Daily commentary
Since I have a decent amount of links, I thought i would do a special Sunday daily commentary. The issue I wanted to highlight is credit and how it gets created. At some point I may make a longer version of this to flesh out the points but what I want to focus on here is the ECB’s cutting the interest rate it gives euro areas banks on deposits at the ECB.
When the ECB last met that was the big news, that the ECB would no longer give banks interest on deposits. Some people took it to mean that banks would be forced to increase lending. For example, this story from Reuters quotes a central banker saying just this:
ECB policymaker Josef Bonnici said the plunge in overnight deposits – to 325 billion euros from more than 800 billion a day earlier – was "encouraging" and said he expected to see a rise in loans to firms and consumers as a result.
Nonsense. Banks don’t lend reserves because banks are not reserve constrained. When you get even central bankers thinking banks are reserve-constrained, you know you have a problem. The way that it works is that a central bank uses reserves as a means of hitting a target interest rate. It controls the level of reserves to keep that target. Banks can actually lend as much money as they want as long as the target rate is in place. So the system is rate or price constrained, not quantity or reserve constrained. And that mans the central bank must provide the system with enough reserves to meet banks’ desire to grant credit ratio at its target rate. The reserves are about helping set interest rates, not about pyramiding money on a reserve base. See my post "Banks are never reserve constrained" for more.
The point is that people who are predicting inflation or more lending or whatever don’t know what they’re talking about. banks assess whether borrowers are creditworthy and grant a loan based on the profit they can make from granting said loan irrespective of their reserve position. That’s how it works, folks. Don’t be fooled by people trying to sell you something else.
Below are a few articles highlighting this fact. Note the Mish and Steve Keen articles because they go further in telling you that banks ability to create money also means that a fully reserved and gold-backed system will make no difference. Price is the lever, either the price of money in terms of interest rates or the price of a currency in terms of gold. bans will continue to grant loans and increase credit aka money supply under all private banking systems.
The bottom line for the euro zone is that the austerity push is going to kill demand for loans by creditworthy customers and the ECB can’t do anything about it.
Anyway, that’s it. Here are the links.
Mish & Steve Debate: Steve Says (I) | Steve Keen’s Debtwatch
Europe
Note that despite the macro problems in Europe, equities still offer relative value versus either US equities or core euro zone bonds where yields are ridiculously low.
Y si esto falla, ¿qué hacemos? | Economía | EL PAÍS
Portugal – Please Switch The Lights Off When You Leave! | A Fistful Of Euros
European Stocks Rise for Sixth Straight Week; Aegis Jumps – Bloomberg
Finland May Get Bank Shares as Collateral, Urpilainen Says – Bloomberg
Analysis: Greece too far behind to copy Irish bailout model | Reuters
Analysis: Spain’s new austerity buys some time, not solution | Reuters
US
Analysis: In the U.S. housing market, recovery or Lost Decade? | Reuters
Banks
Deutsche Bank gets prosecution witness status in rate probe | Reuters
Banksters Take Us to the Brink | The Big Picture
On bank deposits: Dilbert comic strip for 07/14/2012 from the official Dilbert comic strips archive.
Calculated Risk: Libor Scandal: Old Articles
Analysis: Ranks of tight-fisted community banks surge | Reuters
Technology
3 reasons a $49 Lumia 900 price drop won’t help Nokia — Mobile Technology News
RIM Found Liable for $147M in Patent Suit – Liz Gannes – Mobile – AllThingsD
Google’s Nexus tablet selling fast across retail chains | Reuters
Other links
The Mike Norman link tells you that economics is hopeless in some respects. Mainstream economists continue to act like the crisis hasn’t invalidated their macro theories. It has.
Twelve more years for house prices to recover – Telegraph
Brazil Retail Sales Fall Most Since 2008 as Shoppers Pinched – Bloomberg
Mike Norman Economics: Krugman sides with Wren-Lewis — and admits he was wrong about the crisis
China to invest $5 billion to renovate rural houses: Xinhua | Reuters