Why haven’t any IMF officials been prosecuted for malpractice in Greece?

I have discussed the work of the IMF Evaluation Office before. The IEO “provides objective and independent evaluation” of the IMF performance and operates “independently of IMF management” and reports to the Executive Board of the organisation. It is an independent as one could imagine in this milieu. I have just finished reading the 474-page Background Papers that the IEO released in 2016 and which formed the basis of its June 2016 Evaluation Report – The IMF and the Crises in Greece, Ireland, and Portugal. It is not a pretty story. It seems that the incompetence driven by the blind adherence to Groupthink that the earlier Reports had highlighted went a step further in the case of Greece into what I would consider to be criminality. The scale of the professional incompetence notwithstanding, the IEO found that IMF officials and economists violated the written and constitutional rules of their own organisation and failed to supply relevant documents for audit. So why are all these economists and officials still walking free, given the scale of the disaster they created?

In 2011, the IEO released a scathing assessment of the IMF’s performance in the lead up to the GFC – IMF Performance in the Run-Up to the Financial and Economic Crisis.

I wrote about it in this blog – IMF groupthink and sociopaths – among others.

The Report identified neo-liberal ideological biases at the IMF and determined that the IMF failed to give adequate warning of the impending GFC because it was “hindered by a high degree of groupthink” (p.17), which, among other things suppressed “contrarian views” where an “insular culture also played a big role’ (p.17).

The report said (p.17):

Analytical weaknesses were at the core of some of the IMF’s most evident shortcomings in surveillance … [as a result of] … the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises.

It said that (p.17):

The prevailing view among IMF staff — a cohesive group of macroeconomists — was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions. They also believed that crises were unlikely to happen in advanced economies, where ‘sophisticated’ financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.

Groupthink meant, according to the report that the “IMF economists tended to hold in highest regard macro models that proved inadequate for analyzing macro-financial linkages” (p.18).

It said the IMF economists were “operating in silo … tended not to share information nor to seek advice outside of their units” (p.18).

The “silo behaviour is a long-standing problem” which prevented the IMF from being able to “connect the dots”. Further, the “IMF reports rarely referred to work by external analysts pointing at the mounting risks in financial markets” (p.19).

This reflected “the IMF insular culture” (p.19).

And, “IMF macroeconomists, particularly in area departments, did not sufficiently appreciate the skills and experience of financial sector experts” (p.19).

It concluded that the Fund was poorly managed, was full of like-minded ideologues and employed poorly conceived models.

In a previous report the IEO had demonstrated how inaccurate the IMF modelling has been.

So an all round shocking assessment.

But not much changed it seems.

In this blog – The culpability lies elsewhere … always! – from January 7, 2013, I discussed the admission by the IMF that they had made disastrous errors in their estimates of the impact of fiscal austerity in Greece on growth and employment.

The IMF admitted that “Our results suggest that actual fiscal multipliers have been larger than forecasters assumed.” Not just larger but diametrically opposite in impact to what the IMF claimed would be the case when it was bullying Greece, along with its Troika partners into imposing destructive austerity.

The mistake was so large that if the correct estimates of the multipliers were used at the time the Troika was pushing austerity onto Greece then it would have known the policy shift would lead to the cumulative decline in growth of around 13 per cent over two years (2011 and 2012).

Instead, based on the false estimates the IMF claimed that the contraction would be 3 per cent in 2011 and by 2012, Greece would grow by 1 per cent. The reality is that it contracted by 7 per cent in 2011 and a further 6 per cent in 2012.

The mistakes occurred because the underlying economic approach that the IMF use is deeply flawed. Millions of people were made unemployed by these sort of mistakes. No IMF official or economist was imprisoned for professional incompetence and malpractice.

And so we get to more recent times.

I have just finished reading the 474-page Background Papers that the IEO released in 2016 and which formed the basis of its June 2016 Evaluation Report – The IMF and the Crises in Greece, Ireland, and Portugal.

It is not a pretty story. It seems that the incompetence driven by the blind adherence to Groupthink that the earlier Reports had highlighted went a step further into what I would consider to be criminality plain and simple.

The IEO found that IMF officials and economists violated the rules of their own organisation, hid documents, presumably to hide their chicanery and generally displayed a high level of incompetence including failing to under the implications of a common currency – pretty basic errors, in other words.

The IEO Report sought to evaluate:

… the IMF’s engagement with the euro area during these crises in order to draw lessons and to enhance transparency

The period under review was 2010 to 2013, which covered the “2010 Stand-By Arrangement with Greece, the 2010 Extended Arrangement with Ireland, and the 2011 Extended Arrangement with Portugal.”

The IEO noted that the IMF involvement with the Troika was quite different to its normal operations.

