Monthly Archives: July 2012

Telegraph – Osborne Allies Brief on Second Go at Loosening #NPPF

Telegraph

Allies of George Osborne, the Chancellor, are said to be considering another attempt to loosen the rules on building as part of a new drive to stimulate the UK economy.

However, other Conservative ministers have pledged to resist any move from the Treasury to revisit an issue that sparked one of the biggest political battles of the Coalition Government.

Ministers earlier this year were forced to scale back plans to sweep away legal protections for the countryside amid protests from campaigners and Conservative supporters.

However, it is understood that Eric Pickles, the communities secretary, and other ministers responsible for planning regulations, are opposed to any new move on planning rules.

Mr Pickles brokered the compromise deal over the planning strategy with environmental campaigners is said to be extremely reluctant to revisit the issue of planning so soon.

New figures last week showed that the UK economy continued to shrink in the second quarter of the year, and is now smaller than when the Coalition came to power in 2010.

Mr Osborne is under mounting pressure to move away from his austerity programme and borrow in order to boost demand.

The chancellor has insisted that there will be no departure from the current deficit-reduction plan, meaning he has to find alternative means to stimulate growth.

Treasury officials are now working on a package of “Plan A plus” measures that will be set out in the autumn.

Last week’s GDP figures showed that construction activity declined particularly sharply, and some Conservatives and economists have identified planning laws as a potential impediment to growth.

Earlier this year, the Government revised planning laws in the new National Planning Policy Framework, which simplified rules on new construction.

During the drafting of the NPPF, the Treasury pushed for much more radical measures that could have allowed almost unrestrained building in rural areas.

Early versions of the document were rejected by groups including the National Trust and the Campaign to Protect Rural England.

Under pressure from those groups – and the Daily Telegraph’s Hands off our Land campaign – ministers compromised and produced a document that includes protections for rural areas.

Mr Osborne has made little secret of his frustration that environmental groups and other campaigners are opposing measures he sees as necessary to boost economic growth.

Last week, he was forced to back down on a bid for larger cuts in subsidies for windfarms than the Liberal Democrats had wanted.

Government advisers now believe that Mr Osborne could push for a new dilution of planning laws in his autumn economic package.

“George has even less time now for all of the green groups,” one Government source was reported as saying yesterday.

Whitehall officials also pointed out that the economic effects of the NPPF have not yet been felt because few planning decisions have been made under its rules.

Osborne wants another fight on the #NPPF

Spectator

The coalition announced a new national policy planning framework in the Spring. But it was not as radical as George Osborne and the Treasury wanted it to be: opposition from heritage groups like the National Trust and various environmental organisations led to it being watered down. With the economy shrinking and construction in particular decline, though, the Treasury wants to come back to this fight. I’m told ‘George has even less time now for all of the green groups’.

If Downing Street does come back for another bite at planning, it is sure to spark political controversy. The question is whether the continuing problems of the economy will enable them to win the argument that it needs to be made easier to build in this country.

Recollateralisation and Collateral Chains in the Monetary Circuit Theory Banking Model

In a previous post we added collateral to our monetary circuit banking model and showed how collateral added to bank lending power, and how in effect lack of collateral added to lending costs and/or reduced lending power. (with a slightly simplified accounting treatment)

Fig 1 Collateral Model


Bank
Assets Liabilities Equity
Operation Lending Power Value Loan Ledger Bank Working Capital
Required
Reserves
Firm Deposits Safe
Deposit Collateral +Lend Money*Default Risk -Lend Money*Default Risk
Add Collateral +Lend Money*Default Risk -Lend Money*Default Risk
Record Collateral -Lend Money*Default Risk +Lend Money*Default Risk
Adjust Required Reserves & Lending Power - (Lend Money*Default Risk)*Reserve Ratio + (Lend Money*Default Risk)*Reserve Ratio

Recollaterolisation is despositing that asset again against a loan from another financial institution. Lets model this with bank B lending to Bank A. We are familiar with the operations for the lending bank so lets concentrate solely on the debtor bank.

