Randall Wray: Making Money Work for Us – Chapters 1 & 2, RP Book Club
(https://www.youtube.com/watch?v=dpjcnbA9Rks)
2023(e)ko ots. 12(a) #EachOneTeachOne #MMT #RealProgressives
Guest Speaker – Eric Tymoigne
Chapter 1 – What is Money
Chapter 2 – Where Does Money Come From?
Transkripzioa:
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foreign
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welcome everyone I appreciate you all joining us for another installment of the critically acclaimed RP book club
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Series tonight Our Guest question answer is Eric Des Moines he’s an associate
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professor of Economics at Lewis and Clark College in Portland Oregon and research associate at the levy
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economics Institute of Bard College he’s published a few books among them are the
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rise and fall of money manager capitalism Minsky’s half century from World War II to the Great Recession
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which he co-authored with El Rancho Ray and Central Banking asset prices and
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financial fragility Eric Des Moines the floor is yours sir
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hi thank you for having me a great pleasure to be here to discuss this new book so
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I guess I’m looking forward to a great discussion tonight all right I guess I will get started
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with our presenter if he’s available perfect hi everybody they asked me to do
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my reaction and summary of this portion of the book just introduce myself my
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name is Kenny I’m pretty new to the group but I’m helping out with a few different things
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I’ll Just Jump Right In so yeah with this the section we covered kind of just the intro a preface and
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introduction and then chapter one and two a lot of detail on almost everything that us and MMP World talk about so kind
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of main takeaways in the preface was really talking about something we hear a lot in mmt about how it’s a lens and a
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lot of the folks in the mainstream or the current economic mainstream people that we see look at this like as if they
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have some glasses that are distorting their vision and the focus of mmt is you
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know as a lens as we hear often that show how the economic systems and modern economies really work
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and then the intro is really just kind of an outline of the whole book so really gonna just jump right into
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chapter one here so it talks about what is money and how it’s used for lots of different things
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and we investigate all the different things that it can do but that isn’t
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necessarily the best description of what it is so we talk about in section B how it’s an IOU and how
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modern money is based on credits and debits or assets and liabilities and it’s actually based in quite simple
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accounting and we should see this like t account table that we use throughout to track
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assets and liabilities for different types of transactions and as we went through these chapters I on the side
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tried to make one of those t account tables for each of the examples that was given
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there was one in the beginning but then later on there was one about the contractor being hired and I try to like do that and I certainly may have some
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questions about that in the future we can see in the first example this transaction of a mortgage showing the
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seller has the asset of the house and then he or he removes that asset in exchange for a new asset which is a
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check from the bank which is the promise to be paid in the amount written on the check that bank
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has a liability that check is a liability to pay the seller the amount that’s written on that check
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so then the bank gives the asset that they’ve purchased which is a house to the buyer in
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exchange for the promise of the buyer paying them back which is the mortgage so the mortgage is the asset for the
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bank should still be paid back even though that’ll be over time it’s still an asset to them but it’s a liability
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for the buyer because the buyer will then owe the bank until they finish
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paying that off and then they talk about how you’re redeemed and so you have to always kind of have the asset and the liability on each side
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of the transaction to cancel each other out but in the end it all cancels out to zero which we’ll see later on it’s a big
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important point in this happening even at scale of like governments and you know trillions of dollars and billions
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of people the same rules apply then in section c we talk about how this debt
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and Redemption Works around this example that is very often used in mmt which is this owner of the pizza shop
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and so they are running this sale and they want sorry a promotion they want to give out free pizza to drive people to
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come into the shop and so they give out these coupons that you can redeem for a pizza and anyone who comes in to the
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store with a coupon we’ll get one so that’s a reliability
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that they’re owed when they come in and once they come in the debt is paid you get to the pizza the coupon is given
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back to the owner and then after that point the coupon is useless and so the shop owner wants to throw that in the
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garbage because it’s a you know if someone else grabs one he might end up giving out more pizzas than the original
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coupons created so as soon as it’s been redeemed it’s just immediately thrown in the garbage and so what’s funny is
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right now we talk about all these different complicated ways of Economics but this
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kind of simple way of redemption has been around for a very very long time and you know it kind of explains how
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this method of just simple credits and debits and tracking
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is pretty standard has been around for many many years and how they use like either paper bills or tally sticks and
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stuff just to pay taxes and everything so it’s pretty interesting so section D here moves us into how
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that monetary systems also have this quality of record keeping that the actual money itself or the
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tracking of these things doesn’t have a lot of actual value whether it’s the sticks or other pieces of paper but really it’s more about keeping track
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of who owes what and something that I noticed is
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historically this kind of IOU system has been really more of the standard and any
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gold standards that have been used in you know in history are actually pretty recent in a diversion from the norm so I
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don’t know if that’s historically accurate but based on the book it seems like the gold standard that we had in
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the US and other countries did in more recent history is actually a diversion from this IOU based system that’s been