1. “the euro area programs were the first instances of direct IMF involvement in adjustment programs for advanced, financially developed, and financially open countries within a currency union”.

2. “they involved intense collaboration with regional partners who also were providing conditional financial assistance, and the modality of collaboration evolved in real time.”

3. “the amounts committed by the IMF … were exceptionally large … exceeded the normal limits of 200 percent of quota for any 12-month period or 600 percent cumulatively over the life of the program. In all three countries, access exceeded 2,000 percent of quota.”

So one would think that the IMF would have exercised especial care and been committed to transparency, given that for the “financial years 2011-14, these countries accounted for nearly 80 percent of the total lending provided by the IMF”.

It didn’t turn out that way.

Interestingly, the IEO for all its independence was set upon by “several Executive Directors and other senior IMF officials” at the outset of the evaluation process (when establishing the Terms of Reference), who claimed that the 2012 Bailout was just a “continuation of the 2010 SBA” and so it was not possible to evaluate them separately.

In other words, the IMF was trying to close down assessment of its activities.

The IEO said their were “Three overarching questions” which guided their evaluation:

First, was the IMF’s crisis management appropriate, given the exceptional circumstances? Second, did the IMF compromise its best economic judgment because of the way it engaged the euro area? Third, what could the IMF have done differently to achieve better outcomes?

So to get answers, the IEO interviewed relevant people and sought access to relevant documents.

Not so easy.

1. “The IEO did not have full access to confidential IMF documents in a timely manner.”

2. “many documents were prepared outside the regular, established channels” and were not provided for review.

3. “written documentation on some sensitive matters, even with the help of generous staff resources, could not be located.”

4. “As a result, the IEO in some instances has not been able to determine who made certain decisions or what information was avail- able, nor has it been able to assess the relative roles of management and staff.”

The words cover up come to mind!

On this theme, the IEO also found that the IMF Executive Board had never formally considered “how the IMF would engage with a euro area country in a program relationship” (p.16).

Instead it deployed:

… small, ad hoc staff task forces to explore various contingencies, but the work of these groups was so secret that few within the institution knew of their existence, let alone the content of their deliberations. The IEO has seen some, but not all, of the written reports prepared by these groups.

Where are these reports? Shredded? Why are they not available for audit? Who was in charge of these ‘task forces’? Why haven’t they been made accountable for the damage they caused?

The result was that the IMF failed to appreciate the basics of a common currency. As regular readers will appreciate my rule of thumb is that anyone who conflates say Japan (currency issuer) with France (foreign currency user) discloses their ignorance immediately.

The IEO concluded in this sense that there was a:

Lack of analytical depth, rigor, or specificity and the failure to highlight sufficiently the need for stronger remedial action in a currency union were among the factors that undermined the quality and effectiveness of surveillance.

That sounds like the IMF was very shoddy. Millions were losing their jobs as a result!

Further, the IMF became Fanboys for the Euro and the nonsense that the European Commission and ECB were pumping out at the height of the crisis about the soon to be enjoyed recovery and that the euro had been a spectacular success (remember Trichet’s glowing comments!).

The IEO concluded:

IMF staff’s position was often too close to the official line of European officials, and the IMF lost effectiveness as an independent assessor.

In the lead up to the crisis, the IEO found that the IMF has not warned its membership of the “euro area vulnerabilities”.


Before the launch of the euro in January 1999, the IMF’s public statements tended to emphasize the advantages of the common currency more than the concerns about it that were being expressed in the broader literature … the view supportive of what was perceived to be Europe’s political project ultimately prevailed in guiding the Fund’s public position. Thus, while other observers saw potential vulnerabilities arising from the operation (if not the design) of the Stability and Growth Pact or from the inadequacy of the framework to resolve systemic problems, the IMF World Economic Outlook stated in 1997 that “the emerging policy framework appears to strike a good balance between rules and the necessary scope” for judgment in the monetary and fiscal areas (IMF, 1997).

Groupthink leads to suppression of alternatives and denial.

Despite repeated analyses from outsiders that the failure to create a true federal fiscal capacity and the harsh Stability and Growth Pact rules, which limited Member State fiscal flexibility, would expose the Eurozone to a systemic crisis, the IMF didn’t say a word.

It was gung ho with Brussels all the way.

Further, even in the face of dysfunction, the IMF continued to play the ‘fanboy’ role with respect to the Eurozone:

The IMF, like most other observers, missed the buildup of risks in the euro area’s banking system overall … the IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value …

But it was not just a matter of failing to understand the Eurozone issues.

The IEO concluded that:

The weaknesses of IMF surveillance in the euro area echoed the larger problem of IMF surveillance in advanced economies … [there were] … several factors at play … a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches … These factors were compounded in the case of the euro area by a “Europe is different” mindset.