Fig 1 Recollateralisation Model


Bank
Assets Liabilities Equity
Operation Lending Power Value Loan Ledger Bank Working Capital
Required
Reserves
Firm Deposits Safe
Deposit Collateral +Lend MoneyA*Default RiskA -Lend MoneyA*Default RiskA
Add Collateral +Lend MoneyA*Default RiskA -Lend MoneyA*Default RiskA
Record Collateral -Lend MoneyA*Default RiskA +Lend MoneyA*Default RiskA
Adjust Required Reserves - (Lend MoneyA*Default RiskA)*Reserve Ratio + (Lend MoneyA*Default RiskA)*Reserve Ratio
Reduce Lending Power - (Lend MoneyA*Default RiskA)*Reserve Ratio - (Lend MoneyA*Default Risk)*Reserve Ratio
Borrow Money Bank B -Bank Loan B (1/ Lend MoneyA*Default RiskA)*(1/Default Risk B) + Bank Loan B (1/ Lend MoneyA*Default RiskA) )*(1/Default Risk B)
Transfer to Lending Power + Bank Loan B (1/ Lend MoneyA*Default RiskA) - Bank Loan B (1/ Lend MoneyA*Default RiskA)
Deposit Collateral Bank B -Lend MoneyA*Default RiskA +Lend MoneyA*Default RiskA
Repay Loan -Repay Loan +Repay Loan
Adjust Lending Power -Repay Loan +Repay Loan
Adjust Required Reserves and Lending Power -  (Bank Loan B (1/ Lend MoneyA*Default RiskA)* (1/Default Risk B)*Reserve Ratio) + (Bank Loan B (1/ Lend MoneyA*Default RiskA)* (1/Default Risk B)*Reserve Ratio)

So in terms of lending power the bank has received collateral and used it again as collateral for its own loan, and increased its own lending power by the reciprocal of the default risk. So if the default risk is 5% this can be levered by a factor of twenty. On the other hand this expansion is reduced both by the default risk on loan B and by the need to keep a proportion of the increased working capital to maintain any reserve ratio.

So to give an example lets say a bank receives $1million collateral on a loan and that bank has a reserve ratio of 5%. That bank would increase its lending power by $950,000. The difference being the need to reduce excess reserves.

Mow lets say that Bank A now deposits this as collateral with Bank B, with a default risk of 5%. The posted collateral cancels out the direct increase in lending power, however the loan gives an increase of $19 million to lending power, as $1 must be retained as deposits.

Why would a bank do this, it has dramatically increased lending power but at the cost of future repayments at the prevailing rate of interest, so how would it be able to make a profit? Again the reason being during times of moderation and expanding lending power banks can borrow short from each other and lend long. Because of the cost of funding such loans will not compete with relatively risk free lending not secured with loaned funds. Such additional loans will therefore be higher risk and secured at the margin, and therefore will require higher collateral. The higher the collateral the more it can be expanded. What this shows is that during periods of moderation there is an increasing tendency to try to secure riskier and riskier loans, even when the default risk for most loans is low, and that the ability to recollaterolise means that ensuring such periods lending power will increase as well as the systemic risks from the interlinking of risk through collateral of financial institutions. Yet another example of Minsky’s thesis that stability sows the seeds of instability.

We can also see that the theoretical boost across the whole banking system is a taylor series of the form we have encountered before, however this is only a theoretical upper limit and approaching it will take some period of time during financial stability.

Broness Hanham Written Statement on Regional Strategy Abolition #NPPF

Here

It is the Government’s policy to revoke existing regional strategies outside London, reflecting manifesto commitments made by both Coalition parties in the 2010 general election and subsequently incorporated into the Coalition Agreement. The Localism Act 2011 provides for the abolition of regional strategies in a two-stage process. The first stage, to remove the regional planning framework and prevent further strategies from being created, took effect when the Localism Act received Royal Assent on 15 November. The second stage would be to abolish the existing regional strategies by secondary legislation. However, any final decision on this must take account of assessments of, and consultation on, the possible environmental effects of revocation of each of the existing regional strategies.

