Jason

Enjoyed your email very much. This perspective is so at odds with my old banker buddies with whom I worked in the crazy interest rate days of the late 70s. Some folks saw that as the end of the world. I used it as an opportunity to drop out of the system, ditch the company car, set aside the three-piece pinstripes, and go back to school for four years. I ended up learning “old” stuff, but there were useful thought tools I gathered during that time.

I am enjoying the exposure to MMT, etc. and look forward to the Zoom Meet and your next email.


My best to you,
Tom Sylvest, Jr.
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> On Sep 19, 2020, at 7:12 AM, nysa71 <[log in to unmask]> wrote:
> 
> Hello ToK Community,
> 
> Briefly on bank lending and government "borrowing", from an MMT perspective...
> 
> When people take out a loan from a bank, it is a common misconception that banks loan out other people's savings at the bank. This is called the "Loanable Funds" doctrine.
> 
> But this is not true. Banks loan money based on whether or not the borrower is credit-worthy. Then the bank loans money into existence --- or more precisely, the bank loans bank credit denominated in dollars.
> 
> However, in the macroeconomy, this "money creation" nets to zero, since the financial asset on one side of the balance sheet equals the financial liability on the other side. 
> 
> Now banks have reserve requirements. And at the end of the day, banks go on what's called the Fed Funds market, where banks who have a surplus of reserves can loan to banks that don't meet their reserve requirements. The interest rate on these loans is called the overnight rate. The more reserves in the banking system, the lower the overnight rate --- the less reserves, the higher the overnight rate. 
> 
> If a bank can't get a loan, the Federal Reserve is the Lender of Last Resort, but at a higher overnight rate, so banks try to avoid this.
> 
> Enter Federal "borrowing"...
> 
> Like taxes, federal borrowing has nothing to do with funding federal expenditures. The dollars had to have been spent into existence before there were any dollars to "borrow". So borrowing must serve some other function.
> 
> Borrowing is the issuance of Treasury Securities. Their function is to drain reserves from the banking system so that the Fed can hit their targeted overnight rate. The more dollars drained, the higher the overnight rate, and vice versa.
> 
> MMT economists will say that their really is no operational necessity for this since we've been off the gold standard for almost 50 years now. Hence, they often advocate for the cessation of issuing Treasury securities, (i.e., Federal "borrowing"), let the private banking system be flooded with reserves, and the overnight rte drop to zero. Commercial interest rates would stay at a minimum.
> 
> So just as federal spending and taxation are "fiscal policy", federal borrowing is "monetary policy", (i.e., the targeting of interest rates). And MMT economists tend to favor fiscal policy over monetary policy.
> 
> Indeed, the "lynch pin" to fiscal policy --- or using the language of the ToK, the "joint point" between the descriptive aspects of MMT and whatever prescriptive policies could flow from that description --- is the Federal Job Guarantee. And I'll make that my next topic.
> 
> In the meantime, for those who might like to read up a little more on bank lending and federal borrowing, here's a paper from two leading MMT economists (written in a very accessible way for the layperson): https://urldefense.proofpoint.com/v2/url?u=http-3A__moslereconomics.com_wp-2Dcontent_graphs_2009_07_natural-2Drate-2Dis-2Dzero.PDF&d=DwIFaQ&c=eLbWYnpnzycBCgmb7vCI4uqNEB9RSjOdn_5nBEmmeq0&r=HPo1IXYDhKClogP-UOpybo6Cfxxz-jIYBgjO2gOz4-A&m=imesmz15wvhC0RYwrzZdeZz47RaVrtTIDvGkNL60FL4&s=NreUdLwU0eVE7G0KkIkaivP5YhyZQb1yqg1iL_mtHUY&e=  <https://urldefense.proofpoint.com/v2/url?u=http-3A__moslereconomics.com_wp-2Dcontent_graphs_2009_07_natural-2Drate-2Dis-2Dzero.PDF&d=DwMFaQ&c=eLbWYnpnzycBCgmb7vCI4uqNEB9RSjOdn_5nBEmmeq0&r=HPo1IXYDhKClogP-UOpybo6Cfxxz-jIYBgjO2gOz4-A&m=VrFAgR8s2DeQQxwnnnnHZwuENLj7xQnGWCQd51oaS1w&s=rGn95aFlBkRe6cNkni1TPKtP-w7TxzbKAD7Z2Ca8gWc&e=>
> 
> Have a good one,
> Jason Bessey
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