The Groupthink led to denial that the crisis would deepen in the Eurozone.

The IMF decision-making was also deeply flawed.

When the Board approved the massive 2010 bailout for Greece it did so knowing the plan would fail unless there was “preemptive debt restructuring”.

The IEO found that:

… there was no open and early discussion of the pros and cons of all options available to the IMF.

TINA prevailed.

In doing so, the IMF Board breached its own rules and was forced to make changes to its own guidelines in May 2010. The IEO found these changes:

… did not receive the customary careful review and deliberation by the Board … the modification process was not transparent.

The changes were hammered through without proper briefing.

I have already covered the “overly optimistic growth projections” that the IMF used in the bailout design in other blogs and above.

But in this regard, the IEO found that:

Lessons from past crises were not always applied … for Greece, high-risk as it was, included “no Plan B” …

TINA again.

On Accountability and transparency, the IEO concluded that:

… a good fraction of the Executive Board—and more broadly of the IMF’s membership—was not fully kept informed during the crisis undermined the Board’s oversight function …

There were “Delays in completing internal reviews involving euro area programs”.

In other words, they were sailing blind, making changes to programs when they hadn’t fully appreciated the damage that the previous program had caused. And so it went.

Finally, (and I am only touching the surface), in the background paper on Greece, we learn that while:

It is not unusual for IMF programs to disappoint in comparison to ini- tial forecasts, but orders of magnitude are usually much smaller than those in the SBA for Greece … An output shortfall as large as Greece’s is thus exceptional even by IMF program standards. Also, in comparison with IMF forecasts made for other market access countries over the same crisis years (2010–12), the magnitude of Greece’s growth forecast errors looks extraordinary …

The ‘bridge fell down’, who went to prison for professional incompetence.

The Report lists the reasons for this massive error:

1. The IMF “over-relied on the confidence effects, restoration of market access, and improvements in the investment climate that its designers hoped would result from program implementation and completed structural reforms.”

That is, its theoretical models were wrong.

It was obvious to anyone not trapped by the neo-liberal Groupthink that confidence would plummet as a result of the austerity programs.

But the IMF models had Ricardian Equivalence built-in such that it was held that consumers and firms would spend to more than fill the gap left by the public cuts because they no longer feared the high deficits and the need to save to pay the higher taxes necessary to pay back the deficits! That short of mumble jumble that exists on in the land of mainstream economics.

2. They had catastrophic errors in their models:

… the assumed fiscal multipliers were too low, implying a fiscal consolidation less costly than it actually turned out to be.

As a result:

… real GDP in 2012 was 17 percent lower than in 2009, compared to the 51⁄2 percent decline that was projected in the SBA-supported program. Over the same period, nominal GDP was almost one-fifth lower, compared to the 2 percent decline initially forecasted. The original growth projections were largely maintained until the fifth review (December 2011) but were then marked down, with the expected recovery delayed until 2014. Projections for unemployment were raised in line with the severity of the contraction. The unemployment rate in 2012 was 25 percent, compared to the original program projection of 15 percent.

Disastrous errors.

3. The IMF failed to understand the structure of the Greek economy despite demanding massive structural adjustments including privatisations, cost cutting etc:

… only a small part of Greek exports could be expected to depend on competitiveness; a more substantial part (food, commodities, and maritime services) could not be expected to respond to lower unit labor costs. Awareness of the peculiar structure of exports should have lowered the expectation of the potential contribution that exports could make to growth.

The fly-in, fly-out over a weekend type assessment that the IMF is famous for – where they hole up in some ritzy hotel for a weekend and impose the one-size, fits-all (wrong) model on a nation was in action in Greece.

No deep understanding. Just an arrogance driven by the confidence that Groupthink brings to the most incompetent of operators.

In conclusion, the Greece Case Study highlights what we have known all along.

The mission was not to help Greece but, rather, to save the euro from collapse and preserve the assets of the banks in France and Germany that were exposed to such a collapse.

The Greeks were just the bunnies!


Another disastrous report on the way the IMF operates.

It should motivate governments that contribute their funds to support the IMF to withdraw that support immediately and work to create a new institution that operates to extend the real resource bases for disadvantaged states to ensure their citizens enjoy better material standards of living.

It should ditch mainstream macroeconomics models and commit to a much broader scope of analysis.

And, several IMF staffers and officials should be imprisoned for malfeasance.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

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    31 Responses to Why haven’t any IMF officials been prosecuted for malpractice in Greece?

    1. Jerry Brown says:

      Why would a nation subject themselves to an IMF review, or their advice, in the first place?

    2. Neil Wilson says:

      What I don’t understand is this ‘fiscal multiplier’ nonsense.