The Strategic Environmental Assessment process is set out in an EU Directive (Directive 2001/42/EC). In March 2012, the European Court of Justice issued a significant ruling on the interpretation and application of the Directive (Inter-Environnement Bruxelles ASBL & Others v Government of the Brussels-Capital Region).

As part of the Strategic Environmental Assessment process, and before the decision of the European Court of Justice, there has already been consultation with the statutory consultation bodies on the scope and level of detail of the environmental reports. Public consultation took place between October 2011 and January 2012 on the basis of environmental reports published in October 2011. Detailed responses were provided in the course of this exercise.

Following the decision of the European Court of Justice, in the light of planning policy and legislation that have been put in place since January 2012, in light of the earlier consultation responses, and in order to be meticulous in observing the requirements of the Directive, the Government is now updating the environmental reports and undertaking additional consultation. We are publishing the first of the updated environmental reports: the report in respect of the proposed revocation of the East of England Regional Strategy shortly and will place a copy in the Libraries of both Houses. This report builds on and is intended to supersede the previous report.

The period for consultation responses will remain open for eight weeks. We welcome and encourage all interested parties to respond. At the end of that period we will consider all consultation responses, including those already submitted during the October 2011 to January 2012 response period.

In the coming weeks my Department will publish updated environmental reports relating to the proposals on each of the other regional strategies, so that those proposals too can be the subject of additional consultation. In each case there will be an 8 week period for consultation responses. All updated environmental reports will be placed in the Libraries of both Houses as they are published.

The proposed revocation of the Regional Strategies may be regarded as a material consideration by decision makers when determining planning applications and appeals.

In respect of plan-making, the National Planning Policy Framework implementation period provides councils with the incentive to get their plan policies up to date and in doing so they can have regard to the policy to revoke Regional Strategies and the new National Planning Policy Framework policies. A local plan document must be in general conformity with the regional strategy at the stage that the plan is submitted for examination but it is open to councils when preparing local plans to take account of the policy to revoke up to the time of submission. Local authorities can also bring forward proposals (for example on housing targets) which have a local interpretation to them in their plans, based on their own sound evidence base where that is justified by the local circumstances. That evidence base is likely to be more up to date than that included in the Regional Strategies. Each case will depend on its particular facts.

Indian Planning guards against ‘Inspector Raj’

‘Inspector Raj’ a great term describing Indian Bureaucracy.

With an aim to do away with ‘inspector raj’ , Union Minister for Urban Development Kamal Nath said the new Delhi Master Plan should be made user-friendly and futuristic for the benefit of the common man. “Non user-friendly plan perpetuates ‘inspector raj’.

What does it mean?

It means the archaic system of  laws, permits and licences that hinders growth.

It used to be known as Licence Raj  the elaborate licenses, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and economic reforms in 1990/1991. The Licence Raj was a result of India’s decision to have a planned economy where all aspects of the economy are controlled by the state and licences are given to a select few.

Though that system has no ended there is a residual of over bureaucratisation resulting from the Raj era, hence the term inspector Raj is still used.

 

St Cuthbert Out Drops Out of Neighbourhood Plan #NPPF

This is Somerset Thanks to Civic Voice

A Neighbourhood Plan for Haybridge and Glencot has been put on hold following a report to St Cuthbert (Out) Parish Council.

A fact finding group found that other councils around the country had created neighbourhood plans only for them to be considered flawed as their district council had not completed strategic plans for the area.

It was felt that a Neighbourhood Plan was needed as it could designate certain areas as Local Green Spaces to give them protection from development.

