The Myth of the Money Multiplier

This is one of the most widely believed models in economics, but it is simply wrong, I show how this false model drove the policy measures by Central Banks during the economic crisis, resulting in huge expenditures being needed to cause relatively trivial stimuli.

[floridaman]

Dr. Keen, You posted a masters level lecture a few years where you analyzed Freidman's velocity theory. Was most informative. This is welcome too.

[Interstellar]

Ok, the transaction beginning at 24:48 of the video purports that the commercial bank is lending to firms from the “commercial bank’s liability to the central bank.”

So, it isn’t lending the reserves it borrowed from the central bank but, rather--the commercial bank is lending the liability the central bank holds against the commercial bank?

And this somehow reduces the commercial bank’s liability to the central bank, but increases deposits at a firm??

Based on the limited narrative about this transaction, this line is absurd and seems “ad hoc” to make it seem like the opposing view does not work.

[Achrononmaster]

What's (sort of) amazing is the software banks use has this hard coded, they indeed cannot loan out their reserves, and instead purchase the borrowers promissory note record it as an asset, and credit the customers account (Richard Werner's papers). So the curious questions are (a) did the software programmers know this is what they were doing? (b) did the bank accounting pro's designing the software specs do it deliberately following the legal requirements, or did they get double-entry correct by sheer mistake? If "yes" to "no mistake" why were they not supporting MMT and PK banking experts sooner?

[rickobrien]

would be helpful to put the contribution link I would have contributed.

[conscious_being]

Money multiplier made sense in the days of gold-backed fractional reserve banking. In those days the banks would have been constrained by the reserves they had in how much loans they could make (determined by the required reserves ratio). But there was really no way for the Central Bank to increase the reserves of the banks, since it couldn't create the reserves by making an accounting entry.

FDR's gold confiscation was intended to increase the reserves in the banking system, in order to let the banks create more money to lend. The Bretton Woods agreement was another way the US banking system gained reserves (gold foreign Central Banks exchanged for US$).

Banks never lent reserves (which doesn't even make semantic sense), but in the gold-backed currency days they were constrained by the reserves they held in how much promises they could make. In the fiat currency days where reserves are nothing more than the Central Bank credit and can be created in the same fashion that bank credit is created i.e. through double entry book-keeping, banks are never reserve constrained in their lending decisions.

It appears the books haven't been updated since the gold-backed currency days.

[seensnakes]

Neither MMT nor Austrian Economics have
The walking promissory note
A gold certificate is a promissory

The promissory note quagmire
A person signs a mortgage promissory
The asset is the promissory note it

[ddicin]

Well...there goes my monetary economics degree ....great lecture. I totally agree with this presentation. I suppose that the only effective stimulus is fiscal policy. I guess that Open Market operations is used only to manipulate the rate of interest on excess reserves ??

[libations_and_lamentations]

Excellent! I just heard about the money multiplier today, it didn't make any sense to me and I didn't see how it could work, was basically told that it works and if I'm too stupid to understand how then that's my problem. I have shared this video with a few "smart people" I know 🤣🤣 Thanks!

[sanyamahajan]

what happens to money multiplier and reserve ratio during financial crisis

[josephinhiding]

Focus needs some checking. Not readable.

[jameslovering]

Just signed up as a supporter, long been enjoying and learning from your work. www.patreon.com

[lowersaxon]

Can hardly follow his English. Not very articulated and by far too fast. You have a global public! Slow down and try to speak articulated. And the multiplier is ok, properly understood.