Scarecrow

This woke me up, to write. At Winterspeak:

winterspeak said...

The notion that reserves somehow enable lending is a terrible confusion of how the "monetary base" works, bank lending works, and reserve works.

Ramanan said...

It is true that the bank is attracting deposits and that it may have found itself with a lot of reserves before making the loan. However it doesn't "cause" the bank to make more loans because it doesn't make the borrower more creditworthy.

And at Asymptosis, Tom Hickey:

The argument is about causation. One claim is that reserves cause lending, and deposits lead to reserves, so deposits cause lending... The other claims is that demand causes lending...

Tom's complete comment is particularly good, I think, and useful to me. But that's beside the point just now.

Winterspeak and Ramanan and Tom Hickey all express the same thought: "The argument is about causation," as Tom says. The argument is about whether reserves cause lending.

But this is just the argument MMTeers are having amongst themselves. Nobody outside MMT says that reserves "cause" lending. MMT has adopted this as an argument they can shoot down, but it's nonsense because nobody is making that argument.

Reserves do not cause lending. Reserves limit lending. Whether they work or not is another matter; but the intent of the reserve requirement was from the beginning to give central bankers some control over other bankers in regard to money-creation. The intent was to put limits on the fractional-reserve process.

So Winterspeak's focus on reserves enabling lending, Ramanan's focus on reserves causing loans, Tom Hickey's focus on reserves causing lending, it is all just a red herring. A straw man.