      It’s almost like they made up a way of calculating it that was specifically designed to discredit government action.

      Because building a hospital has no more value than building a casino once you abstract things to numbers.

      All GDP is equal, but private sector GDP is more equal than public.

    3. Andreas Bimba says:

      Our democracies have failed by allowing such destructive extremists to gain control of global macroeconomic and social policy. Time to purge our institutions of these self serving extremists, restrain the corporate robber barons that seek to rule us, restore some balance, the primacy of truth and evidence and to ensure that governments act in the best interests of all citizens.

    4. Alan Longbon says:


      Great blog entry. Thanks.

      “And, several IMF staffers and officials should be imprisoned for malfeasance.”

      Is there not some sort of international court where a case could be lodged?

      United Nations perhaps?

      I expect it would be a white wash and be defeated also by who had the best lawyer rather than the facts of the case. Perhaps Oxfam, Amnesty or Greenpeace could lodge a case.

      Perhaps it could be crowdfunded.



    5. Jerry Brown says:

      Neil Wilson, I’m of the opinion that what we need to do, needs to be done, regardless of multipliers or economic analysis of any sort. Hospitals are one of those things we need, casinos are luxuries best case. That being said, truly private sector GDP probably is ‘more equal’ than public sector GDP because it is more likely to reflect what people consider valuable.

    6. Gogs says:

      Under the more Socialist regimes that many MMT supporters favour economic policies would be expected to accentuate policy in the direction of a more humane society (eg hospitals rather than casinos).

      This preference indicates that consumerism could play a lesser role in total GDP; a viewpoint that needs to be elaborated so that the population better appreciate the ideological basis of many MMT supporters.

    7. Erik says:

      Hello Bill,

      I would like to ask if you could explain one thing you said in an old post.
      “All that happens in bond sales is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.”

      This should mean bond sales do not reduce the inflationary pressure that may arise through the higher demand of the private sector induced by deficit spending. However much of the bond sales are sold to households! Which means their deposits are reduced simultaneously as the banks reserves are reduced.

      It seems to me that the correct statement would be that bond sales do not necessarily reduce deposits and therefore demand, but it surely can, depending on who purchases the bond, right?

      It would be great if you could write something about it, as this your only post I found about it
      (btw it is from 2011: “Painstaking, dot-point summary – bond issuance doesn’t lower inflation risk”)

      Thank you very much! If anyone else reading this knows the answer, please answer as well!

    8. Mike Wright says:

      With the current barrage of Venezuelan news in mind, I wonder how many neoliberals are happy to defend the treatment of the Greek people by this institutional Groupthink?

    9. Chrislongs says:


      I think an important point is that Europe (ie France) has had provided the recent heads of the IMF leaving the USA the World Bank as a trade off. No wonder China is developing an Asian based organisation.
      Perhaps all the contributors to the IMF including Asian countries should now withhold funds until a full audit is completed!

    10. Salford Lad says:

      The IMF and the World Bank are not altruistic entities, but have become instruments of Washington Foreign policy.
      They are bludgeons to subdue a Nation and loot its assets by privatisations imposed by the inability to repay extortionate loans. No different from a Mafia operation.

    11. Stelios says:


      Their deposits are reduced because they preferred saving in government bonds instead of deposits. They are no more richer let alone poorer as a result of the bond issuance.

      The mainstream logic implies that if deficit spending was not matched by an equivalent bond issuance, then people would somehow be more inclined to spend, as if keeping your savings in deposits in contrast to bonds, alters your consumption patterns. This could hardly be the case. Consumption is more than anything a function of income, not a function of liquidity.
      If deficit spending is likely to increase inflationary pressure, then it will do so regardless of whether there is an accomanying bond or not.

    12. Jim Green says:

      Malpractice in America…..

      The Republican agenda is based on MYTHS, LIES AND PROPAGANDA, to benefit the few, at the expense of the many—and is a vicious attack on our democracy, to wit: 1. ‘government will run out of money’ myth. 2. ‘government deficits will leave a burden for the kids and the grandkids’ myth.
      3. ‘the nation will go broke’ myth. 4. ‘healthcare and pensions are unaffordable’ myth. In short: IT IS IMPOSSIBLE TO BE A CHRISTIAN, AND VOTE REPUBLICAN, Amazon/Kindle

    13. Jerry Brown says:

      Erik @18:37, Professor Mitchell usually explains bond sales by a government as an ‘asset swap’. Yes, if a household purchases a bond it will reduce their deposit assets but it increases the household’s ‘bond assets’. If the market for government bonds is very liquid (which it is), or if the bonds can be used as collateral for a loan, or if they can be used in other exchanges much as currency is, then this asset swap does not really reduce the household’s ability to spend. The point of the matter is that it is the spending itself that is potentially inflationary and the bond issuance does nothing to decrease potential spending.

