[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)