(From: http://labancaperbene.be)
Some crucial facts that you are not supposed to know
* There is no such thing as a bank loan.
* A loan is when the use of something is handed over to someone else.
* If I lend you my car, I can’t also use it myself.
* When banks ‘lend’ money, they are not extending loans.
* What they do is much more important – the single most important fact about how economies actually work.
Banks create money – out of nothing
With a reserve requirement of 2%, and a deposit of 100 euros, a Bank can extend 4,900 euros in credits. Where do the 4,900 euros come from?
From nowhere.
What makes banks special? They create 98% of our money
Their role as the economy’s accountants AND their ability to individually create credit makes banks special (MacLeod 1855; Schumpeter 1912)
- The textbook representation is incorrect: banks are not merely financial intermediaries. They are special, because they create new money ‘out of nothing’ = credit creation
- This is how 95-98% of our ‘money’ is created – by commercial enterprises.
- In other words: the creation of the money supply has been in private, commercial hands for a long long time.
The fundamental cause of banking crises:
The privatised creation and allocation of money
* Banks are profit-seeking institutions.
* They do not consider the macroeconomic or social welfare implications of their creation and allocation of money.
* They do not even consider how their actions might affect themselves in the long-run
* Banking has been an industry oblivious to sustainability considerations for centuries.
* This system has been put in place by interested parties without any public debate about it.
Some features of the credit market
- Banks ration credit to maximise profits (Stiglitz and Weiss, 1981) (as loan demand > supply, equilibrium rates would be too high)
- The credit market is rationed and supply-determined
- There is no indication that their selection of projects/firms to give newly created money to is the best possible for the economy as a whole.
• Given the reality of credit creation, the quantity of credit is the key budget constraint on activity and thus determines growth, asset prices and should be used for policy.
See Professor Richard A. Werner PowerPoint presentation at the Danish Institute for International Studies (DIIS) here:
Central Banking and the Governance of Credit Creation (17 March 2009)
http://www.diis.dk/graphics/_Staff/eba/Werner%20Copenhagen%20DIIS%2017%20Mar%202009.ppt
* There is no such thing as a bank loan.
* A loan is when the use of something is handed over to someone else.
* If I lend you my car, I can’t also use it myself.
* When banks ‘lend’ money, they are not extending loans.
* What they do is much more important – the single most important fact about how economies actually work.
Banks create money – out of nothing
With a reserve requirement of 2%, and a deposit of 100 euros, a Bank can extend 4,900 euros in credits. Where do the 4,900 euros come from?
From nowhere.
What makes banks special? They create 98% of our money
Their role as the economy’s accountants AND their ability to individually create credit makes banks special (MacLeod 1855; Schumpeter 1912)
- The textbook representation is incorrect: banks are not merely financial intermediaries. They are special, because they create new money ‘out of nothing’ = credit creation
- This is how 95-98% of our ‘money’ is created – by commercial enterprises.
- In other words: the creation of the money supply has been in private, commercial hands for a long long time.
The fundamental cause of banking crises:
The privatised creation and allocation of money
* Banks are profit-seeking institutions.
* They do not consider the macroeconomic or social welfare implications of their creation and allocation of money.
* They do not even consider how their actions might affect themselves in the long-run
* Banking has been an industry oblivious to sustainability considerations for centuries.
* This system has been put in place by interested parties without any public debate about it.
Some features of the credit market
- Banks ration credit to maximise profits (Stiglitz and Weiss, 1981) (as loan demand > supply, equilibrium rates would be too high)
- The credit market is rationed and supply-determined
- There is no indication that their selection of projects/firms to give newly created money to is the best possible for the economy as a whole.
• Given the reality of credit creation, the quantity of credit is the key budget constraint on activity and thus determines growth, asset prices and should be used for policy.
See Professor Richard A. Werner PowerPoint presentation at the Danish Institute for International Studies (DIIS) here:
Central Banking and the Governance of Credit Creation (17 March 2009)
http://www.diis.dk/graphics/_Staff/eba/Werner%20Copenhagen%20DIIS%2017%20Mar%202009.ppt
References:
- Werner, Richard A. 2005. New Paradigm in Macroeconomics (pp 174 to 180)
- Schumpeter, Joseph A. 1912. The Theory of Economic Development
- Macleod, Henry Dunning. 1855. The Theory and Practice of Banking
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