      And if you were thinking that the banks would find they have less deposits on hand that they could then lend out, and that lack might control inflation, the facts are that banks do not need deposits in order to make loans. Loans create deposits rather than the opposite.

    14. Xanti says:


      Remember that the monetary quantity of bond sales exactly matches the monetary quantity of the fiscal deficit, to the penny. This implies the following:

      The amount of currency that the private sector decides to save and convert into bonds is exactly the same amount that the public sector spends into the economy. It’s like saying that -4+4=0

      The fact that savings can be held in currency or bonds does not change the fact that savings mean unspent money, by definition. Therefore, regardless of the form of savings, fiscal deficits add the same amount of monetary assets to the economy irrespective of whether bond sales occur or not (current operating procedure vs Overt Monetary Financing).

      Furthermore, in terms of potential inflationary pressures, bond sales is actually the MORE potentially inflationary option, as bonds typically are a great collateral accepted for loans.

    15. Norman says:

      Salford Lad: “The IMF and the World Bank are not altruistic entities, but have become instruments of Washington Foreign policy…”

      Michael Hudson has written about this at length in “Super Imperialism – The Origin and Fundamentals of US World Dominance” (2nd edition 2002).

      The chapters on “Birth of the American World Order 1914-1946” are especially fascinating.

      Unfortunately, the book is quite expensive.

      [Bill edited out link to commercial site]

    16. Andreas Bimba says:

      This article and some of the comments leave me with some questions about some of the implications of the MMT approach to macroeconomics. Can anyone be so kind to answer the following:

      If banks do not need deposits in order to provide loans, why do the banks even bother to advertise for depositors or offer any interest on such deposits? Is it a regulatory requirement that limits the quantity of loaned funds to some multiple of deposits held, that necessitates that deposits be held?

      Apparently the big 4 Australian banks have borrowed considerable sums of $US at low interest rates and then loan this money to Australian property purchasers and other local and foreign businesses and organisations at considerably higher interest rates? Have they borrowed and loaned at a 1:1 ratio? Again why have the banks borrowed at all if banks ‘create’ money when it is deposited into the account of the entity that took out the loan?

      Currently most developing countries need to grovel to the World Bank and IMF and thereby comply with their destructive neoliberal dictates so that they can get hard currency that they can use to finance the foreign sourced component of development projects and to buy other necessary imports, as their local currencies are apparently not accepted internationally? At what point does a nations currency become accepted for international payments and is ‘tradable’ in the same way the $AU currently is? Is it not possible for a nation to go the other way and go from having an internationally accepted currency to having a ‘local only’ currency perhaps due to hyperinflation or war or unrestrained fiscal stimulus in that currency?

      As the Australian government, like all governments with their own sovereign currency is not fiscally constrained, and can create as many Australian dollars as it chooses (apart from spending excessively locally that inflation results), what would stop the Australian government using ‘created’ $AU to go on an international spending spree to buy up the world’s corporations, property, agricultural land, fine art, precious metals and any other nice to have foreign assets?

    17. Erik says:

      To Xanti, Jerry Brown ant Stelios:

      Thank you all very much for your answers, I think I understand now. Even though the bond sales reduce the deposits of the ones who buy bonds, this is unlikely to affect the possible inflationary pressure of new demand, as bonds are very liquid and the households already had a desire for savings. And the overall amount of assets still rise no matter what.

      Thanks again!

    18. No surprise here. All the IMF presidents are European.
      Most have been ministers in cabinets. The last three, Rodrigo Rato, Dominique Strauss-Kahn and Christine Lagarde have demonstrated reckless behavior and connivance with corruption. Rato has been incarcerated several times and is being prosecuted in several corruption cases. Strauss-Kahn is a lecherous rapist. Lagarde was involved in the Tapie case. How can anything decent come out of that organization?

    19. Derek Henry says:

      Andreas Bimba,

      When Australia sells the world it’s resources that it has produced it gets paid in the local currency and this sits in the buyers central bank. So Australia does not need to create $AU to go on a world wide spending spree.

      a) Australia can then buy goods and services in that country using the newly acquired local currency

      b) Save that currency by buying a bond to earn interest

      c) Move it back home and change it to $AU

      So what stops Australia via option a) from buying world’s corporations, property, agricultural land, fine art, precious metals and any other nice to have foreign assets?

      Rules that the buying country sets in place. If you want to play in their sandbox you have to play by their rules. Australians are banned from buying many things with their excess savings that they acquire via trade. Probably monitored by the merger and acquisition authorities.