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around for thousands of years before and now in section e that is the case
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where money is really a unit of measuring value so it’s like a ruler or
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like a measuring cup so that’s another property of money and then concludes at
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the end that there’s no perfect definition of money because it can be lots of different things he makes this quote saying from I think it was Hyman
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Minsky said anyone can create money it’s just a matter of being accepted so there’s no perfect definition of money but in general it’s kind of like the
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unit of account which is like that unit of measurement but then also the IOU being the two main characteristics
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so I was all there and in chapter one I’ll keep going into chapter two as the
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things get a more Hefty here this kind of explains how everything works at a relatively deep level I thought so
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kind of kicks off in section B talking about how the Central Bank creates money
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and how the government when it comes down to finances is actually two entities you
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have the treasury which is in charge of all the spending and the receiving and then the Federal Reserve which is the
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actual bank and just does banking operations but also does some monetary policy so the saying is the Central Bank lends
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and the treasury spends and so we start out with the FED how
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they lend money into existence they create money by lending money to private Banks every private bank has an account
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at the FED which is something I only pretty recently learned when learning about mmt and and that money in those
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accounts is really just like normal money but has a special name because it’s an account at the Fed so those are called reserves so that’s the that one
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particular relationship between a private bank and the central bank is a little bit different because it’s the central bank and that you know those are
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Reserve accounts about their dollar in cents like anything else and then private Banks can then lend Monies to individuals like us
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for a mortgage or car loans or all kinds of stuff like that and then whenever there’s a loan that’s
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given out to individuals this fed just marks up the account at the private bank and that is how they actually create
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money out of thin air and then if that also has another role in that it clears
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payments between Banks when people send money to each other so if I send if I’m using One Bank you’re using a second
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bank and I write you a check you know you send it to the jet you send it to that person the account gets
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marked up and then in the back end the FED kind of moves the reserves from the One bank to the other clear that payment
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and make sure everything is lined up so I’m in section c we go into some more
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detail about the treasury how the treasury spends money into existence so whenever the government spends money on
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goods or services or pays its employees it it creates money because it has an account at the central bank
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and so the way I was thinking about this is that just in the same way you send a
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you know you when you send a check when you are asking a check we have a you know our bank’s name is on it and when
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the treasury writes a check it’s kind of like their bank is the Fed and so in this example that’s given the
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treasury writes a check to a contractor for building them something and the contractor go ahead and takes the check
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deposits into their private bank his bank sends the check back to the FED to be cleared and the money is moved from
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the treasury’s account into the at the FED just to that bank’s account and now the contractor has the access to that
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money but that action of the treasury when the treasury is spending that is
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the moment where the money is created when it gets out into that private Banks account so those are kind of the two
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scenarios where money is created just out of thin air both of these ways of money creation
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cycle through the economy through private Banks who all have Accounts at the central bank right so any transfers
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between banks are actually just additions and subtractions at the FED but those two main
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lending and spending are how money is created and then the opposite of that when we get into section D is deletion
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and that talks about taxes so this is basically just a reverse of the way the treasury spends so treasury
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taxpayer rates check to the IRS treasure I guess the treasury is who processes it
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then the taxpayers bank account is subtracted that amount and that just basically just destroys the money
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technically it gets put into the treasury’s account which threw me off for a second right there and I’m like
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wait I thought that we destroy the money when you pay taxes but then they put money into the treasury’s account so now
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you could potentially think that wait the treasury is just saving up all that money and whatever but earlier in the
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chapter they mentioned how the internal bookkeeping between the government agencies doesn’t really matter as soon
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as the money’s taxed it’s removed from the private sector and it’s deleted in fact that idea though was quickly canceled because
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in order for anyone to to get new money the government has to create it first so it was like a little bit of a
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distraction there and this understanding but really what ends up happening is that treasury account is always made
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sure to be positive because no checks in the treasury can really balance so section e goes on to talk about how the
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government doesn’t have to spend what it can get into that treasury account the treasury bylaw has to clear all checks
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in a short term it can run an overdraft but then the FED will always just top up that account to make sure it’s positive
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all the time so there’s no way for the treasury to bounce and check that’s kind
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of the proof that the government is not taxing us to spend they have to spend first before taxing
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and then in the last section talks about how the private banking system is really kind of government controlled and how
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private Banks create money when they make loans and this is a very popular scorekeeper analogy is used here like
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when you go to a sports game whenever the team scores points the scores keeper just types in the score the keyboard and
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the points are awarded on the scoreboard they can’t run out of points as long as the points were scored according to the
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rules of the game then the the team gets those points
