Saturday, April 16, 2016

Steve Keen — Economists Ignore One of Capitalism’s Biggest Problems

Banks don’t “intermediate loans”, they “originate loans”….
Steve Keen schools Joe Stiglitz on "intermediation"

Banks don't "lend out" munnie that has been deposited with the bank. They extend credit by taking promissory paper ("loans"), which is an asset (receivable*) for the bank and a liability for the borrower, in exchange for crediting deposit accounts, which is an asset (payable**) for the borrower and liability for the bank. The bank promises to honor demand for withdrawal and the borrower promises to repay on the terms negotiated. When a bank extends credit, it is all just on paper. And at no point in the process of customer withdrawal or repayment, do other customer accounts get debited or credits other than as directed by the borrower regarding use of funds in the deposit account that the bank credited at the time of origination.

There are no "loanable funds."
In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.
The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.…
Evonomics
Economists Ignore One of Capitalism’s Biggest Problems
Steve Keen | Professor of Economics and Head of the School of Economics, Politics and History at Kingston University. London

* A simple illustration of how bank loans are "receivables" is that receivables are transferable and many firms "factor" their receivables by selling them at a discount. Mortgages are typically factored for example.

** Nothing moves from one account to another when a bank credits a deposit account in the process of origination. The notion of a depositor's funds moving from the depositor's account to the account of a person getting a bank loan is imaginary. When a loan recipient withdraws funds originated by the  loan, no other depositor's account is affected.

14 comments:

Andrew Anderson said...

Yep.

What we have is the equivalent of a government-enabled/enforced/subsidized counterfeiting cartel for the sake of the depository institutions themselves and for the sake of the rich, the most so-called creditworthy.

Worse, a "normal" counterfeiting cartel would only steal by inflation but our counterfeiters steal by deflation and bogus interest too. Not to mention recurrently cause peace-threatening world depressions.

TINA? Then you haven't thought enough since there clearly is.

Bob Roddis said...

Please explain how the process of the government granting a unique and special privilege to a bank to lend money it creates out of thin air is properly labeled "capitalism" and the how horrific results therefrom can be properly deemed "one of Capitalism's Biggest Problems".

The entire process is Keynesian/monetarist, statist, fraudulent and klepto-cratic. It has nothing whatsoever to do with "capitalism".

Your entire MMT/ fiat money game is based upon the purposeful distortion of plain language and concepts.

Kristjan said...

"Please explain how the process of the government granting a unique and special privilege to a bank to lend money it creates out of thin air is properly labeled "capitalism""

That's how it is, it is credit creation. Is there some other capitalism in your head that history knows nothing about? Or are you claiming there was capitalism without credit creation. Nope Bob, you are hopelessly lost. Someone has brainwashed you.

Footsoldier said...

Your entire MMT/ fiat money game is based upon the purposeful distortion of plain language and concepts.

Sorry Bob you've lost the plot.

Here this official report from the Bank of England will help you.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf


Or is the Bank of England using purposeful distortion of plain language.

Bob Roddis said...

The Bank of England report does not contain the word "capitalism". I understand the funny money creation process.

Obviously, you cannot explain how a Keynesian/monetarist, statist, fraudulent and klepto-cratic process of money creation has anything to do with "capitalism" in the free market sense. Because it doesn't.

Ralph Musgrave said...

I thought Bob Roddis had been banned from this blog (quite rightly). Sorry to see him re-appearing. Anyway, re his point that money creation by private banks is not part of capitalism, capitalism is normally defined as something like “a combination of free markets and private ownership of the means of production”.

Private money creation (i.e. trying to get others to accept your IOUs and to the extent that those IOUs get passed from hand to hand as means of payment for goods and services) is very much part of free markets. So I can’t for the life of me see why private money creation is not part of capitalism.

And while I’m basically in favour of free markets, there are several aspects of capitalism we can do without. Private money creation is one of them.

Greg said...

Hey Roddis,

talk about using distorted unclear language...... wtf do you mean by "funny money"?

Matt Franko said...

"Joe" is another really smart guy .... This is the kind of guy we would always want to invite to a conference.

Yes Joe Stiglitz on how banks intermediate and Jim Grant on funny munnie those two would be great to listen to....

Or if Jim Grant can't make it, because we've helped him maintain his reputation and is now too busy writing Time magazine cover pieces, maybe we could get Bob Roddis to still in for him....

That would be a great conference!

Andrew Anderson said...

And while I’m basically in favour of free markets, there are several aspects of capitalism we can do without. Private money creation is one of them. Ralph Musgrave

The problem isn't private money creation but government-subsidized private money creation.

Without those subsidies then a lot more wealth and power would be "shared" via shares in equity, aka common stock, a private money form that requires no government privileges*.

But why share when those with equity can legally steal via government-subsidized private money creation?

*eg. government-provided deposit insurance, a fiat lender/asset buyer of last resort, exclusive access to accounts at the central bank.

Bob said...

funny money = monopoly money

Simsalablunder said...

""Joe" is another really smart guy .... This is the kind of guy we would always want to invite to a conference."

He's one of the Levy Institutes' Board of Governors. One of your "MMT top enders"…

Matt Franko said...

Salsa I know.... Hence Keen is the moron here for trying to say banks don't intermediate.... Banks DO intermediate you can get that right from a Levy Board member here with Joe...

Really glad Joe is there to keep this straight.... Otherwise people might be misled by idiot Keen here.... Whew!

Ralph Musgrave said...

Andrew Anderson,

You’re quite right: it’s the fact that privately issued money is subsidised that’s wrong. Coincidentally I published a paper recently (which is appearing in some economics journal shortly) with the title “Taxpayers Subsidise Private Money Creation”. See:

https://mpra.ub.uni-muenchen.de/70162/1/MPRA_paper_70162.pdf

Simsalablunder said...

"Salsa I know...."

Judging from your comment you don't know…