The Mises Institute responded to my criticism of their video regarding the Fed. Let’s review the rebuttal. 
Playing With Fire
On October 13, I wrote Playing With Fire – a Very Disappointing and Factually Incorrect Mises Article on Money
Note: When I say Mises for the rest of this post I do not mean Ludwig von Mises or the Mises Institute, but rather one particular video and the response to my article.
I have high respect for Ludwig von Mises, the person, the Mises institute, and Austrian economics.
I made the claim, and still do, the Mises video, shown below, has clips that are wrong.
The Business Cycle
Jonathan Newman responded to my post with Who Starts Business Cycles? Banks or the Fed?
Newman claims I pulled statements out of context.
I didn’t. You can check for yourself.
At the 2:30 mark Jonathan Newman, a Mises economist discusses Fractional Reserve Banking.
“How do banks make a profit? With fractional reserve banking. It involves creating new money out of thin air.”
“Fractional reserve banking is the idea that banks keep a fraction of deposits in reserve so that somebody walks in and makes a deposit. What they [the banks] actually do is take that money and they use it to finance loans that they make to other people, business loans, mortgages.”
Continuing at the 2:58 mark, Joseph Salerno, Professor Emeritus at Pace University responds to Newman with “Let’s say they lend out 90 percent. They are comfortable keeping one dollar for every ten dollars that people will deposit. So you can write checks up to $1,000 on that checking deposit. At the same time there is 900 more dollars in circulation than there was before you made that deposit.”
Fresh Video Rebuttal
I played the video again. I invite readers to do so as well, from the start to at least the 3:40 mark.
There was no mention by Mises that banking used to work the way the video describes but now doesn’t.
The video perpetuates the myth of deposits being lent out over and over and over again.
Historically Speaking
Q: How long ago did banks lend deposits?
A: When we had a full gold standard and paper dollars were convertible to physical gold on demand. Some might argue 1971 when Nixon removed all convertibility to gold, ushering in unlimited credit on demand.
And Now
As I pointed out “Banks do not lend deposits. Rather, deposits are the result of loans.”
Note: I accidentally stated that backward and Newman graciously corrected my sentence because he knew from context what I meant.
Thanks! I corrected my original post.
Fictional Reserve Lending Is the New Official Policy
With little fanfare or media coverage, the Fed made this Announcement on Reserves.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
However, that announcement did not really change anything because reserves already did not figure into loan decisions.
When Do Banks Make Loans?
- They meet capital requirements
- They believe they have a creditworthy borrower
- Creditworthy borrowers want to borrow
From the BIS
The underlying premise of the first proposition is that bank reserves are needed for banks to make loans. An extreme version of this view is the text-book notion of a stable money multiplier.
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans.
The main exogenous constraint on the expansion of credit is minimum capital requirements.
See BIS Working Papers No 292 Unconventional Monetary November 2009.
Ending reserve requirements in 2020 was little more than admission that reserves are essentially meaningless from a lending standpoint and capital requirements are paramount.
What About the Business Cycle?
From Newman:
In October of 2008, the Fed began paying interest on reserves (IOR) to regain tight control over the Federal Funds Rate amid heightened uncertainty and massive increases in the demand for reserves. IOR provides the added benefit to the Fed by providing a gate between bank reserves and bank credit such that a large increase in bank reserves would not necessarily result in banks expanding credit. Banks obviously took advantage of this opportunity, to the point that minimum reserve requirements, which had become nonbinding, were eliminated in 2020.
In short, the Fed has immobilized bank reserves to a large extent by paying (bribing?) banks to sit on the money.
So, Shedlock was correct when he said that US banks no longer have reserve requirements, but that is because the Fed has replaced the stick with a carrot. The Fed has “reserve incentives” now, instead of reserve requirements.
We may have a bit of violent agreement here, at least in terms of what the Fed might have been trying to do.
But perhaps the Fed was just pain stupid, because this eventually blew up in their faces in a way that I believe should have been obvious.
In 2008, then Fed Chair Ben Bernanke lobbied Congress for the right to pay interest on reserves. He got his wish.
But rather than sit on money at overnight rates, banks speculated in long-dated US treasuries.
The banks were not content with the “free” money the Fed was giving banks at taxpayer expense. It was pure greed.
Interest rate speculation works fine in a falling interest rate environment.
However, Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, all went bust in March 2023 by parking investor deposits in long-duration treasuries. When the Fed hiked rates, the long-dated treasuries had huge capital losses and a classic run on the bank ensued.
On March 10, 2023, SVB failed, marking the third-largest bank failure in United States history.
So banks didn’t just sit on QE deposits, they speculated on long-dated treasuries and blew up.
But yeah, this was a problem totally of the Fed’s making, and it’s safe to say Mises would agree.
Austrian Economics
“Finally, I want to show that Austrian economists do not have their heads in the sand, as Shedlock suggests,” said Newman.
I never suggested or implied that at all. I have high regard for Austrian economics and the Mises institute. I believe in sound money.
Rather, I was more than a bit disappointed in a video that hugely missed the mark in many ways. I expected better from the Mises Institute.
Apologies if that was not clear.
Five Business Cycle Factors
- Monetary Policy – Fed
- Fiscal Policy – Congress
- Secular Factors – e.g. Demographics
- External Factors – e.g. Oil Embargo, War
- idiosyncratic Factors – e.g. Covid
Newman blames the Fed for the business cycle. I agree with Newman that the Fed has a huge weight in the business cycle. But one cannot blame the Fed for external factors, idiosyncratic factors, or demographics.
I am open to suggestions from Mises on how to weight those factors provided the Fed has no more than 65 percent of the total.
The Fed does not control fiscal policy but the Fed certainly enables fiscal policy by monetizing the debt. Massive QE operations create economic bubbles.
The Fed was not responsible for the unprecedented fiscal stimulus in Covid, but it was responsible to understand the impact.
The Fed’s monetary response on top of a massive and unwarranted fiscal response was one of the worst errors in Fed history.
End the Fed
Like Mises, I would like to End the Fed.
My readers ask, “With what?” And my answer would be the same as Mises: “With nothing”. The Free market can set interest rates better than the Fed.
However, short of a constitutional amendment on letting the market set interest rates, End the Fed might be an unsatisfying answer.
My fear is Congress would replace the Fed by putting itself in control of interest rates and money supply.
That fear is strongly justified. The Progressive wing of the Democrat Party, led by Elizabeth Warren and AOC want to add a third mandate, climate change, to the Fed’s responsibilities.
I suspect Mises would agree that putting politicians in control of money supply and interest rates would be much worse than the Fed.
Please recall Biden’s Bank Regulatory Nominee Espouses Helicopter Money and Praises the Old USSR
Joe Biden’s nominee for the Comptroller of the Currency, Saule Omarova, commented on oil, coal and gas industries: “We want them to go bankrupt if we want to tackle climate change.”
Omarova’s paper is The People’s Ledger: How to Democratize Money and Finance the Economy
In basic terms, the Fed will credit all eligible Fed Accounts when it determines that it is necessary to expand the money supply in order to stimulate economic activity and ensure better utilization of the national economy’s productive capacity. In the economic literature, this form of unconventional (by present standards) monetary policy is commonly known as “helicopter drop” or “QE for the people.”
“QE for the People” is a doozie, straight out of the Marxist handbook.
So, what’s the way forward?
My Six Recommendations
- Separate lending banks from deposit banks
- Eliminate the Fed’s ability to do QE
- Eliminate the Fed’s ability to monetize the debt
- Eliminate Fed’s ability to pay interest on reserves
- Audit the Fed
- Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override
Separate Lending Banks from Deposit Banks
If we separated lending banks from deposit banks and mandated 100 percent reserves on deposits, there would be no Silicon Valley style blowups.
Note that 100 percent reserves on deposits would not stop lending because deposits play no role in lending up to the point there is a run on a bank causing capital impairment.
The reason to split banks into two pieces is to remove all risk from one of the banks. Lending banks can go under by making bad loans.
FDIC is unneeded (or unlimited) at deposit banks because there is always 100 percent reserves.
Deposit banks would have a small fee for safekeeping, handling checking accounts, wire transfers, etc. The more services offered by the bank, the higher the fee.
The 100 percent reserve proposal is not new. Economist Irving Fisher Proposed 100% Reserves in 1935.
The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking. A purely incidental result would be to make banking safer and more profitable; but by far the most important result would be the prevention of great booms and depressions by ending the chronic inflations and deflations which have ever been the curse of mankind and which have sprung largely from banking.