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there are laws and regulations around what you have to do to get approved for a loan right Banks yes they will decide
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based on risk who to give a loan to but there are also regulations set by the government so as long as
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the person applying for that mortgage or a loan meets those rules and on top of
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that the bank wants to take on that risk then the government has promised to create that money as you follow the
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rules of the game you get points of that score as long as the rules of the game are met the government will create money
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through the private Banks so I thought that was a really good way to kind of understand that scorekeeper analogy the
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kind of the next level that scorekeeper analogy there and then section g talks about how
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people have this wrong idea that we borrow money from China and from other countries and and whatnot but that’s
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something about bonds and how there was always this concern that we borrow money from other countries but it turns out we
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just have to actually create reserves before we can sell bonds just further prove that bonds aren’t actually us
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owing other countries money or anything so hopefully that made some sense if you can point out any points I got wrong
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please let me know again real quick I just I guess the thing with mmt is it’s
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crucial to understand that because I think by default the way we’re taught from birth what money is is
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we see it as like a a lot of people think it’s a you know spontaneous Market forces brought it to be and you know
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they don’t really understand it so right away I think I guess our scope of what we can do as a
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society with money is kind of limited because we kind of think maybe there’s a limited Supply or
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I don’t know it’s just it’s so important to understand what it is and where it comes from that’s what I kind of took
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from these chapters but Virginia do you have anything else before we hand it over uh let Eric respond to Kenny’s
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summary and then we’ll we’ll start going to the questions I do want to point out that Nate asked a question that says
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he’s still confused actually Nate why don’t you ask that question so tell Eric
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what you were confused about because you weren’t very clear in your question but I have a feeling it’s important
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okay uh everything gets debited and credited
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and it all seems to balance out in the end my initial understanding was that
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Congress could spend money into existence and that
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basically it seems like everything balances and that goes counter to my understanding of it
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okay thank you Kenny for the summary that was a lot to go through in a few minutes
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so I’ll just I’ll take five minutes to to go at a few points
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and then in doing so I’ll try to answer Aaron’s
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questions and after that I guess we can open it to anyone
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I guess chapter one is really about understanding what a monetary system is
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okay what is that and there are two essential components in there there is a
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unit of account what in the book it calls money okay and then there if you
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want something he doesn’t use in the book but monetary instruments okay financial instruments more broadly that
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what we call also money okay but I want to make a difference here between the
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unit of account as he does in the in the book between unit of account that he calls money and those monetary
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instrument the cash e-bank accounts okay those things are
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far short instruments that are denominated in the unit of account and
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uh once you have this definition of a monetary system with these two
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components uh the next question is well
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how how is money in injected in the economy who can
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issues monetary instruments who defines the unit of account things like that
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and so he approached in chapter one he tries to to give an answer of well how
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do we conceptualize money and so he starts by saying that well we could look at it from the point of view of the
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functions of money okay money is what money does okay and so let’s say you’re
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an economist that wants to study on us an anthropologist who wants to study a
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society and you want to figure out if they have money in their society you just look for hints by looking at how
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people pass between each other an object and it looks like this same thing is
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passing between people and looks like it’s a medium of exchange there we have okay or a monetary instrument
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okay what he says is that’s probably not the best way to think about a monetary
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systems okay and so the way he’s going to look at Monetary instruments is more
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as I’ll use financial instruments that instruments okay and with that then
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comes to try to figure out well okay debts are basically
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involves two parties someone that is going to debt which is
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the issuer of the debt and someone will hold that debt which has a creditor
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and so you can think of a monetary instruments are as functional
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instruments that are issued by someone and held by someone else okay and
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what are the properties of those financial instruments well one essential
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property is uh they pass among people always at a fixed nominal value okay so
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um ten dollar bill changed hand at a ten dollars okay not
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at five dollars or at one point or eight dollars or another Point okay they
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always have this fixed nominal value at which the person will call that liquidity so that comes into the book
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one aspect of a monetary instrument is that it’s liquid
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okay once you have that the next question is all right so who can create
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monetary instrument okay and the answer is anyone okay
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everyone can do it the point is to get it accepted and that’s where it’s difficult
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and so the analogy it takes is with the pizza coupons here okay and pizza
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coupons everyone can create pizza coupons you and I can make one okay and
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it says oh you want free pizza okay and everybody shows up with that coupon well
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has to make a pizza okay now um the the issue then is well well people
