Wednesday 1 July 2015

Don't Bank On It

It is very hot so as little time is to be spent on the machine one looks for a little light reading to get up to date.

It is not widely known but the Bank of England now runs its own blog, "Bank Underground" (geddit?) and the articles therein, not many at present, are largely explanatory or analytical.

Yesterday, Zoltan Jakab and Michael Kumhof explained in an article "Banks are not intermediaries of loanable funds and why this matters" intricacies of bank financing that many find elusive.

It turned out to be anything but light reading, however the end paragraph said the following:


To summarize, banks are not intermediaries of real loanable funds, they do not collect new deposits from non-bank savers. Instead they provide financing, they create new deposits for their borrowers.

This involves the expansion or contraction of gross bookkeeping positions on bank balance sheets, rather than the channelling of real resources through banks.

Replacing intermediation of loanable funds models with financing and money creation models is therefore necessary simply in order to correctly represent the role of banks in the macroeconomy.

But it also addresses several of the empirical problems of existing banking models.


Now why, suddenly, am I all hot and bothered?

1 comment:

  1. Interesting. A number of people have been saying this for some time but now it appears to be mainstream.