2013-12-17

"Nominal Tomato"

Thanks to a roundabout series of links I followed, initiating at Marginal Revolution, I became aware of this rather elucidating discussion at Scott Sumner's blog. The knock-out punch in the debate was thrown by a person calling himself/herself "zanon," and reads as follows (all spelling and grammatical errors are in the original, but don't judge too hard, because this obviously intelligent person equally obviously speaks English as a second language and still manages to be both clear and witty):
Doc & Philo: I will show Sumner the same respect you extend to flat earthers when you try to convince them that planet is, actually, round. 
It is not like this stuff is hard. And look at extreme arrogance of this comment: “The core theorem of monetary theory (the public determines the real demand for money and the Fed determines the nominal supply of money) is founded on the fallacy of composition. Because bankers don’t see the big picture, they have no idea of the role they play in the system.” 
I hates bankers. But Sumner and his ilk hold themselves up as people too smart of “fallacy of composition” who can “see big picture” and then they display knowledge of basic loan as taking out suitcase of vault money from bank and eating it with ketchup (or something, certainly it is not used for actually buying something on planet earth). 
If Sumner was to apply his “fallacy of composition” “big picture” brain to, say, human reproduction, he would say babies come from hospital and start writing papers on how stork migration patterns impact population growth. It is imbecilic. 
Banks, at system level, do not lend out reserves. They simply do not. Therefore, quantity of reserves do not impact whether banks make loans or not. OIR has no impact on bank lending. 
I have shown very clearly how, in case of simple car loan, reserve is debited at one bank and credited at another bank by exact same amount. This blows great smoking hole in “banks lend reserve” at system level. It leaves entire Sumner position as smoldering wreck. It is not first time this has been pointed out to Sumner, and he is lost cause for obvious reason, but you as commenter maybe interested in learning something new should be able to smell the stinky fish. 
Reserve requirement, and fractional reserve banking, impose no limit hard or soft on bank lending at system level. Canada has requirement of zero. Capital requirement pose hard limit. Academic economist do not understand this fundamental difference — no doubt because they are too focused on “big picture” or navel. Your guess. 
MarcC: Fed has option of doing its job and maintaing FFR at target, or blowing up interbank market. If system hits reserve constraint, which it can for any reason for technical only, those are its choices. Do its job, or blow up. 
I mean hecks. Enough people develop appetite for Scott Sumner vault cash with ketchup, and walk out with suitcase of money from deposit account, system could hit reserve constraint (and not there has been no lending). Ben Bernanke says “oh no, do I do my job or let system blow up?! People want to eat dollar bill with ketchup! Let me call Scott Sumner so he can tell me whether I should act normal or destroy interbank market, and with it, banking system”. 
Scott sumner will write post on nominal tomato.
Brilliant.
Considering the extent of the discussion at that link, I now feel a bit of an intellectual obligation to learn more about what commenters "zanon" and "anon" are calling "Post-Keynesianism." I know nothing about it. The commenters, at least, are knowledgeable of actual bank operations, which makes me inclined to learn more about their underlying macro model.

We shall see.