Under the National Planning Policy Framework land designated for housing in a council’s Core Strategy, also known as the Local Plan, grants house builders planning permission.

Mendip District Council has yet to complete its Core Strategy for the area and therefore it would not be possible for a Neighbourhood Plan to demonstrate that it had objectively taken district council plans into account.

It was therefore recommended to the parish council that any decision to create a Neighbourhood Plan is deferred until the district council adopt a completed Core Strategy.

This was unanimously passed by the council who gave their thanks to the fact finding group for their efforts.

Proof of the Credit Accelerator (but not quite as we know it)

Take our formula for lending power as developed through previous posts

LP    Lending Power

EQ    Equity

R    Principal repayments

I    Interest

D    Dividends

R     reserve ratio

E    Excess Reserves

M    Money leant

C     Collateral

F    Short term funding costs

 

Now let us gather on one side of the equation all of those terms that equate to prior savings

Where S=Prior Saving

Now lets gather the net new investment terms

  1.  

Note we are dealing here with the maximum amount of the change in debt, only profitable loans will be made by a bank.

 

So the equation becomes:

Change in Lending = Change in Savings +Change in Investment

 

But because the investment creates new savings it becomes

 

  1. D’=S+S’

This makes sense it means that a change in debt can come about through Crusoe like savings or through bank created money or some combination of the two.

However a change in debt is not a change in money as the Crusoe like savings is existing money in deposits. The change in money would be as follows:

  1. M’= S’

Familiar keynsian grounds.

Now what about the approach to effective demand. This is a flow variable for transactions, and so money in balances not used for transactions will not count. It would be double counting to include factor payments where these are already accounted for in flow of funds. And so

Change in demand =GDP +change in money used in transactions.

The change in money used in transactions is given by (5) above not (4) so we have very nearly but not quite the Steve Keen Walras/Schumpeter/Minksy law for aggregate demand – the Credit Impuse – or as he refers to it the Credit accelerator. The difference being the elimination of change in debt due to savings. The approach though is correct as the formula includes only the net addition of bank created money, which was Schumpeter’s intention to show the bridging of the demand gap between output now and new expanded output following debt created growth later.

Note this formulation is in instantaneous time and shows the effect of the additional demand at the point the new money is deposited in an account and about to be spent. An instant later we see the impact of changes in output including the growth induced by the change in debt. At that later point when the money is transferred to an asset (likely in another bank) it is recorded as GDP and not change in debt.

Of course this assumes the money is all spent and none remains in the original bank account. If part remains unspent we have to include the C.A. Phillips K factor.

However unspent loans add to excess deposits and so increase lending power pro-rata and so with two provisos effect aggregate demand pro-rata. Those conditions being that banks lend to their lending power, which they wont throughout the credit cycle, secondly banks are already at their desired reserve ratio.

Having looked at the savings part of the equation lets look at the debts part (equation 3).

What it says is Change in debt equals amortization of loan minus cost of loan.    

Now you might think they cancel so so what. They only cancel when capitalised at net present value. They will not cancel in instantaneous time.

What we have here is what used to be called Hawtry’s Wheel of Production, Hawtry in his own verbal explanation of the Credit Accelerator said the following:

 at the beginning [of a period of credit induced production there] will be an excess of purchasing power and no goods to buy, and at the end an excess of goods and a shortage of purchasing power… But the economic activity of a civilized community is continuous… the real significance of the power of the banks to create or extinguish money is that it enables them to bring about the release or absorption of cash. If the net result of all the different causes at work is an absorption of cash, then there is deficiency of purchasing power; if the net result is a release of cash, then there is an excess of purchasing power. (Birmingham Debates 1933)