Caitlin Long, CEO and founder of Custodia Bank, wants to create a deposit only bank and the Fed said on some spurious crypto-related charge.
I speculate the Fed does not want competition from a safekeeping bank because it wants to force you at some later date into using its own allegedly safe Central Bank Digital currency.
QE and Monetization
Reining in QE and monetization would not prevent fiscal deficits, but it would stop the Fed from being a huge enabler of deficits and economic bubbles.
The bigger the deficit, the stronger the upward pressure on interest rates.
Diversity and Groupthink
The Fed preaches diversity but where is it? Every Fed president believes in disproved models like inflation expectations, the Phillips Curve, and the need for two percent inflation.
The Fed’s own studies debunk inflation expectations and the Phillips Curve. Yet every post-FOMC meeting, Powell, like Yellen, and Bernanke, harps about inflation expectations.
The absurd theory is that people act on expectations and those expectations become self reinforcing.
Please consider the Fed report Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
The Fed study was not only accurate, it was funny, and replete with humorous quotes.
I can make it simple. Inflation expectations don’t matter because at least 80 percent of the CPI is inelastic.
People will not double up on rent in advance if they think rent will go up. Similarly they will not double up on gasoline, medical operations, etc.
And among the elastic items, people won’t take two vacations this year an none the next if they think hotel costs will rise, etc. Factor it all in, and there is very little people can actually do that will matter, no which way they think prices are headed.
Diversity is not about race or sex. It’s about opinions and they all believe the same nonsense.
Attack From Within?
It would be a slow process, but there was some chance of that happening.
On January 17, 2020, The Mises Institute asked Could Trump’s Next Fed Chair Be A “Goldbug?”
Shelton has been a vocal Fed critic who has praised the gold standard in the past. While she has recently advocated for lower interest rates, she has also been a critic of the Fed’s policy of paying interest on excess reserves, which has become a key policy tool since 2008. Shelton’s nomination is also interesting due to the stark contrast between her background and most of her colleagues’.
The good news is that Ms. Shelton is not a technically trained academic economist, indoctrinated in the prevailing orthodoxy. She holds a doctorate in business administration from the University of Utah and has spent most of her career in the world of free-market policy think tanks, including stints at the Hoover Institute and the Atlas Network. She also writes refreshingly and articulately in favor of the gold standard, or some version of it.
The bad news is that she leans heavily toward supply-side economics, which is deeply flawed on monetary policy. Like most supply-siders, the position she advocates may be summed up in the motto, “I favor sound money—and plenty of it.”
Still, though by no means an Austrian, Shelton’s voice on the Fed would create some much-needed ideological diversity in the central bank.
Unfortunately, Shelton fell one vote short in the Senate when a Republican senator got sick from Covid and did not vote.
And the problem with attack from within idea is the next person might be another Saule Omarova or Elizabeth Warren clone.
Balanced Budget Amendment
On January 26, 1995 the House approved a balanced budget amendment. Unfortunately, the bill died in the Senate.
Profile in stupidity: In 1995, Mark Hatfield, Senator from Oregon, cast the decisive vote against the Balanced Budget Amendment to the United States Constitution.
Hatfield was the only Republican to vote against.
Conclusion
In general, I do not have strong disagreements with the Mises Institute and certainly not with Austrian economics.
I panned a specific video for two reasons that upon replay are still valid: The video perpetuates a fractional reserve lending myth and it offers no discussion of a reasonable way forward.
I would prefer to End the Fed, with a constitutional amendment, and kill deficit spending at the same time. A balanced budget amendment came within one Senate vote of passing.
My more pragmatic recommendations are along the lines of what might realistically be done.
Even if a balanced budget amendment is water over the dam, points 1-5 offer a practical approach to “End the Fed” because they would hugely restrain what the Fed can and cannot do.
Mises is free to post this, rebut it, or add to it.
Addendum: Reply From Jonathan Newman
Thanks for your response. My last word on the matter: less than two minutes later in the video, in the section on what government has to do with banking, Salerno and I discuss that the Fed cartelized the banking system so that no one bank is overextending loans compared to the others. Perhaps more context and longer clips from our interviews would have cleared this up for you, but I assure you that the story we are telling is that the inherent instability of the pre-Fed banking system led to the creation of the Fed. The documentary is about the damage caused by the Fed, and so to keep it focused, we didn’t include discussion about the endogenous money debate. Another reason, as I mentioned in my article, is that it doesn’t matter: whether money is endogenous or exogenous does not bear on ABCT per se, but on the historical analysis of how cycles are started. And even if money is purely endogenous, the Fed still enables the banking system to expand credit by manipulating interest rates, serving as a lender of last resort, and protecting banks from market mechanisms. So the Fed is not “off the hook” and deserves the blame even in view of endogenous money.