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trust that you can make pizzas well if you’re owned a pizza shop yes okay uh
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but the other ways maybe not unless people know that you make good pizzas okay so the same is true with the
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monetary instruments okay the idea is that you have to make sure that other
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can accept it and so there are mechanism of acceptance that exists two main
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mechanisms is one is you promise to convert your monetary instrument okay
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into something else so it could be a goal it could be a
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dollars of the government the Euros whatever you want to promise
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and the ability to make other accept that monetary instrument by promising
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convertibility depends on do they believe that you can make good on that
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promise okay and that well depends they may be looking
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around above your shoulder and I see you have a pile of gold there’s okay fine okay I’ll take it okay
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but usually um for us it’s difficult because we don’t have what we promise to convert
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into okay the other way is to promise that you
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will be able to to so when you issue that thing you promise that whoever
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holds that monetary instrument say this is a monetary instrument when they give it back to me they can
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clear debts they owe me okay and that’s the case for example with taxes okay so
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you can pay taxes owed to the government okay by giving back to the government
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the monetary instrument they issued okay in same way Banks okay they basically
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have a broad acceptance for Bank monetary instruments for two reasons first it’s convertible into government
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money cash okay but another reason why a lot of people are willing to accept it
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is because lots of people are indebted to Banks okay they owe Banks money
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because they have mortgages they have student debt cardets all kinds of stuff
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and so Banks said that if you give them back their own monetary instrument
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you’re clear of that debt okay basically they debit your account okay and you’re
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the bank account is the money issued by Banks and you can use that to pay debt
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you owe Banks and so these two mechanisms of what in the books called
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Redemption when means to return to the issuer the monetary instruments that it
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issued previously conversion and paying use over to the issue those are the two
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main ways you create acceptance if you have a broad range of debtors
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okay and so in that case you can basically you’ll find a wide range of
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people willing to accept your monitor instrument because they know that they can pay you with those things if you
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have a pile of whatever you promise to convert into that also will create
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acceptance okay so that’s the first chapter the second chapter uh is trying to explain
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well how does the issue work inject money into the economy monetary
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instruments okay and so there you can as you said you can either lend or you can
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buy something okay there’s actually a third way you could also provide gifts okay give grants okay that’s another way
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you could go and so that’s how you inject it okay now the
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way you remove it is through the Redemption channels that we just talked about okay for the government is you can
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taxes is one okay but another one they could promise to convert into a foreign
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currency or they can promise to give you gold okay for bank money okay the way it’s removed
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from the economy is by people paying debts they owe Banks okay or by people
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going to the ATM machine and giving back to the bank it’s on I’ll use okay the
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bank account you have and in exchange getting gaining the government money it’s a bit like the same thing as the um
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Pizza coupon okay when you go to the pizza shop you give back to the pizza
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shop the coupon which is the value of the pizza shop and in exchange you get a
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pizza where for banks they don’t make pizzas okay but they do promise to
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convert their own uh you their own monetary instrument into another uh you
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another monitor instrument which is Federal Reserve notes okay that’s how they’re officially cold
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okay and uh well then after that the book goes into
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the nitty-gritty of well how does when you pass the idea of just the government
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okay as an abstract thing and you go into the nitty-gritty of the
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institutional operations of government spending and taxing and issuing bonds
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okay there what you get is you have to look at the coordination between the treasury and the central bank
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and basically what you have here is a
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complicated debits and credits okay that occur but broadly you can get to the the main
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point of the chapter which is government spends by creating money and taxes
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destroy the currency um and so in doing so here we get to
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Aaron’s point the debits and the credits and the assets and liabilities okay when
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the issuer issues money well it’s an asset for you okay whoever receives that
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and it’s a liability for the issuer and when you you pay your taxes your
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accounts are debited okay and your debt to the issuer also goes down
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okay so for every if you want to put it another way for every creditor there is
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a debtor okay for every Spender there is an income earner and so for
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every credit there must be a debit somewhere else basically
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so it’s basically what we have here so I’ll stop here and just let questions flow
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Stephen D asks from chapter two are the Bank Reserves at the FED plus
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bonds outstanding equal to the cumulative deficits over the years
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okay um so um the uh so the public debts not not the
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reserves okay but the public debts the bonds broadly defined so there are several types of Securities that are
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issued by the treasury but let’s call them bonds those are accumulated
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um that we have outstanding that are represent the sum of all the deficits
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over the years yes so it’s a bit like the analogy I give is