Hawtry however did not pursue his own logic. At the beginning of a period of credit induced production there will be a net increase in purchasing power from workers to be spent on the existing stock of goods as the new goods have not yet been produced. Banks have net released cash but have not yet started to receive it in terms of principal and interest payments. As production gears up if this makes a profit there will be a net paying down of loans as they are amortized, this will be a net reduction in purchasing power in terms of the purchasing power generated by the bank as the loan is paid down. However as the cost of the loan is paid down unless there is a high rate of depreciation there will by now be a net profit from the capital accumulation leading to greater deposits in reserves from capitalists bank accounts and potential from higher workers wages’ Also from the bankers point of view once the inflation adjusted IRR point of return is reached all payments to it of premium and interest are pure profit. The greater competitiveness of the loan induced production process enables more to be produced per unit of investment and so more to be consumed per unit of income, even if that income shifts from no longer competitive old processes to more competitive new ones.

So change of debt matters, from a producers view point, as although the increase in debt and purchasing power at the beginning of a loan is exactly cancelled out by a decrease at the end (assuming steady inflation and interest rates) over the period of the loan assuming productive investment not speculation on assets, purchasing power has increased by producing more of what is demanded per unit of money.

The next stage of this analysis will be to graph certain aspects of this equation and compare it to IS/LM, before we do so however we need to expound a compatible therefore of portfolio demands for money. I also hope to compare this approach to that of Kalecki, especially once we consider the returns on the four factors of production.

 

 

Correctly Modelling Reserves, Cost of Funding and Collateral in Monetary Circuit Theory

This post clarifies the treatment of bank reserves and ‘excess reserves’ in the MCT banking model in response to feedback from Steve Keen. Hopefully this approach will be persusive in understanding the interbank role of reserves in transmitting economic expansion, contraction and risk.

1) Where the Power to Lend Comes From

The past series of posts, especially here and here, have looked to develop the double entry monetary circuit approach to endogenous money by extending it to consider equity and other factors such as ‘excess reserves’. The aim was to explain how banks can create money from a starting position of a blank balance sheet. Banks can create money but not from an empty balance sheet. The solution was to introduce equity and use that to feedstock ‘lending power’ a term I am trying to revive from early 20th century banking theory which refers to the ‘intangible asset’ of the ability to create profits from money creation – an issue highlighted by Neil Wilson and now adopted by Steve Keen,

Fig 1 How Equity Contributes to Lending Power in Start Up Bank


Bank
Assets Liabilities Equity
Operation Lending Power Value Bank Working Capital Safe
Grant Equity for Lending +Equity -Equity
Grant Lending Power +Equity -Equity

I expected the treatment of reserves to be controversial although I had only one serious challenge in  a new model and the comment below appear to refer to my proposed approach

[One] way to involve reserves and try to make them part of the system is to argue that banks lend from liabilities rather than assets, and that one of its liabilities is a working capital reserve–the banking sector’s own liabilities to itself. Then you can derive a system which appears to show that banks lend from reserves …the bottom line here is that eliminating “Fractional Reserve Banking” does nothing to eliminate the capacity for banks to create money: that will exist in a purely free market system just as much as it does today.

I agree but that is not the issue, the point being made is that fractional reserve banking increases lending power, but that power exists as my model shows when a bank starts up has no deposited reserves, only equity. . Private correspondence from Steve Keen on the basis that all endogenous money creation must come from the liability side – I agree – and my preliminary response was published here. This approach was inadequate though, reserves and excess reserves pop up from the model emerging from the black box within. This revised model explicitly models fractional reserves banking as a series of double entries between liabilities and from my enquiries mirror real world bank operations.

2) Fractional Reserve Banking

In modern form fractional reserve banking arose in renaissance Italy (the earliest recorded example is from Venice) when banks realised that they had more reserves on hand then their day to day demand for reserves from depositors required, and hence they could lend it out at interest. This was greatly aided by the ‘venice system’ the discovery of double entry bookkeeping. We know however that Roman banking (preserved in Byzantine and transmitted to Venice) operated on a fractional reserve basis.

