Frances Coppola - If You Don't Understand Banks, Don't Write About Them

Many economists don't understand how the banking system works, says Frances Coppola, and  go on to write inaccurate books or give ill advice to governments. Here, in this article, she severely criticises a prominent economist for writing such a misinformed book.

One thing MMTers are pretty clued up on is how banking works, and yet many economists - who don't understand how banks work at all - criticise MMT.

The author, a young economist with a first-class degree from Oxford, the famous English university, acknowledges that banks don’t need deposits in order to lend. But she then reintroduces the discredited “money multiplier” explanation of bank lending. Furthermore, she confuses bank reserves with liquid assets, and liquid assets with capital. This confusion exists not just in this paragraph, but throughout the book. How on earth can someone write a book about “financialization” without apparently even a rudimentary understanding of how banks work?

Having to explain all this again has made me realize that the new generation of economists is every bit as ill-informed as the old one. Though this is not surprising. After all, they’ve been taught by them. The “money multiplier” has been shown many times to be an inadequate and misleading explanation of how banks work, yet it still features in many undergraduate economic courses. No university would teach the Ptolemaic system to young astrophysicists, so why are they still teaching its financial equivalent to young economists?

Forbes

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