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Monday, April 23, 2012
Josh Ryan-Collins — Credit is what Credit does
From Berlin to Edinburgh: experts call for control of credit creation to be put at the heart of banking reform
Read it at NEF The New Economics Foundation Credit is what Credit does
by Josh Ryan-Collins | Senior researcher, Monetary Reform
This got me thinking. How does MMT consider inflation and credit money? Do banks create inflation or not?
Credit money is chiefly responsible for demand side inflation. Lack of availability of real resources is chiefly responsible for supply side inflation.
Josh made a very good speech in Edinburgh. But I’ve got doubts about inducing or forcing banks to lend to the “productive” sector rather than the property sector.
Banks are by definition institutions where people expect to get $100 back for every $100 dollars they deposit. Banks will therefor always tend to lend only in exchange for relatively good collateral, e.g. property. (And even property didn’t prove a brilliant form of collateral over the last five years.) In contrast, if you want to take a risk with your money, invest in the stock exchange or start your own business or go to Las Vegas: the options are numerous.
Tom Hickey asks “How does MMT consider inflation and credit money? Do banks create inflation or not?” My answer is thus.
MMT says that in a recession, the government / central bank machine should create new money and spend it into the economy (as tax cuts and/or increased public spending). As to private bank money creation, that is an optional extra. Advocates of fractional reserve approve of it, while advocates of full reserve disapprove. MMT has no view on the latter argument, far as I know.
Do banks create inflation? The answer is “yes” in the following limited sense. Private banks can create savings out of nothing and lend them out. They don’t need to forgo consumption in order to lend (as does any normal lender). Thus banks can lend at below the natural rate of interest. That is inflationary, which will induce the central bank to withdraw monetary base in order to avoid inflation. That process continues till the amount of monetary base is reduced to the bare minimum.
Two speakers at Edinburgh supported this point by saying that private banks tend to take over seiniorage from central banks (Ann Pettifor and Ben Dyson).
Hi Tom,
ReplyDeleteThis got me thinking. How does MMT consider inflation and credit money? Do banks create inflation or not?
Thanks in advance!
This got me thinking. How does MMT consider inflation and credit money? Do banks create inflation or not?
ReplyDeleteCredit money is chiefly responsible for demand side inflation. Lack of availability of real resources is chiefly responsible for supply side inflation.
Josh made a very good speech in Edinburgh. But I’ve got doubts about inducing or forcing banks to lend to the “productive” sector rather than the property sector.
ReplyDeleteBanks are by definition institutions where people expect to get $100 back for every $100 dollars they deposit. Banks will therefor always tend to lend only in exchange for relatively good collateral, e.g. property. (And even property didn’t prove a brilliant form of collateral over the last five years.) In contrast, if you want to take a risk with your money, invest in the stock exchange or start your own business or go to Las Vegas: the options are numerous.
Tom Hickey asks “How does MMT consider inflation and credit money? Do banks create inflation or not?” My answer is thus.
MMT says that in a recession, the government / central bank machine should create new money and spend it into the economy (as tax cuts and/or increased public spending). As to private bank money creation, that is an optional extra. Advocates of fractional reserve approve of it, while advocates of full reserve disapprove. MMT has no view on the latter argument, far as I know.
Do banks create inflation? The answer is “yes” in the following limited sense. Private banks can create savings out of nothing and lend them out. They don’t need to forgo consumption in order to lend (as does any normal lender). Thus banks can lend at below the natural rate of interest. That is inflationary, which will induce the central bank to withdraw monetary base in order to avoid inflation. That process continues till the amount of monetary base is reduced to the bare minimum.
Two speakers at Edinburgh supported this point by saying that private banks tend to take over seiniorage from central banks (Ann Pettifor and Ben Dyson).