The earliest monetary circuit theory double entry models have assumed that all deposits are held as a liability under working capital and therefore 100% of the reserves are added to lending power. This is unrealistic a bank must keep a reserve amount to deal with anticipated daily withdrawl levels and to meet any regulatory demands. Lets model this for simplicity as before only modelling firms which are also equity holders in the bank. What the model does is to split liabilities through internal transfers between required reserves and working capital.

Fig 2 How Required Reserves Contribute to Lending Power


Bank
Assets Liabilities Equity
Operation Lending Power Value Loan Ledger Bank Working Capital
Required
Reserves
Firm Deposits Safe
Grant Equity for Lending +Equity
-Equity
Grant Lending Power +Equity
-Equity
Deposit & maintain required reserves +Deposits
-Deposits
Transfer Excess Reserves +Deposits *(1-reserve ratio) -Deposits *(1-reserve ratio)
Increase lending power from
Excess Reserves
+Deposits *(1-reserve ratio) -Deposits *(1-reserve ratio)
Lend Money
 -Lend Money +Lend Money
Record Loan
-Lend Money +Lend Money
Charge Interest +Interest Charge -Interest Charge
Record Interest
-Interest Charge +Interest Charge
Repay Interest and Loan -Loan Repayment
-Interest Charge
-Loan Repayment
-Interest Charge
Record Interest and Loan +Loan Repayment +Interest Charge -Loan Repayment -Interest Charge
Pay Dividends
-Dividends +Dividends
Transfer Dividends to Deposits
+Dividends -Dividends
Increased Deposits From Dividends Used for Asset Purchase +Dividends-Asset Purchase*(1-reserve ratio) -Dividends-Asset Purchase
Increased Deposits from Loan Used for Asset Purchase +(Lend Money-Asset Purchase)*(1/reserve ratio) -Lend Money-Asset Purchase
Increased Working Capital from Excess Reserves +(Lend Money-Asset Purchase)*(1/reserve ratio)
+Dividends-Asset Purchase*(1-reserve ratio)
-(Lend Money-Asset Purchase)*(1/reserve ratio)
-Dividends-Asset Purchase*(1-reserve ratio)
Transfer Working Capital to Lending Power +(Lend Money-Asset Purchase)*(1/reserve ratio)
+Dividends-Asset Purchase*(1-reserve ratio)
-(Lend Money-Asset Purchase)*(1/reserve ratio)
-Dividends-Asset Purchase*(1-reserve ratio)

The formulas and approach is the same as in the previous model with the model taking into account the geometrical reduction of excess reserves through multiples banks only with the explicit modelling of required reserves and the correction for the topping up of lending power via working capital.

If all lent money is used to purchase assets there is no net creation of excess reserves. There will be from dividends.

3) Modelling The Cost of Funding

The above model assumes a business model of banking. That is the profit of a bank is the cost of the loan minus the revenue from the loan at net present value. What if a bank has lent up to its lending power but still finds that there are additional profitable loans to be made? If the cost of funding the additional lending power still maintains an acceptable level of profit the bank will if it can borrow short to extend its lending power for long term loans. Before long any positive profits will restore lending power meaning short term funding will be the principle requirement. This is the underlying dynamics behind the nostrum that banks make money through borrowing short and lending long. This is known as the reserve window. Lets model this.

Fig 3 Inclusion of the Cost of Funding


Bank
Assets Liabilities Equity
Operation Lending Power Value Bank Working Capital
Required
Reserves
Firm Deposits Safe
Grant Equity for Lending +Equity
-Equity
Grant Lending Power -Equity
+Equity
Cover Reserve Window -Short Term Funding +Short Term Funding

It would be a great mistake to assume that from the viewpoint of the system as a whole as opposed to a single bank the funding costs of one bank are the income of another and this cancels. This would be to make a classic ‘loans=deposits’ mistake. Correct yes in terms of anticipated capitalisation of future income but that income is radically uncertain. In terms of very short terms loans yes for all intents and purposes they will cancel but we also have to consider the impact of collateral.

