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View Diary: "In Defense of Deficits" by the great James Galbraith (19 comments)

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  •  Hey KatieC.....thats a good point with some nuance (3+ / 0-)
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    katiec, priceman, psyched

    that really should be talked about and addressed.

    I would like to refer you to these two articles that are related to your point in different ways.

    This one is from Joe Weisenthal at Business Insider about how the low supply of new public debt (financial assets) in a way forced the creation and expansion of the mortgage backed securities industry during the surpluses of the late 90's.

    And this one is from Mark Dow over at Behavioral Macro that talks about how the conventional wisdom notion that banks must increase their bank reserves commensurate with their growing levels of liabilities is false.  That in fact, the reserve or capital requirements for the banks are actually met by banks holding Treasury securities as collateral.  More evidence of what you say about the need for banks to have public debt for their own uses, even if they rail about deficit that benefit the 99%.

    Unless I'm missing something, I think this can be simply demonstrated by looking at how (before the start of QE) the Fed's monetary base (bank reserves) grew by $600 billion between 1985 and 2008 while total private sector debt grew from less than $1 trillion to $40 trillion plus during the same time period....According to this data, private credit growth is not correlated with reserve growth.

    and private sector debt levels......

    As I think more about it...why would it be?  If Treasury securities are seen as just as good and legal a bit of collateral for increased leverage as bank reserves....and securities pay a higher interest rate.....of course the banks will prefer the higher interest rate paying collateral all else being equal.

    "The Earth is my country and Science my religion" Christiaan Huygens

    by Auburn Parks on Tue May 28, 2013 at 05:51:10 AM PDT

    [ Parent ]

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