As I mentioned in my article, anybody who wants to know what Austrian scholars have to say about it will find many articles and books on modern banking practices. Hopefully the documentary motivates people to do a deep dive on topics like this one, with all the resources we have on our website. My #1 recommendation for interested readers is Bob Murphy’s Understanding Money Mechanics, who has a whole chapter on this debate.
I agree with the thrust of your recommendations to neuter and end the Fed! Cheers.
It seems we are mostly in violent agreement.
I am happy to promote Understanding Money Mechanics available at the Mises store.
Cheers back at you.
Now let’s embark on ending the Fed or gutting it.
The business cycle is a CREDIT / DEBT cycle.
Rubbish. The FED s unable to manipulate interest rates.
“So banks didn’t just sit on QE deposits, they speculated on long-dated treasuries and blew up.”
I just want to add Charles Schwab Bank to this list. The absolute fools at this bank lost $20 billion or something and they don’t get NEAR enough ridicule. I think the CEO even kept his job. An absolute travesty accomplished by the biggest fools in Texas. And that’s saying something, given the existence of Texans like Ken Paxton.
Newman made more than one faux pas in his remarks that I saw.
“Fractional reserve banking is the idea that banks keep a fraction of deposits in reserve so that somebody walks in and makes a deposit.”
That’s backwards: deposits are kept so that somebody walks in and makes a withdrawal. That’s the only reason for a deposit.
Before 1861, banks mostly didn’t have deposits: they printed their own money to lend. If one made a withdrawal, it was in their own currency. The Department of Treasury ended this when the Civil War broke out, fearful of the sort of inflation that ended up eating the Confederacy alive. Henceforth, the banks made loans via check but had to keep deposits on hand for customers who wished to withdraw cash.
Newman’s remark on the Fed creating the cycles seems to fly in the face of all economic history. Aggravate, yes. Create, no. As Mish has said many times, the Fed reacts to the cycles, lagging behind the action. I think the only time the Fed has been ahead of the action is last month’s 50bps hike, and that’s seemingly reacting to the Democrat campaign’s sluggish momentum.
Powell:
#1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time” #2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
Our “means-of-payment” money supply hit an ATH in November 2020.
But it wasn’t a mistake to reduce policy rates by 50 basis points on Sept. 18. Interest rates are the price of credit. The price of money is the reciprocal of the price level. So, the FED should ensure that bank reserves contract:
Sep 2024: 3,236.8
Aug 2024: 3,321.1
Jul 2024: 3,302.2
Jun 2024: 3,379.7
May 2024: 3,376.1
On the Balanced Budget Amendment (from the NY Times):
“Mr. Dole, a candidate for President in 1996, said the amendment’s defeat was unfortunate because President Clinton had “abdicated his responsibility” to control Federal spending and had set the tone for Senate Democrats by proposing a budget last month that forecast $200 billion annual deficits through the end of the decade.”
200 billion. We should wish.
The US Constitution DOES grant the US government the authority to “coin money”, it unfortunately did not limit borrowing and spending.
Powell has simply lucked out. The percentage of DDs to TDs has risen by 18%. That activates monetary savings, increasing the velocity of circulation. MMMFs have shown phenomenal growth (increasing the velocity of money). And at the same time the FOMC has conducted QT, draining reserves by 21 percent.
Reserves of Depository Institutions: Total (TOTRESNS) | FRED | St. Louis Fed
I.e., lending by the banks is inflationary, whereas lending by the nonbanks is noninflationary. The nonbanks have shown increased growth rates during C-19.
Non-Bank Financial Institutions’ Assets to GDP for United States (DDDI03USA156NWDB) | FRED | St. Louis Fed
The paradigm is the 1966 Interest Rate Adjustment Act. That is why the economy has been so strong.
