Merijn Knibbe — A Minskyian interpretation of endogenous money creation: central banks don’t always rule the roost

The Bank of England has published a paper which states that 97% of all money is created by private banks, institutions which, when it comes to money creation, to an extent can go their own way. But Nick Rowe argues that this is theory: banks will actually have to go down the road laid out by the central bank as market forces will prevent the banks to create more ‘official’ money than the GDP economy needs at any level of the central bank interest rate. Nick Rowe is not entirely right. During the last two or three decades the larger part of money was not created because of GDP-transactions related lending but by mortgage lending. As house related lending and borrowing have increasingly become activities on a kind of asset market, speculative and Ponzi borrowing has become increasingly important on this market which means that the GDP-interest rate is not that important when it comes to restraining lending....

Banks create money. For decades, a very large part of this money was created by mortgage lending. As the central bank does not target house prices or mortgage lending and as the housing market was largely uncoupled from the GDP economy this means that the central banks did not control money creation. Or the increase of debt. Money is endogenous. But the central bank sometimes isn’t.

Real-World Economics Review Blog
A Minskyian interpretation of endogenous money creation: central banks don’t always rule the roost
Merijn Knibbe