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let’s take a bathtub okay and you have water flowing in okay from the water
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flowing in and so the water flowing in is um the deficit and the amount of water
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in the tub is the public debt okay so the stock of water is the public debt
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and the the addition to it the new issue of bonds if you want to call we call
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them treasury Securities okay is due to deficits now you can also have money
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flowing out of the sink if we run surpluses okay uh when you a government the U.S
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treasury you run Surplus is you you uses it to repay the public debt and so the
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flow of water in the tub would fall okay
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all right Virginia did you have a question yeah I wanted to it’s about
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it’s sort of related to this so I want to read Tom Ramirez’s question he says I
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know the the federal government can create money unlimitedly what is the
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constraint on private Banks creating money is it a capitalization or Reserve
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Ratio or are they only limited by the demand for loans and and I I’d like to
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add to that because Eric I get so confused about this idea
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of reserves if Reserve what where does
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it’s not like they have a vault somewhere with money in it so where do those reserves come from and then
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whenever somebody mentions fractional Reserves people get mad at them mmters get mad at
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them because it’s somehow it somehow has an implication so I I
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need you to really explain all of this too okay okay
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so I guess to bring it back to Earth let’s start back to the pizza analogy on
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the pizza shop okay so what constrained uh the ability of the pizza shop to
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create pizza coupons okay they could create millions of them okay problem is
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of course that then the business will go under very quickly because basically
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will provide pizzas for free and we’re in a capitalist system where you have to
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show a profit if you want to survive as a business and so that’s the the first limit and
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same with banks okay Banks could provide credit left and right
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okay but the problem is that well first of all when they provide credit they do two things they accept the IOU of
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whoever wants to get credit so like when you go to the bank and ask to finance a house you issue to the bank
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a mortgage so the bank now has this our you okay and that’s that how you says I
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promise to pay over the next 30 Years every month a certain amount of interest
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in principle and in exchange the bank pays whoever he
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needs to pay to buy the house okay and credit their account back like how do
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you create the money to do that you just type a number on the computer okay that’s how it’s done now the banks could
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do that left and right provide mortgages to homeless people in the street okay
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and that’s basically what they ended up doing prior to this 2008 crisis okay
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they provided mortgages to prisoners okay well we said what happened okay the
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ability of banks to do that in a sustainable depends on that being
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profitable so the first constraint on banks is profitability okay and it’s
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only profitable if people will pay their debts and every month will make the
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necessary payments okay so that’s the first constraint on blanks the second constraint is which is
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related to it is you have to have a certain amount of capital on their balance sheet
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and there are capital regulations and so that’s another one now going to um The
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Reserve thing okay well we can again go back to the the Pizza coupon the
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equivalent of the reserve or banks in the pizza shop is the dough they used to
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make the pizzas okay because again remember we have this coupon okay that
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promises a pizza in the same way your bank account promises to give you well
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some Federal Reserve no they do okay we use that term okay and so um well for
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the pizza shop the limit in terms of those are the
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results so for the bank for the pizza shop The the Reserve is there okay
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the um the pizza shop well I can make pizzas as
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long as it has enough dough okay and well it could run out of those okay
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unless you have to wait for the truck that the supplies are there well I guess we already make it with themselves but
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then they need flour but okay the point is there is a physical limit okay in terms of the amount of dough they can
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create at any day and so they were good and I have problems for banks there is no limit
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okay the reserves are basically two things for banks they are the uh
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physical cash in the ATM machine okay and the other thing is they have
33:56
checking accounts themselves at the Federal Reserves so those are what we call
34:01
reserves okay and the FED can supply reserves in unlimited amount okay
34:09
because basically it’s just about about typing a number on the checking account okay that’s how you you create reserves
34:17
okay so there is no physical unless you look at the filler or Reserve notes okay
34:23
fine but most of it today is electronic entries in a in a balance sheet
34:32
yes so the reserves are never constraint on
34:38
a bank providing credit okay what is a constraint is is it profitable to do it
34:44
and capital regulations with linked to profitability
34:52
absolutely all right our next question is from uh we’re into the org Jeffrey
34:58
gitter Jeff I’m here can you hear me yes sir that Angelic voice
35:07
all right to whatever degree you feel is relevant or you feel you have the time
35:12
for I really feel this is an important one and chapter two starts to touch on it can you describe the difference
35:19
between public Banks including post office banking private Banks investment
35:24
Banks and most importantly for complete understanding Shadow backs what are they
35:30
and what role did all these things have in to derail the Global Financial system
35:35
in OA okay so um so postal banking doesn’t
35:42
have the same constraint as a for-profit private bank okay
35:48
so um here you have more of a public purpose at play okay and yeah if you
35:55
have any trouble you have the government helping directly uh no problem private
36:01
Banks they have to show a profit okay that’s how they run and they also have
36:06
lots of extensive government backing in these days if they run into trouble okay but they at least have to show a profit
36:13
for the rest investment Banks and Shadow banking investment Banks they really
36:19
work more in the financial markets so what we call you and I call Banks they
36:25
are here to basically provide financial services for the little guy okay the law
36:30
of business okay investment banks are more there to
36:36
try to help Corporation raise hundreds of millions of dollars or billions of
36:42