The FED is entirely responsible for all boom / busts. The FED is responsible for the business cycle. People don’t understand the commercial banking system. Not only, as Mish says, banks don’t lend deposits. But all bank-held savings are lost to both consumption and investment, indeed to any type of payment or expenditure. That is Japan’s lost decade’s problem.
The Japanese save more, keep more of their savings in their banks, and insure all transaction deposits.
Money creation is a system process. No bank, or a minority group of banks (from an asset standpoint) can expand credit (create money) significantly faster than the majority banks expand, or they’d lose their: “due from other bank items” correspondent bank balances, and bank reserves.
The point is that all savings/investment type accounts in the banks were derived from demand deposits. The banks pay for the deposits that they collectively already own.
See: “Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
Re “The FED is responsible for the business cycle.”
No. If banks are not interested in lending – cannot see profitable ventures at reasonable risk given the current yield curve – then there’s no boom.
If borrowers are not interested in borrowing – cannot see reasonable returns at current lending rates – then there’s no boom.
Prime example is the complete stifling of the real estate markets due to excessively high prices and rates. The Fed lowering rates isn’t going to reignite the housing market until prices fall.
There is an epic bust brewing, and as always blame can go everywhere. The Fed, for pushing rates down too low and QE too high. The banks, for lending against obviously absurd collateral prices. And the borrowers, for being dumb enough to take on debt on assets whose prices are unsustainable.
But perhaps the FedGov most of all, for pushing to the point where everyone expects further inflation, thereby deluding themselves into thinking that high real estate prices might merely be a prelude to inflated higher prices, and not recognizing that valuations are out of whack.
If we were to enforce a zero-inflation-on-average standard, everyone would know that prices cannot go to the moon, and they’d be smarter about not borrowing or lending against inflated collateral values.
Banks create money by both lending and investing. Banks can buy T-Bills, as they always did between 1942 and 2008.
The Democrats couldn’t pack the Supreme Court, so they packed the FOMC instead. That 50bps rate cut was a huge mistake that will lead to high inflation within nine months. There is still way too much money sloshing around from the near instantaneous $10 Trillion money creation during the pandemic (30% of annual GDP).
“Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override”
This is a really bad idea that could end the country in a heartbeat under extrordinary circumstances. People in Congress are a lot dumber than you must believe. Almost every vote in Congress now is based on feelings rather than thinking (aka “teams” mentality). It is hard enough just to get a majority vote at this point.
Who starts the business cycle?
Banks, borrowers and regulators are all necessary. None alone is sufficient.
All the trading desk has to do is target RPDs, reserves for private deposits as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.
I gotta tell ya Mish, It’s a real shame you have to keep proving yourself “Correct” and especially when the people complaining, know damn well that you were “Correct” in the first place. It’s as if you’re being treated as a Politician with the other side tossing Barbs at you…
Thanks Stu – Much appreciated
>A balanced budget amendment came within one Senate vote of passing.
The problem is the 90s were basically a different universe.
correct – unfortunately
If inflation re-surges, Federal spending will again be at the mercy of the bond market, as it was in the late 80’s and early ’90s.
The bond vigilantes are starting to return, the scent of blood is already in the water.
Once the bond market has veto power over FedGov spending, it might again demand a balanced budget amendment. And maybe this time not give in.
Inflation will reassert itself in the 1st qtr. of 2025.
CL [1M] may have completed its countdown #13 downtrend in Oct 31. Bloomberg monitors will never show it to wall street traders. Iran tried to assassinate Bibi, but his Caesarea (Kaisaria) house is fortifies. After this assassination attempt and the largest ballistic missiles attack in history, Bibi might retaliate, despite the DOD Austin leak and Putin warnings. DX {1M} is rising. It might close > July 2001 high @121.29 after Kazan
Legendary investor Paul Tudor Jones: I am clearly not going to own any fixed incomehttps://www.youtube.com/watch?v=VhJ9k9Ojyg4
The increase in nonbank debt is noninflationary, other things equal. But the 2-year rate-of-change in our means of payment money will begin to accelerate in the 1st qtr. of 2025. At the same time short-term money flows will contract in the 1st qtr. unless the FED expands the money stock before then.
The only thing that ever brings change to an existing system is severe economic pain.
“Extraordinary Popular Delusions and the Madness of Crowds” chronicled several of these past occurrences.
That the current system is on verge of another repeat episode is affecting peoples expectations. Not everyone, but enough people are aware that things are not all they are cracked up to be in Oz. These same people are taking actions such as acquiring precious metals, Land/ Farmland, Water resources, safe houses.
