This article is a wrapping up of a sequence of articles on the topic of “central banks as banks,” which is expected to form a chapter in my book on banking.
Bit by bit, the discussion developed into booms as bubbles, but if a boom will crash anyway, even on sound investments, due to on the one hand not enough money supply and on the other, the Piketty equation of r > G, then discussion around bubblesque investments is only half the talk and we are left waiting for your part 2 next month.
Secondly, I wanted to say this when you first introduced central banks as banks, that as a point of logic, a central bank is half bank half anti-bank.
At the discount window and in its repo-loan ops, it is lending, therefore it is a bank.
But with the deposits in bank accounts, a real bank pays an interest rate so that it can use the money; a central bank pays interest for the customer *not* to use the money--but not so the customer doesn't use it while the central bank is, just so the customer doesn't use it; therefore, a central bank is also an anti-bank.
The central gets an income flow from the bonds on its balance sheet, so if wants to think of it as a profit-making entity, it is paying interest to keep deposits so that it can hold the bonds. Of course, the motivations are more about the macro effect of interest rates. It also has a monopoly on base money, which is a way of saying that it is more senior than all private banks. There are also behavioural differences between senior and junior private banks.
Now I think about it, except for the recent innovation of interest on reserves, the U.S. Fed, anyway, wasn't paying interest--that is the Treasury doing that.
I am not sure what you meant about "paying interest to keep deposits so that it can hold bonds:"
--If it is holding bonds, it has itself made "deposits" ("reserves") which it doesn't have to pay to hold because they are captive in the (U.S.) Federal Reserve "Bank" ledger. So it isn't paying to hold deposits, only for the banks not to "hold" them, though I already said that. Of course if Werner is right and banks make money out of thin air, then after the end of the reserve requirement in March of 2020, banks don't need the reserves after all (now it is reversed and the rule is that they hold Treasury bonds), so there's no macro point to pay them not to use them.
--But secondly, although before interest on reserves existed, the Fed didn't pay interest, when it did do something to raise the interest rate higher, it sold bonds rather than held bonds. But you said "pays interest so it can hold bonds."
Nice take. Mark Carney went into some good gruesome detail about the maturity mis-match shit show leading to 2008 in his book Value[s]. It was an interesting inside/central banker view of that situation. Pity about the rest of the book which, following the obvious insight that “markets don’t always clear”, added up to an appeal to add a thin veneer of “values” to the neoclassical model, and a bit of self-congratulation for some new regulation that will undoubtedly prevent that exact situation from happening again.
As an aside, studying Political Economy has made me feel like I’m living in a parallel universe. I can’t shake the nagging feeling that I should turn this knowledge to evil and make a shit load of money before the planet burns - but for what? Is that *too* cynical?
Bit by bit, the discussion developed into booms as bubbles, but if a boom will crash anyway, even on sound investments, due to on the one hand not enough money supply and on the other, the Piketty equation of r > G, then discussion around bubblesque investments is only half the talk and we are left waiting for your part 2 next month.
Secondly, I wanted to say this when you first introduced central banks as banks, that as a point of logic, a central bank is half bank half anti-bank.
At the discount window and in its repo-loan ops, it is lending, therefore it is a bank.
But with the deposits in bank accounts, a real bank pays an interest rate so that it can use the money; a central bank pays interest for the customer *not* to use the money--but not so the customer doesn't use it while the central bank is, just so the customer doesn't use it; therefore, a central bank is also an anti-bank.
The central gets an income flow from the bonds on its balance sheet, so if wants to think of it as a profit-making entity, it is paying interest to keep deposits so that it can hold the bonds. Of course, the motivations are more about the macro effect of interest rates. It also has a monopoly on base money, which is a way of saying that it is more senior than all private banks. There are also behavioural differences between senior and junior private banks.
Now I think about it, except for the recent innovation of interest on reserves, the U.S. Fed, anyway, wasn't paying interest--that is the Treasury doing that.
I am not sure what you meant about "paying interest to keep deposits so that it can hold bonds:"
--If it is holding bonds, it has itself made "deposits" ("reserves") which it doesn't have to pay to hold because they are captive in the (U.S.) Federal Reserve "Bank" ledger. So it isn't paying to hold deposits, only for the banks not to "hold" them, though I already said that. Of course if Werner is right and banks make money out of thin air, then after the end of the reserve requirement in March of 2020, banks don't need the reserves after all (now it is reversed and the rule is that they hold Treasury bonds), so there's no macro point to pay them not to use them.
--But secondly, although before interest on reserves existed, the Fed didn't pay interest, when it did do something to raise the interest rate higher, it sold bonds rather than held bonds. But you said "pays interest so it can hold bonds."
Nice take. Mark Carney went into some good gruesome detail about the maturity mis-match shit show leading to 2008 in his book Value[s]. It was an interesting inside/central banker view of that situation. Pity about the rest of the book which, following the obvious insight that “markets don’t always clear”, added up to an appeal to add a thin veneer of “values” to the neoclassical model, and a bit of self-congratulation for some new regulation that will undoubtedly prevent that exact situation from happening again.
As an aside, studying Political Economy has made me feel like I’m living in a parallel universe. I can’t shake the nagging feeling that I should turn this knowledge to evil and make a shit load of money before the planet burns - but for what? Is that *too* cynical?
Steve Keen done some great work in this area but your verse much more fun to read. Love the cynicism.
Thanks. Me, cynical? Shocking.