Replying to Avatar a source familiar with the matter

The issue is not over-payment, but payment at all. The central bank is straightforwardly creating new currency (without any reserve ratio or capital ratio imposed as a regulation on how much they can create).

Werner points out that (most) credit creation happens at commercial banks, ignoring or not understanding that a little credit creation at the central bank turning into a lot of credit creation at commercial banks is exactly the reserve ratio "theory".

I put scare quotes because reserve ratio controls on commercial bank lending are regulatory fact, not a natural phenomena which requires a theory to explain. Calling reserve requirements a theory is like calling speed limits a theory.
Avatar
a source familiar with the matter 5mo ago

When the central bank buys assets from commercial banks (QE1) this improves the reserve and capital ratios of the commercial banks, allowing them to create more credit under existing regulations, which does go to borrowers

There's a concept in home and auto lending of an originator, who makes the loan but immediately sells it off, permitting them to go make another loan. When the central bank buys commercial bank assets, this frees up their capital (which bears a regulatory relationship to their ability to make further loans) and this lets the commercial bank act as an originator rather than a traditional lender (who would hold the loan through its life).

Reply to this note

Please Login to reply.

Discussion