3 Comments
  1. Anonymous says

    It’s not just deleveraging that’s the cause. The private sector has the power to determine its own broad money supply [mostly] independently from the level of private debt!

    That means if the central bank conducts QE and pumps in more money (zero duration assets) than the private sector wants, the private sector essentially gets rid of that extra money [over time] without having to deleverage more than it would otherwise.

    The way it does this is to substitute non-bank lending for bank lending, changing the composition of private debt (via refinancing bank borrowing to non-bank borrowing or equity, securitizing loans, changing the relative propensities for bank vs non-bank sources for new borrowing, etc). The key difference is that bank lending increases broad money supply, and non-bank lending doesn’t, so adjusting the mix lets the private sector satisfy its liquidity preference and “undo” the central bank’s actions.

    So ironically, while central banks want QE to increase lending, it can actually hurt pure-play banks! (Other than origination profits.) And it has very little other effect other than on psychology/expectations.

    There are probably some frictional limits in the magnitude of the adjustment, but the theory seems consistent with Post-Keynesian Marc Lavoie’s work, and some knowledgeable commenters on MMT sites agree.

    A chart showing the impact of QE on bank lending in Japan (scroll down):

    http://www.thoughtofferings.com/2010/10/how-loanbond-choice-helps-private.html

    And a chart showing the recent impact of QE on bank lending in the US (scroll down):

    http://www.thoughtofferings.com/2011/04/further-evidence-that-private-sector.html

    1. Edward Harrison says

      Thanks for adding that bit.

      By the way, when I say deleverage, I am no thinking of an absolute amount of debt reduction but more a reduction in the ratio of debt to income or debt to GDP. Japanese GDP has continued to grow, albeit slowly, in large part because of government deficit spending. This has facilitated a relative decline in debt ratios in the business sector.

      1. Anonymous says

        Understood.

        I made my comment because I think it’s a very under-appreciated point in the blogosphere — even prominent MMT authors don’t mention it (whether or not they are aware of it, I’m not certain). Most people have only heard the endogeneity of the money supply explained with respect to the amount of bank lending, not this other dynamic. If true, as the evidence suggests is likely, it casts a whole different light on many QE-related arguments.

      2. Anonymous says

        Understood.

        I made my comment because I think it’s a very under-appreciated point in the blogosphere — even prominent MMT authors don’t mention it (whether or not they are aware of it, I’m not certain). Most people have only heard the endogeneity of the money supply explained with respect to the amount of bank lending, not this other dynamic. If true, as the evidence suggests is likely, it casts a whole different light on many QE-related arguments.

  2. Anonymous says

    It’s not just deleveraging that’s the cause. The private sector has the power to determine its own broad money supply [mostly] independently from the level of private debt!

    That means if the central bank conducts QE and pumps in more money (zero duration assets) than the private sector wants, the private sector essentially gets rid of that extra money [over time] without having to deleverage more than it would otherwise.

    The way it does this is to substitute non-bank lending for bank lending, changing the composition of private debt (via refinancing bank borrowing to non-bank borrowing or equity, securitizing loans, changing the relative propensities for bank vs non-bank sources for new borrowing, etc). The key difference is that bank lending increases broad money supply, and non-bank lending doesn’t, so adjusting the mix lets the private sector satisfy its liquidity preference and “undo” the central bank’s actions.

    So ironically, while central banks want QE to increase lending, it can actually hurt pure-play banks! (Other than origination profits.) And it has very little other effect other than on psychology/expectations.

    There are probably some frictional limits in the magnitude of the adjustment, but the theory seems consistent with Post-Keynesian Marc Lavoie’s work, and some knowledgeable commenters on MMT sites agree.

    A chart showing the impact of QE on bank lending in Japan (scroll down):

    http://www.thoughtofferings.com/2010/10/how-loanbond-choice-helps-private.html

    And a chart showing the recent impact of QE on bank lending in the US (scroll down):

    http://www.thoughtofferings.com/2011/04/further-evidence-that-private-sector.html

    1. Edward Harrison says

      Thanks for adding that bit.

      By the way, when I say deleverage, I am no thinking of an absolute amount of debt reduction but more a reduction in the ratio of debt to income or debt to GDP. Japanese GDP has continued to grow, albeit slowly, in large part because of government deficit spending. This has facilitated a relative decline in debt ratios in the business sector.

      1. Anonymous says

        Understood.

        I made my comment because I think it’s a very under-appreciated point in the blogosphere — even prominent MMT authors don’t mention it (whether or not they are aware of it, I’m not certain). Most people have only heard the endogeneity of the money supply explained with respect to the amount of bank lending, not this other dynamic. If true, as the evidence suggests is likely, it casts a whole different light on many QE-related arguments.

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