dollars in the South Shore markets by uh helping them decide shall we issue bonds
36:49
or stocks okay and things like that the shadow banking
36:55
um well I for that it’s really it’s about trying to circumvent
37:02
some regulations there are several aspects it’s a complicated uh thing I’m
37:08
writing a textbook now on a financial system and I just put out the
37:13
securitization um chapter that goes into the secures the shadow banking
37:20
to understand that you need a lot of background on banking but basically
37:26
um the shadow banking system is trying to recreate the banking system outside the
37:34
regulatory framework put in place by uh government
37:39
and with that comes lots of problems because they are not backed by the
37:46
government and so you have lots of risks that emerge uh I guess I’ll I’ll stop here there are
37:55
lots of problems that come with that yeah if you want to dig deeper and you have finer questions we can go there but
38:00
otherwise I’ll stop here yeah and I’ll just take this opportunity before our next question to urge you guys to head
38:06
over to realprogressives.org and check out the flagship podcast macro and cheese which
38:12
are guest Eric Des Moines actually was on an episode not too long ago if you
38:17
want a textbook too it’s available online and the chapters two are online you can find them by the way shoot me an
38:24
email absolutely okay our next question is from a guy named Steve grumbine
38:30
Stevie there buddy I am hey Eric thank you so much for joining us tonight really really appreciate this so my
38:37
question is what is this fetish do you think about concept of the private
38:45
Federal Reserve why do you think it’s so poorly understood that’s part one and
38:50
number two is what what is the significance if you will when the federal government grants Charters to
38:57
Banks and the term private this this is like I I’m skipping through a lot of the
39:02
way I wrote my question I I’m concerned because it seems to literally cause such
39:08
massive brain disruptions and people that they
39:14
can’t understand the most fundamental basics of mmt and given even Jeffrey’s
39:20
question which I think kind of is really important to be able to segment those types of Banks and understand the kind
39:27
of activities that are occurring just at a fundamental level you know if I’m not mistaken all banks
39:35
are given Charters by the federal government and by default if you take Warren Mosler he would tell you that all
39:42
banks are public Banks the difference is that they’ve been deregulated and turned into monsters
39:48
so I I guess my question to you is what is it about the concept of private and
39:54
public Federal Reserve that you feel over the last hundred plus years has
40:00
generated so much angst and lore and mythology and and
40:07
literal incapability of understanding basic concepts how has that impacted
40:12
Society so on the Federal Reserve um I I mean
40:17
the Federal Reserve is a compromise of the culture of the United States that
40:24
sees the federal government with pretty very suspiciously and so the way the
40:31
Federal Reserved was created and organized is awkward I would say but
40:37
ultimately it’s a it’s a public institution so if we look at the way it’s organized you have 12 Regional
40:45
Banks okay and these 12 original banks are for-profit institutions okay and
40:53
they issue stocks to their member banks but the and so number banks are the
40:59
private banks that wish to join the Federal Reserve System and be regulated
41:04
by the Federal Reserve and to do that you have to buy stocks of the Federal
41:11
Reserve Banks one of those 12 here okay so for in in Portland we are our
41:17
associate we are in district 12 and District 12 is overseen by the Federal
41:23
Reserve Bank of San Francisco so if you are a bank and you want to
41:28
become in district 12 and you want to become part of the Federal Reserve
41:34
System which most banks are not what you have to do is buy into buy stocks of the
41:41
Federal Reserve Bank of San Francisco those stocks are not tradable they
41:47
cannot be used as collateral they’re more just uh uh card membership uh card
41:54
okay what’s good about then is they give you a six percent dividend okay and
41:59
that’s lots of free money there so you have that the board of each Fitters or bank or the
42:07
board of directorship of each Federal Reserve Bank is composed of directors
42:12
that are supposed to come from different sectors of the economy the banking side
42:18
and uh the other sectors of the economy uh the Central Bank the
42:25
Washington DC where you have the Board of Governors that basically
42:32
oversees all the stem all 12 Banks okay also as I say who is I’m becoming in on
42:38
the board of directorship then the elected president and the president can then participate into what we’ll call
42:45
the Federal Open Market comedy and then there is a system of vote on this
42:51
committee not every president can vote all the time except the president of the New York fed
42:57
so the point is that yes you have a complicated institutional organization
43:03
where the private the federal reserve banks are a for-profit but at the same
43:11
time they’re overseen by a board of Governor that basically tells them what
43:18
to do and they also any leftover profit that make they basically give that to the treasury
43:25
okay we call that remittance okay and so Banks compete to give as much remittance
43:31
as possible to the U.S treasury okay know that they make a lot of their profit by owning U.S treasuries okay
43:40
which are the debt of the U.S treasury so yeah here you have
43:45
this big plate of spaghetti here all kinds of things moving around and being
43:51
mingled together okay and that’s again a specificity of the American culture okay
43:59
and we have this complicated way to do it we could just have one Central Bank that oversees you know
44:06
tired of the United States that has no for-profit purpose whatsoever just the
44:12
Border governor and that’s it okay but again people in the United States don’t like that they like to have a
44:18
decentralized system that lets more participation into the decision-making
44:25
process somehow by the rest of the population
44:30
thank you sir appreciate it is that CAG Lee is that the question yes
44:35
okay the question is there are 12 federal reserve banks
44:40
with the Federal Reserve Bank of New York being the most influential why do we have so many federal reserve
44:47
banks why not just have one not just two DUI yeah it’s it’s connected to what you
44:54
said but you were talking about private Banks as well
45:01
is it is that all connected no I was not talking I was talking about this so you
45:07
have so let’s think of it as a pyramid at the very top you have the board of government there and then below that you
45:14
have the Federal Reserve Banks okay San Francisco Bank the newer Banks the
45:19
Kansas City uh federal reserve banks many others and under that you have the
45:25
private banks that operate and can be members of that system or not
45:32
okay I wanted to be sure okay great yeah next we have Larry day with a question
45:39
Larry if you’re ready I I guess we’ll ask for in the chernova Presley proposed
45:45
federal job guarantee program would Congressional allocation go through the Federal Reserve at all
45:52
well so the Congress decides what the spending should go uh what kind of
45:58
spending we should do okay and once this is done the rule of the treasury is to
46:04
implement that budget and um so the funds used to implement that budget are
46:12
all in an account uh well they’re um in accounts uh the Federal Reserved
46:18
in the past they also used to be in Randy mentioned that they used to be at private banks no
46:24
since the financial crisis the Central Bank the considerary the U.S treasury
46:30
basically closed all the spreading bank accounts and moves all its funding into
46:37
the account it has at the Federal Reserve so everything is in there and so to spend the treasury uses that account
46:45
okay to receive tax revenue is it also uses that account yeah
46:51
and I think that comes to one of Kenny’s questions which is well I thought tax is
46:57
done or destroyed and they’re not the source of Revenue we could we can deal
47:02
with that if we want friend of the org Matt pivovitz has a question Matt yeah
47:08
so I just wanted to bring it back to something was mentioned a little bit earlier regarding Kepler requirements as
47:14
opposed to really having reserve requirements or fractional Reserve
47:19
so I’m just trying to get a little more information on what exactly is the capital requirement I think my most
47:26
latest understanding is tier one Capital assets divided by Consolidated assets I
47:32
don’t really know what that means but I would like to know more thanks yeah so the question then is what
47:40
do we consider capital okay and um so here you have several ways to generate
47:47
Capital the first one is Banks generic Capital Bay making a profit okay so when
47:54
we think about uh well making a I want to make money okay and um making a
48:02
profit is making money well if you think about it for a second Banks they’re the
48:08
issuer of the money so for them making a profit uh they
48:14
don’t they don’t get anything on the asset side like we have in our bank
48:19
