Wow, the injection that the Riksbank says it needs, SEK 80G, is about the size of the 2022 defence budget. I wonder if the spending of such huge amounts of money without much democratic oversight might lead politicians to want to reduce the power or independence of the Riksbank.
Prior to central banks paying interest on reserves, income was essentially strictly positive unless the central bank was holding risky assets.
The issue with Greece was with their government, not their central bank, so it might not be the best comparison.
Arguably, two historical events show what happens a central bank is insolvent. The first Swedish central bank, Stockholm's Banco, starting issuing loans in exchange for personal guarantees from the borrowers (rather than collateral) and financed these loans with money creation. When they took losses, they had no collateral to seize. Ultimately, this resulted in inflation and the bank was wound down.
A second example would be John Law's bank. John Law essentially used his company to attempt a corporate takeover of France. Some of this activity was financed through stock issuance and some was financed through credit from John Law's bank. Eventually, John Law started issuing money at the bank to buy the stock in the company at artificially high prices. This had the effect of wiping out the equity in the joint operation and resulted in the failure of John Law's bank and high rates of inflation.
Thank you for this brilliant article!
Excelente artículo. Y muy, pero muy pertinente para la realidad del país donde vivo, Argentina.
Wow, the injection that the Riksbank says it needs, SEK 80G, is about the size of the 2022 defence budget. I wonder if the spending of such huge amounts of money without much democratic oversight might lead politicians to want to reduce the power or independence of the Riksbank.
historically what has happened when interest rates have risen dramatically on central banks with large debts?
Greece didn't have sovereignty of its currency (couldn't just create the money) and i am not sure how it has fared since bankruptcy.
I believe the other option is bankruptcy and marking down the debts,
Prior to central banks paying interest on reserves, income was essentially strictly positive unless the central bank was holding risky assets.
The issue with Greece was with their government, not their central bank, so it might not be the best comparison.
Arguably, two historical events show what happens a central bank is insolvent. The first Swedish central bank, Stockholm's Banco, starting issuing loans in exchange for personal guarantees from the borrowers (rather than collateral) and financed these loans with money creation. When they took losses, they had no collateral to seize. Ultimately, this resulted in inflation and the bank was wound down.
A second example would be John Law's bank. John Law essentially used his company to attempt a corporate takeover of France. Some of this activity was financed through stock issuance and some was financed through credit from John Law's bank. Eventually, John Law started issuing money at the bank to buy the stock in the company at artificially high prices. This had the effect of wiping out the equity in the joint operation and resulted in the failure of John Law's bank and high rates of inflation.