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Paul Sheard, MMT, excess reserves

I ran across this post today (link below).  I have no doubt Paul Sheard understands MMT, but I don't think of him as a full fledged member of the MMT crowd.  This piece from FMQ also tossed out the mention of a Fed research paper that supposedly proves Sheard wrong about banks not lending reserves (except to other banks).  If you have time, Cullen, please share your thoughts.  I will try to read the paper mentioned in the FMQ Update piece and also touch base with Mr. Sheard.  https://www.goldmoney.com/research/goldmoney-insights/fmq-updated

I found the Minneapolis Fed paper mentioned on the Goldmoney site (FMQ Update) - but have not read it yet:


Hi Steve,

This is a common response. There's two problems with it:

1) Banks are in the business of earning interest on their assets relative to their liabilities. Why would a bank want to hold cash?

2) Banks are in the business of earnings interest on their assets in a low risk manner. When market interest rates are, let's say, 2% on overnight reserves, that means T-Bills also yield about the same. So, a bank can either earn interest on their reserves OR go out into the market and take a lot more risk on something like long-term bonds or loans.

Of course, the problem isn't any of the above. The problem is that banks tightened their lending standards and the demand for loans collapsed. So, the quantity of lending hasn't increased and the banks haven't had the desire to take more risk because their capital requirements really don't allow for it.

Oh, and one more thing - even if a bank was stupid enough to draw down its interest bearing reserves for cash the Fed would still control the quantity of excess reserves because they'd respond to any bank led change in reserves by responding with the needed quantity of QE. In other words, they do in fact control the quantity of excess reserves because the banks are required to act on their behalf to purchase assets when they need them to.

As for Sheard - I don't know whether he associates himself with the MMT people or not. He seems to understand the operational realities of the financial system very well so my guess is he's more like me - he knows the good parts of MMT, but also knows they take certain views a little too far. But that's just a guess.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

I find it interesting how so many people base their understanding of monetary economics in terms of a quantity of money.   As always, due to Thermodynamics, the real economic value of money is always zero.  The integral of zero is always zero.  There can be no measure of the real economy based on a quantity of money (as evident from the first figure in the Sheard article vs. any real economic measure).

It should be clear to anyone that a quantity of reserves doesn't matter in banking based on how Canada and the UK implement monetary policy.  There are no reserve requirements in these countries.  There are no excess reserves.  But a bank needs Reserves to satisfy many transactional requirements.  The central bank in these countries impact credit creation by placing two discriminators on Reserves, the lower bound is set by the IOR, and the upper band by the equivalent of the Discount Rate.

Given these facts it should be clear that there is zero value in the concept of a FMQ.  It's something we can measure, but that doesn't mean it has any scientific value.