4) Modelling Collateral

Those who lend without collateral are making a risk that the loan will default. This may add to the cost of the loan by adding an interest premium. If the cost is high then collateral may be required.

Collateral acts as insurance. Lets say there is a 5% risk of a loan then this sum, discounted to NPV is the additional insurance required at the granting of the loan. This is typically taken as cash. Lets model this from the perspective of the banking system as a whole.


Bank
Assets Liabilities Equity
Operation Lending Power Value Loan Ledger Bank Working Capital
Required
Reserves
Firm Deposits Safe
Deposit Collateral +Lend Money*Default Risk -Lend Money*Default Risk
Add Collateral +Lend Money*Default Risk -Lend Money*Default Risk
Record Collateral -Lend Money*Default Risk +Lend Money*Default Risk
Adjust Required Reserves - (Lend Money*Default Risk)*Reserve Ratio - (Lend Money*Default Risk)*Reserve Ratio
Reduce Lending Power - (Lend Money*Default Risk)*Reserve Ratio + (Lend Money*Default Risk)*Reserve Ratio

So we can see from the perspective of the system as a whole collaterals effect in increasing lending power is offset to a very large degree by the reduction in excess deposits in the system. What this means is changes to collateral requirement effect the change in debt – a well observed phenomenon noted by Minsky. As collateral requirements increase so the change in debt reduces.

We may modify our formula as follows

Where C=Collateral

Interesting extensions to this approach would be to model recollaterolisation and collateral chains

If you Havnt A Preferred Option Yet it Isnt Premature #NPPF

The clear implication of the SoS call in decision issues today for Bishops Cleeve

the JCS is at a very early stage and little weight can be attached to it. The appeal proposals are necessary now to meet immediate housing need and the presumption in favour of sustainable development in the Framework applies…the JCS is at a very early stage and little weight can be attached to it. The appeal proposals are necessary now to meet immediate housing need and the presumption in favour of sustainable development in the Framework applies.

The inspector concluded

PSGP (paragraph 18) advises that where a DPD is at the consultation stage then refusal on prematurity grounds would seldom be justified. Some four years after the steer in the draft RSS EiP, the DPO is only in consultation draft form, without an agreed option to take forward. The JCS should not attract significant weight at this stage. By this definition, neither of the proposals would be premature.

The consultation on the draft joint core strategy proposed to focus development on Gloucester and Cheltenham, and also considered part of the area unsuitable in landscape terms.  The SoS and the inspector considered the site in isolation and because of the NPPF gave little weight to landscape issues, issues of good strategic planning or protection of the countryside.  The first major test of the NPPF where it has made a difference.  The first major test and its weaknesses become apparent.

The issue is not about setting a precedent for prematurity – after all it turned on the pre NPPF PSGP (planning system general principles) but how little weight was given under the NPPF to the non-housing issues. Of course if Cheltenham had not placed its head in the sand blocking options on the edge of Cheltenham  they would have had a preferred option by now and likely have won the appeal.

Yes Reserves Play a Part in Lending Power

Steve Keen has posted a new model is reponse to Mish Shedlock’s criticisms.

the “loans create deposits” and “loans and deposits precede lags” aspects of the empirically-based Post Keynesian analysis of money…means the model of Fractional Reserve Banking (FRB) is a false model of what currently happens. Instead of FRB explaining how banks are “lending out more money or gold than exists”, something else has to explain that phenomenon.

That something else is the capacity of private banks to create money… banks can’t lend from reserves, and that a system of pure private banking can result in banks creating money.

[One] way to involve reserves and try to make them part of the system is to argue that banks lend from liabilities rather than assets, and that one of its liabilities is a working capital reserve–the banking sector’s own liabilities to itself. Then you can derive a system which appears to show that banks lend from reserves {I think this is a comment on my own proposals here and Steve’s response incorporates some aspects of my proposals but he attempts to show that even then reserves play no part]…the bottom line here is that eliminating “Fractional Reserve Banking” does nothing to eliminate the capacity for banks to create money: that will exist in a purely free market system just as much as it does today.

