Worrying inconsistency at the heart of policymaking
Imagine you read a book* stating that:
Banks do not lend out their reserves at the central bank. Banks create loans on their own, as already explained above. They do not need reserves to do so and, indeed, in most periods, their holdings of reserves are negligible.
Fine. I deeply disagree with this statement, but that person has the right to say it. Free speech is back in fashion nowadays.
The author of that book had actually said a few months earlier something similar in an FT article**:
Second, the “money multiplier” linking lending to bank reserves is a myth. In the past when bank notes could be freely exchanged for gold, that relationship might have been close. Strict reserve ratios could yet re-establish it. But that is not how banking operates today. In a fiat (or government-made) monetary system, the central bank creates reserves at will. It will then supply the banks with the reserves they need (at a price) to settle payments obligations.
So far so good.
Now, imagine that, for some reason, you ended up on another FT article***, dating back five years, declaring this:
Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements.
Point reiterated just two days ago**** by the same economist, commenting on the Swiss central bank euro unpegging:
Furthermore, the Swiss could have curbed inflationary dangers without abandoning the peg, for instance by increasing reserve requirements on banks.
‘Foolish’ you would say. This person should read the other author above, who said that reserve requirements were useless because banks did not ‘lend out’ their reserves and that central banks would provide those reserves on demand anyway. So how could a reserve requirement increase by the SNB prevent money creation and inflationary danger? These two economists clearly disagree with each other.
Ironically, this person also declared that other people “failed to understand how the monetary system works” and that this issue wasn’t “just academic” but that “understanding the monetary system [was] essential.” But has no problem switching from one side of the endogenous outside money debate to the other whenever it suits his argument.
More worryingly, this economist was also a member of the UK’s Independent Commission on Banking, which came up with the idea of ‘ringfencing’. I suddenly find it even harder than before to really trust his views on banking issues. I also find it bewildering that an economist of such reputation could be so internally inconsistent and blatantly contradict himself article after article. This isn’t very reassuring.
Oh, I forgot to say who this economist was. He’s called Martin Wolf.
* See my review of the book, published September 2014, here.
** See article here, dated April 2014
*** See article here, dated November 2010
**** See article here, dated January 2015