[notahacker]

Private banks create monetary aggregates by lending it to private borrowers. The fact that money is created as credit means there are already natural limits to private bank money creation (there aren't unlimited numbers of bank customers who want to borrow money and pay back more later, and some of the people and companies that would like to borrow are not people the bank trusts to be able to make the repayment)

The role of the Bank of England is providing the banks with central bank reserves they can borrow as and when needed to back that privately created money up. So it gets to influence the demand for borrowing private bank money by setting the basic interest rate at which the banks can borrow reserves (mainly by intervening in secondary markets for them, but that's an implementation detail), which means it can make it more expensive to borrow reserves, which will lead to banks lending money at higher interest rates to fewer people, which will lead to less money creation

This stuff is all in the paper...

[scotty79]

But if the private banks already have some money they can lend it again to borrowers. So they could be inflating money supply pretty much indefinitely. Sure, the number of private borrowers is limited but they are happy to sign all of their future life earnings away in exchange for some money now. And as supply of money grows inflation happens so borrowers need more and more money feeding creation of more money and further inflation.

The role of central bank as a limiter of credit action (through fractional reserve) is way more important than feeding new core money into the private banking system so it can be borrowed by private borrowers. Feeding new money is kinda optional and it's most important role is possibly enabling new banks to be created. In absence of it only companies that already have a lot of money could create a bank.

The other thing is that if economy development outpaces growth of money supply created by private banks whole system could get stuck in deflation. Which was not great last time it happened.

[notahacker]

Honestly, I have no idea why you're arguing popular misconceptions about central banks under a paper written by a central bank explaining how central banking works...

Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). So the quantity of money at a given interest rate is ultimately set by the demand of creditworthy borrowers at that interest rate, which is certainly not unlimited.

Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, and it's not "kinda optional" for them to provide enough reserves for the system's day to day needs. Instead, they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.

[scotty79]

> Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008).

2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations.

> The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with,

In the last two decades that requirement was adjusted at least 5 times in my country so tinkering with it is definitely a tool that some central banks use. In the nineties it was even set to 30% to quench hyperinflation.

> Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet.

First formal central bank, The Bank of England was created to finance the war. Central banks gradually acquired their modern roles as they developed.

The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere.

> they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.

That the thing they do most often but not their most powerful tool.

[notahacker]

> 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations.

2008 happened because banks overestimated the resilience of the value of housing collateral that backed their loans to an economic downturn, meaning they got back less than they lent out, not because they had any incentive to inflate money supply pretty much indefinitely, which they obviously didn't do (I mean, if they really had no practical constraints on money creation, they could have solved 2008 for themselves by loaning unlimited amounts to pump house prices back up again...). Inflation wasn't even high in 2008.

> The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere.

And how do they get cheaper money elsewhere? They borrow it on the interbank lending market, the one which the central bank actively intervenes in to set the base interest rate by buying and selling bonds in sufficient quantities to drive the rate up or down (Why does the interbank lending market even exist? Because the 'lender of last resort' makes lending spare reserves to other banks a low risk activity equivalent to exchanging them for government bonds) Seriously, I suggest you read TFA which explains all this rather than continuing to insist that it is wrong ...

> That the thing they do most often but not their most powerful tool.

It's their most powerful tool in normal circumstances, and how monetary policy works. Preventing private credit creation isn't a tool, it's a nuclear weapon, and one most likely to be introduced and enforced by a government department which isn't a central bank...

[scotty79]

I guess we are both aware of those mechanisms. We just assign different importance to them.

I have a question though... I just found this: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Does that mean that currently US banks don't need to hold any fractional reserve? Or is this about something else similarly named?

Does US still have fractional reserve banking?

That kind of explains the surge of inflation. I guess all those other mechanisms are way to weak to counteract it.

To use your parlance, USA got nuked with money.

[notahacker]

> Does that mean that currently US banks don't need to hold any fractional reserve?

They still need to maintain some reserves to permit cash withdrawals and certain transfers, and are still incentivised to lend out at a higher rate than the base interest rate the central bank controls (and reserves still count towards the bank capital requirements which are the actual limiting factor on a particular bank's ability to lend). So the central bank still can act to encourage or discourage money being created by lending exactly as before, the banks just don't have an arbitrary reserve target to hit.

It's not a policy which hasn't been adopted much earlier in other parts of the world, or a cause of the current inflation. The UK had no reserve requirement at all during the mostly low inflation period since 2009, and small symmetric reserve targets chosen by the bank where they incurred a penalty for having too many as well as too few reserves between 1980 and 2009 (a period where inflation came down from pre-1980 record highs to an unprecedented long, stable period of low inflation)

[noyoudumbdolt]

>2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations.

It’s truly absurd to argue that banks have no incentive to limit lending to make sure they get paid back. The 2008 crisis proves no such thing. Banks simply made a lot of bad bets.

[scotty79]

They had all the incentives to make all those bad bets. And to counteract those incentives further regulations needed to be enacted.

What's good for the company in the long run is not necessarily what really happens because companies consist mostly of short sighted decision makers driven by short term incentives. They will happily collectively burn their respective markets to the ground if it brings them short term profit.

What helps large corporations to survive this is their sheer inertia. Banks are kind of special because they, despite being huge, can topple very quickly.