I dont accept Steve Keen’s logic however that reserves pay no part at all in lending power. You could equally have said by the same logic that equity plays no part because his old model included no equity! Equally you could argue that collaterol and risk plays no part because it isnt modelled, or cost of funding doesn’t figure because it isnt modelled. (I hope to publish a revised model with collateral soon and am working with a former banker on the cost of funding/deposit drawdown issue). The truth is reserves play no part in the model because it isn’t modelled – circular reasoning and logical proof of nothing. This is not to argue that lending power cannot increase without reserves – it can – take the example of a bank starting out with equity but no reserves.

The issue is whether or not excess reserves increase. If they do then they are easily modelled in asset/liability terms (and I admit my first attempt was simplistic). It needs an intermediate column – required reserves – between bank reserves and working capital – if a bank (irrespective of reg requirements) sets its own reserve limit (say 10%) then their is an internal transfer from 10% of reserves to required reserves – and again an internal liability from working capital to required reserves. if then there is a increase in ‘excess reserves’ from either dropping reserve requirements or growth leading to more bank deposits there is an increase in working capital and an increase in lending power. Without this journal addition how else can economic growth cause an increase in lending – the monetary ciruit has not been closed. This also explains how bank runs reduce lending power, and how banks deleveraging reduce lending power in other banks through net deposit drawdowns. These were until now puzzles which were not explainable with the MCT pure bootsrap view of lending. We need to close the link, lending creating deposits which in turn through increasing working capital increases lending etc.

Assets Liabilities
Bk Reserves Excess  Reserves Working Capital
+ER -ER
-Delta ER +Delta ER

(thanks to Steve for correcting me again on sign of liabilities)

From the point of view of the fundamental accounting equation the liabilities side has to be negative as lending power = anticipated assets minus liabilities +equity. The equation is always a good check if the sign is right should be.

Where ER is (1-bank reserves multiplied by the reserve ratio).

Its delta ER not ER as it’s a stock – like lending power and Equity that needs to be topped up to play any part at all. Of course the topping up comes from the reflux effect from the change in debt causing growth in the economy as a whole and creating new excess reserves which through spending boosts the lending power of the original loaning bank.

Note also there is not accounting mistake in assuming monetary growth comes from an asset not a liability, from the above all growth comes from liabilities not assets with the approach to what level of reserves to safely hold reflecting what level of money reserves to hold as liabilities to depositors and what level to hold as liabilities held against investment.

The quad accounting principles still hold as the +ER with interest is extra lending liability from the debtor to repay the loan.

Rather than in the crude ‘money multiplier’ approach saying reserves per se increase lending power it is better to say that profitability creates lending power if that profit is certain but lending power can be supplemented by excess reserves and equity and reduced by risk (which can be offset by collateral).

Rob Rawlings said in comments

‘reserves come into play when the borrower starts to spend the loaned money. People who receive this money will pay it into the bank and that bank will expect a transfer of reserves to match this. If the bank does not have them then it will have to either borrow the reserves or sell assets (such as the original loan) to acquire reserves.’

In the banking world this is called ‘deposit drawdown’ and the topping up of deposits to the reserve limit is called the ‘cost of funding’ of the loan.

However this approach was modelled mathematically over 80 years ago within an endogenous money framework – see my blog post above – and can easily be modelled within an extended/corrected version of Steves model. Though one bank loses deposits the banking system as a whole retains them. If every bank was an equal investment/deposit bank the cost of funding nets to zero – though it is prudent to account for the cost of funding (that is assuming no reflux back to deposits) as you cannot be certain of the extent to which your lending bank will directly benefit from increased deposits from other triggered by your loan.

Im sure the increased cost of funding from the rise of pure investment banking was one of the factors leading to our increased debt burden.

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