep as a reserve (known as the Reserve Requirement" and set by the government or central bank) is 10 percent, and it takes the banks a week to go from getting a new deposit to making a loan. The process starts with the $100 created by the government. One week later, the first bank has created another $90 by lending 90 percent of that money to a borrower. A week alter, a second bank creates another $81 - by keeping $9 of the new deposit in reserve and lending out the $81. The process keeps on going so that, after many weeks, there will be $1000 created, consisting of the initial printing of $100 by the government, and $900 in credit money created by the banking system - which is matched by $900 in additional debt.

There will be $900 of credit money in circulation, facilitating trade, while another $100 of cash will be held by the banks in reserve.

In this simple illustration, all the notes remain in the bank's vaults, while all commerce is undertaken by people electronically transferring the sums in their deposit accounts. Of course, we all keep some notes in our pockets as well for small transactions, so there's less creditcreated than the exmaple imlies, but the model can be modified to take account of this.

[This mechanism is known as money multiplier] and it's the process that Obama, on the advice of his economists, relied upon to rapidly bring the Great Recession to an end. Its failure to work was superficially due to some issues that Bernanke was well aware of, but the fundamental reason why it failed is that, as a model of how money is actually created, it is 'neat, plausible, and wrong'.

The fallacies in the model were first indentified by practical experience and then empirical research. In the late 1970s, when Friedman's monetarism dominated economic debate and the Federal Reserve Board under Volcker attempted to control inflation by controlling the rate of growth of money supply, the actual rate normally exceeded the maximum target that the Board set (Lindsey, Orphanides et al 2005:213). Falling below the target range could be explained by the model, but consistently exceeding it was hard to reconcile with the model itself.

[Fractional Reserve System] Empricial research initiated by Bsail Moore (Moore 1979, 1983, 1988a, 1997, 2001) and later independently corroborated by numerous researchers including Kydland and Prescott (1990), confirmed a simple operational observation about how banks actually operate made in the very early days of the monetarist controversy, by the then senior vice-president of the New York Federal Reserve, Alan Holmes.

The "money multiplier" model assumes that banks need excess reserves before they can make loans. The model process is that first deposits are made, creating excess reserves, and then these excess reserves allow loans to be made, which create more deposits. Each new loan reduces the level of excess reserves, and the process stops when this excess has fallen to zero. But in reality, Holmes pointed out, banks create loans first, which simulatenously creates deposits. If the level of loans and deposits then means that banks have insufficient reserves, then they get them afterwars - and they have a two-week period in which to do so. [The reserves required to be maintained by the banking system are predetermined by the level of deposits existing two weeks earlier (Holmes 1969:73)]

[!!!]In contrast to the money multiplier fantasy[!!!] of bank managers who are ubnable to lend until they receive more deposits, the real-world practically of baning was that the time delay between deposits and resergves meant that the direction of causation flowed, not from reserves to loands, but from loans to reserves.

Banks, which have the reserves needed to back the loans they have previously made, extend new loans, which create new deposits simultaneously. If this then generates a need for new reserves, and the Federal Reserve refuses to supply them, then it would force banks to recall old or newly issued loans, and cause a "credit crunch". The Federal Reserve is therefore under great presure to provide those reserves. It has some discretion about how to provide them, but unless it is willing to cause serious financial ructions to commerce on almost weekly basis, it has no discretion about whether those reserves should be provided. Holmes summed up the montarist objective of controlling inflation by controlling the growth of base money - and by inference the Money Multiplier model itself - as suffering from "a naive assumption".

"That the banking system only expands loans after the Federal Reserve System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accomodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accomodating that demand; over time, its influence can obviously be felt. (Holmes 1969:73)"

With causation actually running from bank lending and the deposits it creates to reserve creation, the changes in credit money should therefore precede changes in fiat money. This is the opposite of what is implied by the "Money Multiplier" model (since government money - base money or M0 - has to be created before credit money - M1, M2, and m3 - can be created), and it is precisely what Kydland and Prescott found in their empirical analysis of the timing of economic variables:

"There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything the monetary base lags the cycle slightly [...] The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be consideres [...] The difference of M2-m1 leads the cycle by even more than M2, with the lead being about three quarters [...] (Kydland and PRescott 1990:4)"

"This traditional view of the bank money creation process relies on the bank reserves-multiplier relation. The Fed is posited to be able to affect the quantity of bank deposits, and thereby the money stock, by determining the nominal amount of the reserve base or by changing the reserve multiplier [...]