Once the severe losses occur and a search for a new way forward gets underway then articles such as this will be sought out. For now being “Comfortably Numb” is a way of Life for the majority.
Far too much is invested into the current system of financial control for any sort of evolution into a better model to be allowed and happen gracefully.
Use whatever time is gained by this ongoing Political backed full court press to salvage a dying entity.
Accept that what is coming will be Historic and prepare to come out the other end of it as intact in one piece as is possible.
Pain? The ABA would object. But the banking system needs nationalized.
Everything both Austrian and neo-classical economics is based on is “free” market theoretics which is both a delusion and a complete misnomer for what the actual reality is which is alternately goosed and strangled dominating financial chaos via their wielding of the monopolistic monetary paradigm of Debt ONLY as in the sole form and vehicle for the creation and distribution of new money.
I’m not suggesting the end of private finance, only its dominance of 95-98% of the general populace and every other legitimate business model with a monopoly paradigm concept. The last monopoly paradigm we confronted was Salvation Via Roman Catholic Sacraments ONLY which led to The Reformation.
We need a monetary reformation that strategically integrates the new monetary paradigm of Gifting into the Debt ONLY system that will stabilize the economy.
There is no “blame” for “the business cycle.” It’s just naturally occurring oscillation. Inevitably arising in any population with ANY social awareness.
If some guy arbitrarily; say from doing a line of blow; feels more confident about the future hence his lifetime income; he will spend more. Improving the outlook for the businesses he visits. Causing them to spend more…..
And so forth and so forth,until someone steps back and starts worrying that the tulip price may be unsustainable. Then => the reverse.
There will ALWAYS be oscillation. It’s baked in. Neither the expansion phase NOR the recession one is; in any way at all; a “bad,” nor “good” thing.
What is bad; what is always bad; is idiots “managing the economy.” Any part of the economy. Any part of anyone else’s life. ANY and ALL of that, in ANY way, is ALWAYS bad. ALWAYS causes problems. ALL and EVERY “counter-cyclical” blah-blah, ALL and EVERY backstop, “liquidity” injection, “saving the system”, “preserving jobs” blah-blah-blah, is ALWAYS; NO exceptions; 100.00000000000% wrong, bad and nothing but 100% damaging. To ANY economy. In any possible universe.
“Recessions” are not; in any way; “worse” than “expansions.” They’re just two phases of the same oscillation. You can’t have one without the other, and you can’t have anything at all without either hence both. And ANY interference at all, with ANY part of the cycle is; ALWAYS; strictly inferior to no interference. Noone “needs” idiots “managing”/meddling. In anything. At all. Period. Again, in any possible universe.
Nothing “natural” about it.
From Mish’s post:
“The Fed’s own studies debunk inflation expectations and the Phillips Curve. Yet every post-FOMC meeting, Powell, like Yellen, and Bernanke, harps about inflation expectations.
Please consider the Fed report Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)”
Mish quotes this study on a regular basis (and I’m glad he provides a source as he does for almost all his posts – kudos). But as with almost everything published at the Fed, it specifically notes on the first page “The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors.”
If instead, a reader went to http://www.federalreserve.org and entered “inflation expectations” into the Search bar, he would find 22,000+ documents that explore the research behind the impact of and formulation for inflation expectations theory. Start looking through those and see how many agree with the academic premise of the article Mish uses – a huge minority.
If you want to disagree with inflation expectations, fine. But make sure you realize the majority of research (‘groupthink’?) is not congruent with this particular Fed article
Correct – and you may wish to not I have repeatedly said the Fed does not believe its own studies.
They have been trained and will accept no answer than their bad training
“QE and Monetization”
“I argued in my article from last week that giving banks bottomless “war-time” balance sheet space for Treasuries would mechanically be the same as a QE program. I said that the coming ‘bank QE‘ will look different than the ‘Fed QE‘ we are used to:
https://www.zerohedge.com/news/2024-10-18/countdown-qe
Yeah, read that. We have war economy sized budgets, and it will take the controls particular to a war economy to manage the bond market.
In Oct 2008 congress rushed Bernanke’s Financial Service Regulatory Relief Act
of 2006 to borrow from bank’s deposits, from other peoples bank accounts, effective after Oct 2011. No printing. No QE. Gold took off from $681 to $1,947.