      You can see the problems it can cause first hand if not monitored correctly. How many Australian exporters own housing in New Zealand, New York, Beijing because they wanted a better investment on their export savings rather than buying a foreign government bond. That then push up house prices that locals can’t afford to buy for example ?

      U.S. panel wants to ban China from buying American firms with their export ” $ savings”


    20. derrida derider says:

      OTOH, its the IMF itself that has produced this criticism. The thesis that the IMF was run by malicious individuals and hence these people deserve jail time is rather undercut by that fact – the issue is much more systemic than that, as the evaluation argues.

      Also, a lot of the commenter’s explanation of it as being driven from Washington ignores the fact that under Obama the yanks were in fact persistently telling the troika that what they were doing was suicidal, and urging them to print lots more money. After all, the US was not hurt nearly as badly by German mercantilism as southern Europe was but certainly was not helped.

    21. Brendanm says:

      The discussion of bonds always seems obscured here, much more so than spending and taxing.

      Gov spend $X: add $X to bank reserve account, add $X to invoicee bank account
      Net increase is private worth is bank = $X (reserves) – $X (deposit debt) = $0
      invoicee = $X (deposit asset)

      Tax $X: deduct $X from taxpayer account, deduct $X from bank reserve,
      Net decrease in private worth is $X (reserve above calculations)

      Now issue $X bonds could be one of

      Tax $X from purchaser then issue $X in bonds to purchaser, net change in private worth $X


      Deduct $X from bank reserve, then issue $X in bonds to bank, then bank on sells to investors.

      From all the discussion of quantitative easing, it seems that the second option is more likely?
      If so, issuing bonds is likely more inflationary, because the bond is much more “spendable” than the reserves that were traded.
      It also seems dodgy as hell, because the net effect appears to be that bank has loaned itself $X. This would be true for any sort of trading income the bank makes, like interest payments.

      To Andreas, it is not that the banks don’t need to cover loans with reserves (at whatever ratio is required by law), but rather that they have the rest of the day to get hold of the necessary reserves after issuing a loan and the reserve bank guarantees to act as lender of last resort. Thus the issue of reserves does not figure in the operation of issuing a loan. It is still in the bank’s interests to find sources of reserves that are cheaper than the reserve rate, sources such as domestic depositors and foreign investors. It’s not clear to me why they would borrow in foreign currencies, but I’m sure they think it will be profitable.

    22. Brendanm says:

      Oops, that’s a decrease of $X for taxation and no change to bond issuing.

    23. Mel says:

      “If banks do not need deposits in order to provide loans, why do the banks even bother to advertise for depositors or offer any interest on such deposits?”

      A conclusion that I’m coming to, if I’m right, is that the day-to-day test of a bank’s fitness is getting through clearing. Then the cheques drawn against the bank are offset by the cheques presented by the bank, drawn against other banks, and leave the bank’s reserve account slightly up, slightle down, or unchanged depending on the vagaries of business that day.

      Borrowers get their chequing accounts credited by the bank, promising in return to repay the borrowed money later with interest, eventually generating a business profit for the bank. Unfortunately before they repay the money, they spend it, most likely writing cheques that get deposited at other banks. During clearing, these cheques have to be honoured by the bank, drawing down its reserve account as it pays the banks that presented the cheques.

      Luckily, depositors are the kind of customer who collect cheques from other banks’ borrowers. These cheques go the other way during clearing, restoring the reserve account, and helping keep the bank liquid without any further trouble.

      If I’m right. Cameron Murray wrote an article, “The bank competition myth”, that sparked this thinking. My fault if I’ve misunderstood Murray.

      I guess there are legal requirements as well for some level of reserve balance, but if a bank can talk its way past legal niceties, it’s much harder to talk past other banks demanding to be payed.

    24. Jerry Brown says:

      Andreas, I think it is very normal for people to realize the implications of what MMT reveals and then reject it- based on the implications, not on any rational reason. That was my reaction at least. I am very glad I continued to read Bill Mitchell and realized how much more sense MMT makes than the garbage I learned in college.

      You ask a lot of good questions and I can only help with a few and they are only my opinions about things – not what MMT or Bill Mitchell says.
      If banks do not need deposits in order to provide loans, why do the banks even bother to advertise for depositors or offer any interest on such deposits? – Banking is a spread dependent enterprise where bankers make loans but have to fund them at some point after the loan is made. That funding has a cost in all cases, but usually deposits are the lowest cost case, so banks do compete to a certain extent for deposits. But that doesn’t mean the deposits are necessary for the loan to be made- just that they are often a bank’s lowest cost option and therefore make each loan more profitable.

