I found this statement made by a commenter at another blog several months ago:
"I agree; I think the MMT people are too scathing of what is a simplified explanation of how monetary policy works in normal times. In normal times, starting from an equilibrium in which reserves are held according to their cost and utility, selling more reserves makes it profitable for banks to expand their balance sheets, hence the multiplier, but first the financial crisis and then the payment of interest on reserves altered the balance of their cost and utility. The multiplier collapsed, and it was necessary to add reserves just to serve the existing size of banks’ balance sheets. Moreover when QE involves asset purchases from non-bank counterparties, its initial effect is to expand banks’ balance sheets anyway."
MMTers explain that loans are made when there are creditworthy borrowers on hand. Extending a loan (which increases the bank's asset) creates a deposit for the borrower (which creates the offsetting bank liability). Reserves are only later obtained when and if the loan is withdrawn from the bank, or otherwise paid to another bank. Because the bank now has an interest earning loan, it can easily acquire the reserves by borrowing from other banks or attracting new deposits. Central bank intervention via "flooding banks with reserves" does not force banks to make more loans if there are no creditworthy borrowers to be found. If you believe having more reserves is what causes banks to lend, then you probably believe that banks scamper to find depositors first before they allow you to use up your credit card.
I also asked: What do you mean “payment of interest on reserves altered the balance of their cost and utility”? That many bank loans were priced out of the market by the interest on reserves? Is that how low lending rates have gone, that a mere 25 bps IOR discourages banks from making any more loans? Again, this begs the question - why would the Fed "flood the market with reserves" only to borrow them again from the banks with interest?
MMTers explain that the Fed pays IOR to keep the federal funds rate at their policy rate. Otherwise, all that new reserve will be lent on the interbank market at zero, and the fed will completely lose monetary policy control.
And I asked: What do you mean by “it was necessary to add reserves just to serve the existing size of banks’ balance sheets”? What did exchanging Treasuries for reserves “add” to “serve the size of bank balance sheets”?
MMTers explain that QE did not really add
reserves net financial assets to banks, and only exchanged their interest-paying risk free government bonds with non-interest-paying bank reserves. In taking away their risk-free interest earning assets, QE ensured that banks start considering retail deposits as profit drains rather than the most cost-efficient source of reserves. Rather than encouraging them to make new loans, it likely discouraged them from accepting more deposits, or accepting them without charging bank fees.
The commenter promised a long blog post explaining his view of the money multiplier and how QE enables this "money multiplier" to function again. After seven months, I'm still waiting.