Economics

Good article on Naked Capitalism

By way of nakedcapitalism.com this excellent article from washingtonsblog.com on “Fictional Reserve Banking”:

But whatever you think about fractional reserve banking, whether or not you agree with its critics, the truth is that we no longer have it.

As the above-linked NY Fed article notes:

In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels.

And as Steve Keen notes – citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2007-54, Washington, D.C:

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans are not subject to any reserve requirements.

Welcome to the new financial landscape…

Read more.

2 comments to Good article on Naked Capitalism

  • Loans are never subject to reserve requirements.

    Transactions deposits have reserve requirements.

    I don’t think the quote about no reserve requirements for deposits by companies is correct.

  • I read the article on the Fed site. I couldn’t find anything about banks not having reserve requirements for nonpersonal deposits.