      Apparently the big 4 Australian banks have borrowed considerable sums of $US at low interest rates and then loan this money to Australian property purchasers and other local and foreign businesses and organisations at considerably higher interest rates?- In the first place, I have no idea why banks would be allowed to do that if they were in anyway guaranteed by the government. And I don’t know what these banks are doing- are they borrowing in US Dollars and lending in US Dollars? In which case they are basically US banks, for that part of their operations, if they have access to the Fed and the US payment system. Or are they borrowing in US Dollars and using the foreign exchange market in order to lend in Australian Dollars? If so, I imagine they are assessing the cost of funding their loans and have determined that this is a less expensive way to fund their loans. But that puts them at risk if the Australian Dollar falls relative to the US currency.

      At what point does a nations currency become accepted for international payments and is ‘tradable’ in the same way the $AU currently is?- I really don’t know, but I am willing to guess :). My opinion is that acceptance occurs when the people of a nation produce enough goods and services at a price where foreigners desire to buy them. Then they need the currency in order to do that and it creates a market for its exchange because of the demand for that currency caused by the demand for that production. A government’s ability and willingness to tax in that currency probably also plays a role.

      -What would stop the Australian government using ‘created’ $AU to go on an international spending spree to buy up the world’s corporations, property, agricultural land, fine art, precious metals and any other nice to have foreign assets? The exchange rate value of the currency would plummet. As an American, I have no desire for Australian Dollars unless I need them to get something from Australia. I’m not going to sell you any of my time or production or property for $AU unless I need $AU for some reason.

      Please remember that all of this is only based on what my understanding of MMT says. With some extra opinion thrown in. Professor Mitchell may very well say this is all wrong.

    25. bill says:

      For all those wondering about bank deposits, wholesale funding markets, reserves, loans creating deposits etc, please read

      The role of bank deposits in Modern Monetary Theory


      best wishes

    26. Andreas Bimba says:

      Thanks very much for all for the answers to my questions and I hope to respond properly later. I will read the article Bill referenced and thanks for that. I should have asked one question at a time as I think some answers raise more questions, and many concepts are not as straight forward as I would have hoped. I also think it is important that anyone who seeks to promote the benefits of the MMT approach be able to provide fairly simple answers to the common questions raised by those seeking to learn or that are sceptical, if that is possible?

    27. Jerry Brown says:

      Andreas, MMT as described by Bill Mitchell provides many answers to many questions in a much more understandable way than the alternatives to MMT do. And more importantly, they are the correct answers. As far as I can tell.

      Simple answers to complex problems are called slogans. They have a purpose, but certain things that are complicated may require somewhat complicated answers as well. And another thing that makes it more complicated is that many of us were taught very different things in school, and by society, and by the news and wherever else we acquire information to form opinions. And maybe paid a lot of money and spent a lot of time learning that stuff. And it is difficult to realize when that needs to be thrown away and it isn’t always easy to do.

      Human behavior is sort of complicated. Economics, including MMT, is an attempt to figure out some of that behavior. MMT does the best job describing the systems we have created. I think Bill Mitchell does an extraordinary job of explaining some of those systems in the simplest terms possible. But again, that is just my opinion and he is likely to disagree :)

    28. Andreas Bimba says:

      Do banks need deposits/reserves?

      Quotes from Bill’s article: The role of bank deposits in Modern Monetary Theory

      “From the perspective of Modern Monetary Theory (MMT) private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. We say that loans create deposits.”

      “The important point for today though is that when a bank originates a loan to a firm or a household it is not lending reserves. Bank lending is not easier if there are more reserves just as it is not harder if there are less.”

      “Deposits do not fund loans. But they are one source of funds that the bank has available to ensure that its role in the settlement process is not compromised which would require borrowing from the central bank.”

      “Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.”

      “Loans are not funded by reserves balances nor are deposits required to add to reserves before a bank can lend. This does not deny that banks still require funds in order to operate. They still need to ensure they have reserves. It just means that they do not need reserves before they lend.”

      “Private banks still need to “fund” their loan book. Banks have various sources of funds available to them including the discount window offered by the central bank which I explained above. The sources will vary in “cost”. The bank is clearly trying to get access to funds which are cheaper than the rate they charge for their loans.”

      So the MMT position apparently is that deposits, or other sources of funds such as the international wholesale markets, are indeed essential for a private bank to be able to provide loans but the quantity of reserves does not determine or constrain the quantity of lending by the private bank.

      The comment “Deposits do not fund loans” I still find misleading as it is so easy to misinterpret that as meaning “Banks do not need deposits in order to provide loans” which is not the case as deposits or other sources of funds are needed to fund their loan books and to ensure the banks reserve requirements are met.

      Thanks Brendanm, Mel and Jerry for your answers which were in line with what Bill wrote.


