Warren, can you tell us all how exactly the loan is created in your bank?
simplest case, you come in for a loan and tell us you just want to keep the funds in your checking account for a while
if your credit is ok, we approve the loan at some interest rate over our cost of funds
you sign the loan documents and we increase the balance in your checking account by the amount of the loan
the signed loan documents are the bank’s asset, and your checking account balance the bank’s liability
that’s it!
Thank you Warren. And where did those numbers come from that are on my account now?
the same place the stadium gets the 3 points when you kick a field goal
Yep, good point. But at least the banks demand deposits decrease according to the value of the collateral, and therefore reserve/deposit ratio gets better.
Since you own a bank. Does the central bank has a 24/7 real time access to your financial data (demand deposits, loans etc..)?
Thank you Warren, and you don’t worry about the reserves while you are adding those “points” to my bank account?
Not exactly sure what the conclusion is, but skylien is basically saying this, even with your above scenario:
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Reserve ratio has increased.
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Cash in bank remains unchanged.
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Reserve balance remains unchanged.
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Demand deposits have decreased.
Here is his reasoning:
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Demand deposits are money.
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Demand deposits have decreased.
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Therefore money supply has decreased as well.
@ Think Blue,
I am quite sure that it was not the intention of Mr Mosler to disprove this with that remark. Because also in the former case that the collateral is bought by a customer of a different bank, the total reserve balance of the whole banking system does not change. But at first I had not fought about this case until he mentioned it.
No, the reserve requirement, if any, is calculated later based on total deposits for the prior statement period
and if we don’t have enough reserve balances we either move cash from another account, borrow them in the fed funds market
we are sensitive to the general cost of reserves, as that might play into what we charge for loans, but not quantity or availability.
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yes, loans create deposits, and deposits ‘count’ as ‘money supply’ under various definitions of ‘money supply’
as a practical matter, however, your loan and deposit could sit there forever, and have no effect on the economy. only spending that deposit has possible economic ramifications.
we file regular call reports to the regulators, and get audited regularly, with almost every file checked. they don’t watch us in real time.
Thanks for the answer and the talk! I’m off for some days (snowboarding.. 
I’ll come back to this discussion after I’ve read a paper by Vijay Boyapati on the multiplier.
I wrote this in ‘Soft Currency Economics’ 1994 after sitting in the steam room in Chicago with Don Rumsfeld who sent me to Art Laffer’s firm to get it published:
The Myth of the Money Multiplier
Everyone who has studied money and banking has been introduced to the concept of the money multiplier. The multiplier is a factor which links a change in the monetary base (reserves + currency) to a change in the money supply. The multiplier tells us what multiple of the monetary base is transformed into the money supply (M = m x MB). Since George Washington’s portrait first graced the one dollar bill students have listened to the same explanation of the process. No matter what the legally required reserve ratio was, the standard example always assumed 10 percent so that the math was simple enough for college professors. What joy must have spread through the entire financial community when, on April 12, 1992, the Fed, for the first time, set the required reserve ratio at the magical 10 percent. Given the simplicity and widespread understanding of the money multiplier it is a shame that the myth must be laid to rest. The truth is the opposite of the textbook model. In the real world banks make loans independent of reserve positions, then during the next accounting period borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend the banks whatever they need. Bank managers generally neither know nor care about the aggregate level of reserves in the banking system. Bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return on an asset and the fed funds rate is wide enough, even a bank deficient in reserves will purchase the asset and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase more money in the fed funds market than their entire level of required reserves. These banks would actually have negative reserve levels if not for fed funds purchases i.e. borrowing money to be held as reserves. If the Fed should want to increase the money supply, devotees of the money multiplier model (including numerous Nobel Prize winners) would have the Fed purchase securities. When the Fed buys securities reserves are added to the system. However, the money multiplier model fails to recognize that the added reserves in excess of required reserves drive the funds rate to zero, since reserve requirements do not change until the following accounting period. That forces the Fed to sell securities, i.e., drain the excess reserves just added, to maintain the funds rate above zero. If, on the other hand, the Fed wants to decrease money supply, taking reserves out of the system when there are no excess reserves places some banks at risk of not meeting their reserve requirements. The Fed has no choice but to add reserves back into the banking system, to keep the funds rate from going, theoretically, to infinity.
In either case, the money supply remains unchanged by the Fed’s action. The multiplier is properly thought of as simply the ratio of the money supply to the monetary base (m = M/MB). Changes in the money supply cause changes in the monetary base, not vice versa. The money multiplier is more accurately thought of as a divisor (MB = M/m).
Failure to recognize the fallacy of the money-multiplier model has led even some of the most well- respected experts astray. The following points should be obvious, but are rarely understood:
- The inelastic nature of the demand for bank reserves leaves the FED no control over the quantity of money. The FED controls only the price.
- The market participants who have a direct and immediate effect on the money supply include everyone except the FED.
Thanks for the answers Warren.
People ask me all the time that OK, if the banks create money this way and they are not reserve constrained and the money multiplier is bullshit then what is holding a bank to extend credit to itself and buying the whole economy. It is regulations as we know but how would you explain that in a very simple way.
if you make loans not permitted by regulation your bank gets closed down and liquidated and you go to jail
i think about 1000 people were jailed as a result of the s and l frauds, for example.
Robert Murphy takes on MMT: