Wednesday, October 24, 2012

Steve Keen on the Myth of the Money Multiplier

An interesting article here from Steve Keen on the money multiplier myth:
Steve Keen, “The Myth of the Money Multiplier,” Businessspectator.com, 22 October, 2012.
Although the point is well taken, I don’t quite see how this means that fractional reserve banking is a myth.

If modern banks operate on reserves that are a fraction of their aggregate debts to depositors, then surely we do in fact have fractional reserve banking in the modern world.

4 comments:

  1. I think what he means is that central bank has to supply the reserves in floating fxregime no matter what the reserve requirement is since money supply is endogenous. It can be 10%, 50%, 100%, 200%. CB is still setting the price and It has to supply the reserves. Technically It is fractional reserve. Does It make sence?

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  2. "then surely we do in fact have fractional reserve banking in the modern world"

    Modern banks in Canada and Australia have zero reserve requirement.

    Fractional reserve is almost always used to mean some form of money multiplier system is in operation with reserves acting as some sort of constraint. An idea the Canadian and Australian model dispenses with as a matter of construction.

    In reality we have capital ratio banking.

    The Reserve system is just the means by which a bank deposit is moved to another bank. If as a bank you agree to transfer liabilities for a person to another bank then some other person has to come in the opposite direction to make the accounting work.

    In a modern system the person of last resort is the Central bank.

    Reserves are really a red herring.

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    Replies
    1. "Modern banks in Canada and Australia have zero reserve requirement."

      And yet such banks still operate on vault cash and reserves at their respective national central banks.

      "Fractional reserve is almost always used to mean some form of money multiplier system is in operation with reserves acting as some sort of constraint. "

      That point is well taken.

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  3. I suspect that "fractional reserve banking is a myth" might have to do with the presentation of it: the idea that the reserve is fundamental, and is itself fractioned off in the course of lending. However, absent that connotation you do have a point.

    I suspect this is all related to the occasional rhetorical spasm that eschews "fractional reserve" for "fictional reserve." But then again, according to some sources, it may not be rhetorical at all, in light of all the deposits not even subject to reserve requirements.

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