      In regard to the big 4 Australian banks borrowing $US on international wholesale markets.
      As Bill makes clear in his article, Australia’s banks do have relatively high levels of wholesale funding but this level was reduced a little following the GFC. Bill also wrote “the Australian government foolishly will guarantee any wholesale debt that the big 4 encumber themselves with”.
      Jerry’s point that borrowing a foreign currency to fund loans increases risks and why does the Australian government allow this given their bank guarantees, is in line with Bill’s comment. Australia’s major banks do operate globally so I suppose borrowing $US so as to provide $US loans makes sense but borrowing $US to fund $AU loans to Australian borrowers, if it occurs, should be discouraged.


      At what point does a nations currency become accepted for international payments and is ‘tradable’ in the same way the $AU currently is?

      In line with Jerry’s answer, I suppose it is when international trading volumes are significant and any perceived risks are acceptable.


      What would stop the Australian government using ‘created’ $AU to go on an international spending spree to buy up the world’s corporations, property ………

      Derek mentioned rules that the buying country sets in place and the merger and acquisition authorities.

      Jerry mentioned “the exchange rate value of the currency would plummet. As an American, I have no desire for Australian Dollars unless I need them to get something from Australia.”

      But the $AU is convertible so presumably the Australian government or its agents could purchase foreign assets with the appropriate foreign currency and everything has its price. I suspect that Jerry’s comment that the $AU would plummet (or would it be inflationary in Australia?) is the biggest limiting factor but I’m not sure of the mechanism for the depreciation or inflation and what about a ‘moderate’ foreign asset acquisition program, this may avoid a significant depreciation/inflation and many of the regulatory barriers put on foreign asset purchases?

    29. Jerry Brown says:

      Andreas, just a couple of things. I’m not 100% sure about the Australian Dollar, But I am absolutely sure the US Dollar is not ‘convertible’. If I go to the issuer and try to convert it, they will just give me back the same thing. They will not give me silver or gold or a fixed quantity of another currency or of anything else, all they will ‘convert’ it into is the same amount of US dollars. But like you say, there is a privately operated market for US dollars where I can sell my dollars for other currencies. But that sale price I get will vary according to the demand for US dollars. If the US government went on some huge foreign asset buying spree the demand for US dollars would probably be almost completely satisfied already, and I might find that when I tried to sell my dollars, I wouldn’t get much in return for them- the exchange rate value of the US dollar would have fallen. Now I don’t know just how responsive the private foreign exchange market would be to any particular sized influx of US dollars, so I could not tell you how much the rate of exchange would drop. But I am pretty sure that if the US government tried to buy all the land in Australia with US dollars the exchange rate for US currency would be next to zero.

      As to the banks and the deposit thing- Banks do not need deposits to make loans. They don’t need deposits to make loans. They need to fund their loans at some point almost always, and there are a number of ways they can do that- deposits are just one possible way banks could get their funding. The alternate ways I know of are- borrowing the funds from some other bank, borrowing the funds from the Central Bank, selling new shares to the public, selling existing assets such as bonds (or other already existing loans, or even the new loan), and just plain using their original capital to fund a loan. The geniuses on Wall Street probably have found many other various ways to fund bank operations. And yes, deposits to savings accounts and CD’s from the public are one of these many ways to fund a loan, but that does not mean they are necessary.

    30. Andreas Bimba says:

      Jerry, that makes sense, I suppose the foreign exchange markets determine the applicable exchange rates in accordance with supply and demand and if the Australian government sought to sell too many $AU to purchase $US then the $AU would plummet.

      I take your point that deposits are but one source of funds for loans and should have wrote “private banks need to fund their loan books using funds from various sources such as deposits, wholesale funding markets, selling shares or the sale of assets for example.”

    31. jeff65 says:


      A potential point of confusion may be with your understanding of the foreign exchange markets. I think it is quite common to believe that it is like walking into the bank to get foreign currency at the going rate. It is not.

      One cannot sell one currency to purchase another. That implies two transactions through some some intermediary medium of exchange that does not exist.

      It’s a straight swap. There is only one transaction and each party is both buyer and seller in that transaction. You have to find a seller of the currency you seek who is willing to take whatever currency you have in exchange and then you have to agree on a price (a ratio, e.g. 2 AUD for 1 GBP). If too much AUD is offered in exchange for other currencies then the AUD exchange rate will fall relative to those currencies. This is how the foreign exchange rate adjusts; through individual transactions.

      I think this is important to understand because it makes it clear that AUD wealth can only come from AUD sources: the only source is the RBA. If an Australian company exports iron ore for JPY the world will be no richer in AUD terms unless the RBA accommodates it by printing more AUD to swap for JPY. Without the accommodation, in order for the company to get AUD to pay its workers, it must come from another party willing to swap existing AUD for JPY.

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