account is credited boom Oh we have more money in our account no because for
48:24
banks the money is there I will use Okay so
48:30
the way they make money what the way they record a profit is purely as an
48:37
accounting entry in a balance sheet okay which is you have more Capital now we
48:45
could go through the accounting if you want in the textbook I do go through that but the main point is that for
48:53
banks making a profit there’s nothing physical that is gained there is there’s
48:58
nothing that they earn on about an account somewhere what they earn is just
49:04
plus five honest piece of paper and that’s it and that’s hugely important
49:10
okay because in um for banks they need that plus five as additional Capital
49:17
because it helps them to improve to continue the process of creating money
49:23
and it helps them to meet the capital requirements now uh if you move Beyond
49:28
how you create a capital through through profit another way to raise capital is
49:33
to issue stocks okay and then comes another question is
49:39
what about Beyond stocks and undistributed profit are there other forms of capital so there some people
49:45
are going to say yes you could do so also include other things like what we call loan loss reserves pass you could
49:53
include in there also um like uh let’s say the center of the bank issued very long-term bonds okay
50:02
maybe that could be in tier two Capital requirements so you have layer second
50:07
layer of capital and count that so when you go into the definition of what
50:12
capital is and in the nitty-gritties there we can start to look in details at
50:18
the different elements of capital yes foreign
50:24
excellent all right our next question is from Wayne McMillan Wayne go ahead sir
50:31
hi Eric my question is to do with central banks allowing ordinary citizens
50:36
to have accounts with the central bank and that the Central Bank could actually put money into those accounts what do
50:43
you think of that idea and by the way thank you for that paper that you’ve just written uh Stephanie Kelton just
50:48
alerted me to it that’s a brilliant paper I’ve just been published in the European Journal of economics and
50:54
economic policy thank you oh you’re welcome so um yeah the the point is that
51:01
government wants to delegate some of the credit services that are provided to the
51:08
population okay by you government doesn’t want to do everything okay
51:15
because we think that uh for right or wrong we think that Bankers are better
51:23
uh judging the credit worthiness of people
51:28
and have incentives to do that carefully now we saw during the fall short crisis
51:34
that may not be the case okay and
51:39
um we want also to have um delegate team and services to the for
51:45
private sector or the non-profit sector also okay if you have I mean lecture as
51:51
you call those the name he’ll come back but you have non-profit banking tips a member of our Community Bank okay
51:58
those are non-profit Banks I’m part of one I don’t keep my money in for-profit things
52:04
and so yeah you we could do that we could have everyone having
52:11
um a credit union that’s the name of the Koreans yeah so you could have uh Banks
52:17
I have everyone has an account at the Central Bank who could do that private bank won’t be happy that’s for sure but
52:25
we could do it but we prefer we the the way we answer that question here is to
52:32
say that now there is a role for the private sector to do some of the tasks of determining
52:40
Who is credited worthy how we make payments to each other and we want to leave some of that
52:48
decision-making process to the private sector yeah thanks Aaron yep
52:58
all right our next question comes from Margaret Taylor Margaret you ready yeah
53:04
I love the story about Warren Mosler at the end of chapter two about how he
53:10
I didn’t realize he was a hedge fund a hedge funder and he what he did with
53:17
Italy when it looked like Italy was going to default and he understood no
53:24
they can you know work their way out of this and he
53:30
swooped in and and bought up their bonds and made a profit and then the European countries decided
53:38
to get rid of their Sovereign currency in favor of the Euro and I’ve never understood why they
53:45
did that okay so the main reason is was the first
53:52
there are several reasons one is a political reasons which is a belief that
53:58
having a stronger economic integration would
54:04
help avoid um uh the chance of Another World War
54:10
okay because the first two World War basically start in Europe and so that’s
54:15
the first thing to try to integrate the populations and create a
54:21
European conscience through better economic integration so that’s the first one the other the
54:27
economic reason is the view that by having a single currency and that comes
54:34
from a theory come the optimal currency area the idea is that by having a single currency you improve the efficiency of
54:42
markets and so we’re going to do that to improve the efficiency of market
54:48
leaving aside the um the key component which is you need to
54:54
have basically a government that is at the top here and basically a supervising
55:00
and managing the monetary system we have we’re missing a big component in there
55:05
which is a treasury component in Europe and we have the central bank
55:13
but the Central Bank well it’s changing now especially after the 2008 crisis but
55:18
prior to the crisis saying we won’t ever help
55:24
directly or indirectly the states okay and we are they call it completely
55:31
independent from them okay and there is no treasury to which we have to answer
55:37
and be the bank of we’re just an independent institution at the top okay which is quite a odd way to create a
55:45
monitor system okay if you look at all monetary systems
55:50
modern monetary system they really start with either a combined form of a
55:56
treasury or Central Bank or the two elements of it together and basically helping each other out here we just cut
56:03
off completely one side of that and it didn’t go very well okay and ultimately
56:10
the Central Bank in 2000 during the crisis had to intervene to help the
56:15
member states basically and it continues to do that up to these
56:21
days so um well the again here basically we have another example of a cultural
56:27
maybe uh influence on the way we organize a system that is strongly
56:33
influenced by the German culture and this view that well we should have a
56:38
strongly independent in your bank and but again there they’re trying to work with that culture
56:46
while at the same time making the system work not be unstable and that recreates
56:52
some form of financial support to
56:57
treasuries but in this case it will be individual treasuries
57:04
Stephen Cobb with a question go ahead Stephen hi I actually have just two
57:10
observations about our use of the English language and this has helped me
57:15
understand a couple of important points I think in modern monetary Theory first
57:20
has to do with um our use of the term when you say we
57:25
redeem our our debt and so forth I don’t think we should pronounce it that way the word the root word is deem so to
57:33
dream means to consider or evaluate so if you learn if you loan me money you
57:40
deem me to be a debtor and I deem you to be a creditor and maybe I don’t like
57:47
that and I don’t want to be thought of as a debtor so I pay off my debt in the belief that you will redeem me
57:55
you will reconsider or re-evaluate me I’m not a debtor anymore and you’re not
58:01
my creditor anymore so we read redeem each other not redeem we redeem we
58:07
re-evaluate each other so it’s really about the relationship and the re the
58:12
act of redemption is um you know about our relationship it’s
58:18
not about the money it’s maybe a small point but it helped me to understand the other one it’s it’s
58:24
a very important Point yeah it’s indeed right yeah and in religion we use the
58:30
you know I for my entire life but I’ve heard the word Redemption and religion I
58:35
really have never understood it until I you know looked it up and started to think about it and it’s you know you’re
58:41
a sinner or whatever and you want the Redemption is you want to be seen in a different light that’s right that’s what
58:48
Redemption the other thing I just want to make one other point and that is I’m an English major so this stuck out
58:55
at me we always talk about the government issuing ious really that’s a
59:00
little confusing I think we should say it’s a we owe you because the government is acting as a proxy for the entire
59:07
nation it’s you know if I provided if I own a boot Factory and I provide boots
59:13
for the Army and you give me money uh the entire nation is thanking me for
59:19
providing boots for the soldiers and it’s a we owe you not an IOU the
59:25
government say okay well and I owe you no it’s a we the nation thanks me for providing those boots that’s what so
59:32
anyway that’s my point okay uh yeah and and this word redeem
59:38
and Redemption is very peculiar to the English language when used in the
59:43
monetary context in the process of trying to publish a French mmt book
59:49
and that word Redemption doesn’t work okay it’s it’s strictly a religious word
59:56
in France and that doesn’t work at all we would use more the word reflux okay
