Sunday, November 24, 2019

Banks And Money (Sigh) — Brian Romanchuk


In terms of the the general case concerning contemporary banking, the basic constraint on lending, by which banks create "money"* by crediting deposit accounts (bank liability) and debiting loan accounts (bank asset), is the availability of creditworthy borrowers. This population is flexible based on, financial and economic conditions, bank credit standards, and government policy and regulation. All of these may change over the cycle.

Price of assets rise to the degree that banks are willing to lend against them as collateral, and goods prices will be affected by changes in bank credit policy. Since bank credit generates much more highly liquid purchasing power (M1) by volume in an economy than government net spending (which also adds to M1), "bank money" is a primary driver of asset values and goods prices.

Since banks, even though privately owned, are part of the government-regulated banking system, they submit to government regulation and oversight, for which they receive access to the central bank as lender of last resort and also deposit insurance.

Yet, much of what we still hear is about gub'ment, crowding out, interest rate explosion, and other idiocies based on the erroneous loanable funds theory.

Thankfully, many economists are finally throwing off the heavy yoke of monetarism, but even many of these are still affected by the cognitive biases resulting from monetarism's deep impressions on the psyche. However, a majority of posts that mention MMT are still rants about the dire effects of "fiat currency"and fiscal depravity as opposed to Libertarianism and "sound money."

Bond Economics
Banks And Money (Sigh)
Brian Romanchuk

* I put money in quotes because "money" is an ambiguous term that should be banned from economics, as Brian notes. "Money" is one of those weasel words that everyone thinks they understand; yet, no one does owing to the extremely high level of abstraction that makes it a wild card. Better to say exactly what you mean, ideally in accounting terms with dealing with a unit of account. 

Unfortunately, there are many other terms in economics like this. See, for example, the Cambridge capital controversy that pitted Samuelson and oSlow against Robinson and Sraffa.

4 comments:

André said...

"bank money is a primary driver of asset values and goods prices."

I couldn't understand that.

If you are talking about financial assets, the main drivers of their prices are the base interest rate and the risks of the underlying claims (market, credit, liquidity, operational, reputational or whatever risk).

If you are talking about real assets, like property, plants, equipment, inventory or whatever, there is a complex price dynamic driven mainly by the usual consumer demand, producer supply, risks involved, inflation and so on.

In either case, "bank money" don't seen to be a driver or directly affect prices...

Ralph Musgrave said...

Andre,

Given increased confidence (or irrational exuberance as Greenspan called it) commercial banks will create and lend out more money. E.g. given rising house prices, houses become better collateral, thus banks will assist the boom by lending more. That assumes they are not constrained by reserve or capital requirements, of course.

Conclusion: bank money can certainly be a driver of asset values, though I'm not sure about "primary driver".

Matt Franko said...

Andre both Tom and Brian are Monetarist thru synthesis of the MMT theory with the Monetarist theory via their Platonistic methodology they use... if you synthesize you always end up retaining some of the other theory.... doesn’t work...

Matt Franko said...

“money" is an ambiguous term that should be banned from economics, as Brian notes. "Money" is one of those weasel words that everyone thinks they understand; yet, no one does owing to the extremely high level of abstraction that makes it a wild card. ”

You’re mixing (synthesizing) methodologies again...

Liberal Art trained deals with the literal using figurative ... “money” is figurative it’s NOT a “wild card!”... it’s a figure of speech ... you can’t correct a reification error in interpretation of the figurative using more figurative language... someone not understanding “money!” isn’t going to helped by you telling them it’s a “wild card!”...

MMT the other day saying “the budget is not a pizza!”... no shit Sherlock...

Science trained deals with the real thru abstractions... unit of account, assets, liabilities, debits, credits, income, loss, balance sheet, cash basis, Accrual basis, etc.. all abstractions...

It’s one or the other... take your pick...