There is now mounting evidence that the traditional characterization of the money supply process, which views changes in an exogenously controlled reserve aggregate as "causing" changes in some money stock aggregate, is fundamentally mistaken. Although there is a reasonably stable relationship between the high-powered base and the money stock, and between the money stock and aggregate money income, the causal relationship implies is exactly reverse of the traditional view (Moore 1983: 538)"

---

Page 310

It is possible to interpret this reverse causation as representing "a lack of moral fiber" by central bankers - accommodating banks" loan-creation rather than regulating it in the interest of the economy - but Moore pointed out that the provision of reserves by central banks to match loan-creaton by banks merely mirrored the standard behavior of banks with respect to their business clients. Businesses need credit in order to be able to meet their costs of producton prior to receiving salges receipts, and this is the fundamental beneficial role of banks in a capitalist economy:

"In modern economies production costs are normally incurred and paid prior to the receipt of sales proceeds. Such costs represent a working capital investment by the firm, for which it must necessariuly obtain finance. Whenever wage or raw materials price increases raise current production costs, unchanged production flows will require addiotional working capital finance. In the absence of instanteneous replacement cost pricing, , firms must finance their increased working capital needs by increasing their borrowings from their banks or by running down their liquid assets."

Banks therefore accommodate the need that businesses have for credit via additional lending - and if they did not, ordinary commerce would be subject to Lehman Brother-style credit crunches on a daily basis. The Federal Reserve then accommodates the need for reserves that the additional lending implies - otherwise the Fed would cause a credit crunch: "once deposits have been created by an act of lending, the central bank must somehow ensure that hte required reserves are available at the settlement date. Otherwise the banks, no matter how hard they scramble for funds, could not in the aggregate meet their reserve requirements."

Consequently, attempts to use the "money multiplier" as a control mechanism - either to restrict credit growth as during the monetarist period late 1970s, or to cause a boom in lending during the Great Recession - are bound to fail. It is not a control mechanism at all, but simple measure of the ration between the private banking system's creation of credit money and the government's creation of fiat money. This can vary dramatically over time: growing when the private banks are expanding credit rapidly and the government tries - largely vainly - to restrain the growth in money; collapsing when private banks and borrowers retreat from debt in a financial crisis, and the government tries - again largely vainly - to drive the rate of growth of money up.

The money drove up the unused reserves of the banking sector as never before (from $20 billion before the crisis to over $1 trillion after it) and the money multipliers - which in reality are no more than the ratios of the three measures of the broad money supply, M3, M2, and M1 to base money - collapsed as never before. The M3 ratio fell from over 16 to under 8, and has continued to fall to below 7 since then; the M2 ratio - the one most comparable to the m1 ratio back in the 1920s-1940s - fell from 9 to below 4, while most embarrassingly of all, the M1 ratio fell below 1, hit as low as 0.78, and is still below 0.9 two years after Bernanke's fiat money injections.

Some "multiplier effect" Obama was sold a pup by his neoclassical advisors. The huge injection of fiat money would have been far more effective had it been given to the public, who at least would have spent it into circulation.

Admitting that the Money Multiplier doesn't exist,is inconvenient because, if so, then the supply of money is not exogenous - set by the government - but endogenous - determined by the workings of a market economy. This in turn means that this endogenous process affects real economy. This in turn means that this endogenous process affects real economic variables such as the level of investment, the level of employment and the level of input, when it has always been a tenet of neoclassical theory that "money doesn't matter". So acknowledging the empirically bleedingly obvious fact that the money multiplier is a myth also means letting go of another favorite neoclassical myth, that the dynamics of money can safely be ignored in economic analysis. Consequently, clear evidence that the money multiplier is a myth has been ignored even by the neoclassical economists who know otherwise.

(Carpenter and Demiralp 2010) finally acknowleges this: "Since 2008, the Federal Reserve has supplied an enormous quantity of reserve balances relative to historical levels as a result of a set of non-traditional policy actions. These actions were taken to stabilize short-term traditional policy actions. These actions were taken to stabilize short-term funding markets and to provide additional monetary policy stimulus at a time when the federal funds rate was at its effective lower bound. The question arises whether or not this unprecedented rise in reserve balances ought to lead to a sharp rise in money and lending. The results in this paper suggest that the quantity of reserve balances itself is not likely to trigger a rapid increase in lending [...] the narrow textbook money multiplier does not appear to be a useful means of assessing the implications of monetary policy for future money growth or bank lending"

This acknowledgment of reality is good to see, but - compared both to the data and the empirically oriented work of the rival "post-Keynesian" school of thought - it is thirty years and one economic crisis too late. It is also post-dates the effective abolition of the Reserve Requirement - an essential component of the "Money Multiplier" model - by about two decades.