Richard Williamson asks a sensible and straightforward question: If, as Modern Monetary Theorists propose, banks’ reserve levels put no significant constraints on their lending, why don’t we have 100%-reserve banking — and presumably no runs on banks as a result?
First an explanation — I hope simple, clear, and generally accurate (if simplified):
So back to Richard’s question: if the Fed required 100% reserves, the banks couldn’t lend out all those checking-account deposits. The quantity of “loanable funds” would decline. But banks could still lend, 10-to-1 (or so), against their capital.
What do those numbers look like in practice? U.S. checking and savings deposits total about $6 trillion right now.
Circa 90% of that would be removed from the loanable funds market. Call it $5 trillion — sounds like a lot.
But total credit market debt outstanding is about $55 trillion.
That makes $5 trillion sound…not insignificant (and profound at the margin), but less onerous.
Which raises my question, one that I’m not knowledgeable enough to answer: Would 100%-reserve banking result in there being more bank capital available — more equity investments in banks — which via its money-multiplying power would offset or more than offset the otherwise decline in loanable funds?
Would we end up with roughly the same amount of credit market debt outstanding?
The answer, it seems to me, would depend on a whole lot of complex and interacting incentive effects. Anyone care to take a stab?
P.S. Like me, you’ve no doubt noticed that debt outstanding is in fact about ten times bank deposits. Does this put the big-picture lie to the MMTers’ claim that lending is not reserve-constrained? Is it just a coincidence? Other?
Cross-posted at Asymptosis.