1:00:02
so money flux and reflux said that works better so it’s really peculiar to the
1:00:09
English language this word but I think it’s the proper word because it indeed reflects the fact that monetary systems
1:00:17
emerged modern monetary system emerged through um the uh religious authorities okay and
1:00:27
our social organizations through classes where you have a religious authorities
1:00:33
at the top that create monetary system because they make others indebted to them yep
1:00:39
but yeah monetary creation creates basically a relation between a debtor and a creditor
1:00:46
so next up we have Betty taboni are you
1:00:53
ready go ahead okay why is it a liability to the bank if they are the ones giving money like
1:01:00
when they create a deposit or a reserve and is the money an IOU so I I have to
1:01:09
give the bank something don’t I so that they know that I owe it to them right yes so um when
1:01:17
um when we go ask for the home financing so you want to buy a house okay unless you
1:01:24
have money up front or you pay cash okay entirely usually we have to go to the
1:01:30
bank and when we say ask for a mortgage where really we are the one issuing the
1:01:37
mortgage because for those of you who have had the chance to become a
1:01:43
homeowner okay and um you remember back in the day when you went to the lawyer’s office and you had
1:01:50
this huge pile of documents to read through and lots of signatures okay probably the most important documents
1:01:57
here was what we call the mortgage note and the mortgage node does Clearly say
1:02:02
that I and then your name shows up so I air King wine and if there is another like my wife
1:02:09
okay I or Timon and yellow we promise to pay those things so you are the one
1:02:15
issuing the mortgage it’s your debt okay and you decide to give it to
1:02:20
someone issuing it now what does uh so that’s what you give to the bank in exchange what does the
1:02:27
bank do well the bank creates its own uh IOU okay we call that bank accounts okay
1:02:34
and it doesn’t give you the money okay you never see the money what it
1:02:40
does is directly either makes the payments for you to the home seller okay
1:02:47
and why is that why is a bank account a debt of the bank well it is for two
1:02:56
reasons the main one is that the bank promises to do something in the same way when you
1:03:01
sign the mortgage you promise to do things okay monthly payments of interest
1:03:08
in principle the banks when it creates a bank accounts also promises to do
1:03:13
something and you can go into the nitty-gritty of the legalese of documents come with your bank account
1:03:20
okay two things you can do and the first one is the bank promises that it will
1:03:26
convert one to one into government cash physical currency whenever you want
1:03:35
okay now if you want to withdraw Lots uh right away you might have to give them a
1:03:41
heads up but otherwise it’s anytime he shows up that gives to you
1:03:47
that’s the first thing so the first part of the Redemption mechanism okay conversion into something else the other
1:03:54
thing that they promise is that if you ever owed to the bank something because
1:04:01
you have to pay them something because you are indebted to them you can use the
1:04:07
bank account to pay them okay so they promise they will accept
1:04:12
that okay that’s the other promise that there you get a there is no situation in
1:04:17
which you have lots of money in your a bank account and you say okay let me pay my bank now and I’m gonna do that by
1:04:24
debuting asking them to or write a check to them or the algorithm to debit my account and the bank is gonna say nope
1:04:31
sorry I don’t accept that as a means of payment for my for the debt you owe me
1:04:37
okay that would be defaulting on their promise okay because they promised that
1:04:42
they would accept these book entries and a debit of these electronic balances as
1:04:49
a form of payment
1:04:54
herb Wiseman you can go ahead buddy and ask her question
1:05:00
I didn’t really have a question so Mike said I wanted to respond to the area
1:05:05
liability but then I came up with having just noted that we built and Heritage
1:05:11
you know are having conversations about a common fluency
1:05:17
and interestingly Paul Sydney apparently had somebody to post it and I was expecting MMP would it owes it as well
1:05:27
close that I’d like to make a comment about the double entry bookkeeping
1:05:33
here you say that here but basically the answer to Betty is that if
1:05:38
Double Entry that’s right
1:05:47
thank you another question here from uh one of RP’s own Christina
1:05:54
and she asks can the big private Banks be
1:06:00
realistically practically reformed yikes okay
1:06:05
My Views is uh thanks to the air far too big okay and
1:06:11
there is a huge local more Hazard here because basically if they are ever into
1:06:18
uh problems okay as we saw in the during the crisis okay the
1:06:26
and the answer the the we had a lot of banks that were insolvent okay at the
1:06:32
time okay somewhere in liquid some were completely insolvent okay meaning that the value of their assets was way too
1:06:39
low is valued properly okay it was way too low to be able to meet the payment meet
1:06:45
all the debts they had to pay okay and so um the way we went about it is we went
1:06:54
to say well we first pretended that they were not insolvent by evaluating their assets at a different price and what
1:07:02
they ought to be priced and then after we went to also provide them financial assistance
1:07:09
for months or years okay to make sure that they can keep making their payments
1:07:14
there is a good paper about that that they’re leaving Institute okay and that looks at how how much help there were
1:07:22
the central bank provided okay it’s in the tune of if you sum up all different amount of credit that was probably would
1:07:29
come up to 29 trillion dollars okay on top of that all the other assistants
1:07:34
that was provided by the fdsu by the treasury okay and that creates a lot of more Hazard
1:07:41
because now Banks is well we’re so big that the government is afraid that if we have problems we’re going to crash the
1:07:48
entire economy so we can never lose okay and
1:07:54
I think that’s the problem here that’s quite a different way we answer the
1:07:59
problems uh during the Great Depression okay during the Great Depression we had
1:08:05
declared the bank holiday the government over a week went through
1:08:10
the books of thousands of banks okay so we can do very quickly and went through
1:08:17
the books of thousands of banks and categorize them in category a b and
1:08:24
c okay a there after a week they were allowed to reopen they’re fine their
1:08:30
redeem sound that solvent liquid B’s they had to work things out but they’re
1:08:38
okay okay so the government would basically tell them to season deceased
1:08:43
from some activities and tell them if you do those things and clean up your mess and
1:08:49
create a business that is viable we’ll let you go and sees where the Hopeless one those
1:08:55
were closed during the bank holidays and never reopened we should have done something like that doing the recent
1:09:02
financial crisis okay and actually it’s not we should if you look be a black actually has been pretty adamant about
1:09:09
that is that now we should is we had to under the law we had to basically
1:09:16
carefully look at Banks and basically close them and put them in receivership
1:09:22
if needed and then liquidate them if needed
1:09:30
absolutely I love Bill Black right uh Tom Pittman you ready buddy
1:09:35
good to go um okay um Eric this is kind of mmt101 I think
1:09:41
but I just wanted to make sure that this isn’t wrong because I’ve been using it a lot on quora and I wanted to
1:09:48
ask is the following correct and this is what I’m asking all government spending equals new dollars as a result of
1:09:55
political will in Congress known as high-powered money because it is Bank deposits plus Bank Reserves
1:10:02
and federal taxes due to the reverse of that spending resulted in deleted funds from the bank account and deleted
1:10:08
reserves from the bank’s Reserve account leaving only bookkeeping for the IRS fed treasury Social Security Etc key word in
1:10:16
my question is if I have the bookkeeping part right as well thank you for letting me ask the question
1:10:22
so yeah um sure no problem so you’re saying he has it
1:10:29
right yeah this one yeah so we are at the 90 minute Mark which is a miracle
1:10:36
and we got to all of the questions which is another miracle so Eric we want to
1:10:43
thank you so much for this thank you tell people how they can follow you or
1:10:48
reach you or yeah so um I’m on Twitter but I don’t go
1:10:54
that much anymore there so the best way to reach me is to reach me by email just
1:11:00
type my name on Google and now you’ll get to my page and find my email there if you have questions feel free to ask
1:11:07
and now we can go in more details there in the T accounts and everything if you want to do that
1:11:14
thank you so much this this has been wonderful so we really appreciate it but I’m sure
1:11:21
we’ll call on you again for something so all right then thank you have a good
1:11:26
night thank you everyone have a good night everyone good night