Banks are not a safe place to put your money.
The Israeli air force evaporated Hezbollah cash and melted their gold. Hezbollah bank IOU to depositors cannot be covered. The US gov IOU to the Fed. The Fed IOU to the banks. And the banks IOU to u might be in troubles bc the gov already spent the money. It’s gone.
Mish, how about a quick primer on how bank lending goes? For dummies of course. You’re making the point that bank capital, not deposits, drive loans. Deposits are balance sheet liabilities, loans are assets etc, so that deposits are not “loaned out”? And reserves are cash on the balance sheet?
Fine question, Patrick, but good luck getting an answer here.
Austrian economics and banking theory is heterodox for a reason. It has a lot of theoretical underpinnings, but a lot less empirically backed research.
So when you ask this type of question: of where bank loans actually come from at a real and local bank level – if not from deposits? It’s hard to answer that from this POV. You can look at a real bank balance sheet and see the capital invested there and see the huge amount of loans (assets) on its books as well (and there’s a BIG difference between the two usually). And then ask: where did this one particular bank get the ‘money’ to make all these loans? I’d like to hear the answer to that question as well.
Banks like very much selling bonds, then lending it out + spread.
They seem to hate saving accounts which are drawable on demand.
The cheaper and safer option for the banks is term deposits, but that means they have to either lend it or deposit it with the FED if just overnight.
True, banks could issue/sell their own bonds for financing – plus a spread premium, but look at the actual balance sheets of banks. Such notes/bond issues are very small compared to loans issued. So that’s not a reality for most banks (should make sense since those notes will be expensive relative to deposits)
And Mish says banks don’t lend out from deposits (as you said). But banks aren’t required to deposit such customer deposits overnight with the Fed (as reserves), but they do that a lot because the banks are currently paid 4.9% by the Fed on interest on reserve balances (IORB). So a loan customer better be prepared to pay a lot more to the bank and be a good credit risk (in today’s environment) to get a bank loan instead of deposits being stored at the Fed. This IORB is why the reserve requirement is no longer necessary for Fed monetary policy transmission
Right, IORB are used by non-bank lenders, that don’t take deposits.
They must sell bonds.
My hunch of eliminating the reserve requirements is that the system is so broken that one biggish bank’s failure will bring the system in peril, and then the printing bazooka will be unleashed.
If the system still functions, banks can borrow from one another if in need.
A brave new world.
Remunerating IBDDs has induced nonbank disintermediation. It lowers bond yields and therefore stokes asset prices.
From the standpoint of the system, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume.
Whether the public saves, dis-saves, chooses to hold their savings in the commercial banks or to transfer them to a non-bank will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of these assets and liabilities. The commercial banks could continue to lend even if the non-bank public ceased to save altogether.
Thanks for your response. My last word on the matter: less than two minutes later in the video, in the section on what government has to do with banking, Salerno and I discuss that the Fed cartelized the banking system so that no one bank is overextending loans compared to the others. Perhaps more context and longer clips from our interviews would have cleared this up for you, but I assure you that the story we are telling is that the inherent instability of the pre-Fed banking system led to the creation of the Fed. The documentary is about the damage caused by the Fed, and so to keep it focused, we didn’t include discussion about the endogenous money debate. Another reason, as I mentioned in my article, is that it doesn’t matter: whether money is endogenous or exogenous does not bear on ABCT per se, but on the historical analysis of how cycles are started. And even if money is purely endogenous, the Fed still enables the banking system to expand credit by manipulating interest rates, serving as a lender of last resort, and protecting banks from market mechanisms. So the Fed is not “off the hook” and deserves the blame even in view of endogenous money.
As I mentioned in my article, anybody who wants to know what Austrian scholars have to say about it will find many articles and books on modern banking practices. Hopefully the documentary motivates people to do a deep dive on topics like this one, with all the resources we have on our website. My #1 recommendation for interested readers is Bob Murphy’s Understanding Money Mechanics, who has a whole chapter on this debate.
I agree with the thrust of your recommendations to neuter and end the Fed! Cheers.
ABCT is bull. What’s true from the standpoint of the individual banker (a single bank which receives a primary deposit), is false for the entire system (is a derivative deposit).
The inventory cycle will be with you always, even to the end of the Earth.