Comments on: Australian Banks Get A Government Guarantee

By: Lefty

Lefty — Mon, 08 Feb 2010 02:27:09 +0000

Thanks for that Sean!

That question has bugged me for some time.

With no formal economics training at all, I never cease to be surprised by the sheer number of things that seem to defy all logic and commonsense until you get your head fully around them.

cheers

By: Stubborn Mule

Stubborn Mule — Mon, 08 Feb 2010 01:16:29 +0000

Lefty: that is an excellent question. So much so that I think it is worth a blog post of its own. The “short” answer is that while the canonical MMT “loan creates deposit” scenario is accurate, this is only one possible transaction a bank may have to facilitate. The thing to ask is “what next”? If I borrowed money from the bank to buy, say, a car then the loan (bank’s asset) is matched by a deposit (bank’s liability). If the car seller banks with my bank then that’s all there is for now. But if the seller banks elsewhere, my bank has to make a payment to the seller’s bank. If my bank has insufficient funds in its account with the central bank it will have to borrow the money. If no-one is prepared to lend to my bank then is has a problem. If it could simply reverse the original loan, collapsing assets and liabilities rather than creating them, then there would be a way out, but most loans the bank makes have a term of a year or more and so it cannot ask me to repay my loan (yet). It is this mismatch between the term of loans and deposits that creates the potential problem for the bank (so called “liquidity risk”) and one way to mitigate this risk is for the bank to issue bonds in order to borrow in the wholesale markets. You can think of this process as swapping at call (i.e. extremely short term) deposits for longer-term liabilities to come a little closer to matching the term of assets and liabilities. Having said that, no bank every fully matches the term of assets and liabilities which is why liquidity risk is one of the most fundamental risks associated with banking.

By: Lefty

Lefty — Sun, 07 Feb 2010 09:51:23 +0000

“Overall, however, it is good news for banks who still need to raise significant sums of money offshore on a regular basis,”

This is one thing have not understood regarding MMT – if banks require only credit worthy customers to make loans, then why do they need to raise large sums from offshore? This seems to completely contradict MMT. If they do not need to take deposits and then on lend them, why would they need to borrow from anyone else? Obviously I have missed something . Would you be kind enough to tell me what it is?

cheers

By: Australia and the Global Financial Crisis | A Stubborn Mule's Perspective

Australia and the Global Financial Crisis | A Stubborn Mule's Perspective — Sat, 25 Oct 2008 00:47:26 +0000

[...] bug by Moody’s to the enormous US bailout plan and Government guarantees from Ireland to Australia. Here I will instead take a broader perspective and provide an overview of how the crisis has [...]

By: Michael Michael

Michael Michael — Tue, 14 Oct 2008 04:06:28 +0000

OMG, WTF with this GFC?

By: Kwoff.com

Kwoff.com — Mon, 13 Oct 2008 02:31:08 +0000

Australian Banks Get A Government Guarantee | A Stubborn Mule’s Perspective…

Australia follows Ireland\’s lead and guarantees its banks….