Ralph makes an important point here. Krugman's claim has been the banks don't create new money when they make loans. They just intermediate old money among savers and borrowers. The endogenous money view, embraced by the BOE paper, is that bank lending creates new money "out of nothing" in the sense that old money is not transferred from saver to borrower. The loan as new bank asset creates a customer deposit as a new bank liability. The aggregate assets and liabilities of the banking system rise in total. This is reflecting in an increase in broad money, that is, M1, independently of base money. If more base money is needed to meet reserve requirements, then the central bank accommodates by buying government securities. This should be a simple and obvious point but apparently some smart people have missed it.
Ralphonomics
3 comments:
Ralph's point appears to be that bank loans don't create deposits in an imaginary barter economy.
That's seems to be about it.
Yes, and all those economists modeling an imaginary barter economy think that banks are intermediating between savers and borrowers.
I think I've raised an important point rather than set out the definitive and 100% correct answer to the point. But I'm working on it..:-)
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