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Bank of England recognizes Endogenous Money

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  • #52
    ancapailldorcha
    Moderators, Category Moderators, Science, Health & Environment Moderators, Social & Fun Moderators, Society & Culture Moderators Posts: 39,562 CMod ✭✭✭✭ancapailldorcha


    Article in the Guardian yesterday basically stating that the premise for austerity in Britain was false. I know next to nothing about economics (if anyone has any book recommendations, that'd be great) so I was curious as to what people here might think. Here is the Bank of England paper cited in the article.

    The foreigner residing among you must be treated as your native-born. Love them as yourself, for you were foreigners in Egypt. I am the LORD your God.

    Leviticus 19:34



  • #53
    andrew
    Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 3,372 Mod ✭✭✭✭andrew


    ancapailldorcha's thread merged with this one, since they're pretty much the same topic.


  • #54
    KomradeBishop
    Closed Accounts Posts: 4,981 ✭✭✭KomradeBishop


    Ya David Graeber is a good author on this topic :) His book 'Debt: The First 5000 Years' is quite good.

    My favourite quote on this topic, is from John Kenneth Galbraith:
    "The process by which banks create money is so simple that the mind is repelled."

    Highly recommend Galbraith's 'Age of Uncertainty' economics documentary - linked all of them here - one of the best documentaries I've seen.


    That quote captures well, peoples reaction to the idea that banks create money when extending loans - but now that that has entered the political mainstream (thanks to the Bank of England) and is now considered as indisputably true, the same sentiment applies to the idea of governments creating money in a similar way:
    If you put forward the idea, that central banks can create money (without any debt/interest owed), and give it to government for public spending (limited by an inflation rate of ~2% - the same as banks) - then peoples minds are completely repelled by this idea - people are just not capable of processing it, and quickly make up any excuse to dismiss the idea.

    I have not encountered any other political/economic topic (other than bank money creation), that triggers such a strong and emotional reaction in people - it's pretty fascinating :)
    If you take the time to calmy/dispassionately/unemotionally think it through though, and determine whether this is a real possibility (as well as - importantly - learning how inflation works, how it is not determined by psychology and how much people subjectively value money), then gradually, it will completely and irrevocably change your view of all of both politics/economics, and you won't be able to view worldwide political/economic topics in the same way ever again.

    I know that probably comes across as (rather extreme) hyperbole, but I honestly believe that's one of the few things you can learn - more than any other topic/subject - that will teach you more about how messed up the world is politically, and more about how to fix worldwide political/economic issues, than any other topic you can think of (I view it as that important a topic).
    Unfortunately, it's also one of the most difficult topics that there is, to express in words and properly convey to people.


  • #55
    Eugene Norman
    Closed Accounts Posts: 5,191 ✭✭✭Eugene Norman


    Isn't the idea though that there is no net creation of money if one man's debt (the buyer) is another man's money (the seller) on deposit.

    Increases in net money supply must come from somewhere else.


  • #56
    KomradeBishop
    Closed Accounts Posts: 4,981 ✭✭✭KomradeBishop


    You're precisely right, in that neoclassical/mainstream economics treats it as if "there is no net creation of money if one man's debt (the buyer) is another man's money (the seller) on deposit".
    Neoclassical is the dominant economic school (probably 90+% of economics courses teach neoclassical economics), and predominantly, it teaches this.

    However, if you think about it - treating one mans debt, as the other mans deposit (this part is true), as if there is no net creation of money (this part is false) - is inherently flawed (not just flawed in my view, but completely insane), because it means:
    1: Neoclassical economics completely ignores the role of Private Debt in the economy (and this is completely insane, because the entire post-2007/8 economic crisis, was actually caused by the levels of Private Debt becoming unsustainable - just look at figures of 'Private debt to GDP'; they reached historical highs, and now we are in debt deflation now as a result of this - it is actually Private Debt levels that are holding back economic recovery; something neoclassical economics ignores completely), and

    2: Obviously, Private Debt takes quite a lot of time to repay - so ignoring the role of Private Debt, as if there is no net creation of money, means completely ignoring the time difference between the debt being issued, and the money being repaid - how can this possibly make any sense? Where else in the economy, can you think of accountants advocating ignoring debts? It's totally irrational.

    3: Roughly 97% of the money in the entire economy, is made up of money sourced from loans. If this is true, and if loans carry interest, then where does the money for the interest come from? The total stock of 'Debt' in an economy (which incurs interest every year, on a regular basis), almost always exceeds the total stock of 'Money' - meaning it is literally impossible for all Debts to be paid off, as the money required for paying off debts, has to come from further debts.

    So, as you can see, how the monetary system functions, is the single most important thing in an entire economy - it also happens to be the single thing that economists understand the least.


  • #57
    KomradeBishop
    Closed Accounts Posts: 4,981 ✭✭✭KomradeBishop


    A new Bank of England paper, elaborates on some of the consequences of what Endogenous Money (banks creating money when they make loans) means:
    http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf

    This paper describes how 'loanable funds' theory, has been a key part of macroeconomic models - even ones developed since 2008 - and how that theory is wrong, and thus leads to serious errors in these economic models:
    Since the Great Recession, banks have increasingly been incorporated into macroeconomic models. However, this literature confronts many unresolved issues. This paper shows that many of them are attributable to the use of the intermediation of loanable funds (ILF) model of banking. In the ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. But in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.

    One of the other big notable things here, is that people are often taught that Savings leads to Investment (because under 'loanable funds' theory, saving in a bank, leads to those savings/deposits being loaned out and invested) - this is false however, because under Endogenous Money, Investment actually leads to Savings (because a loan being taken out and put into an investment, creating new money in the process, leads to that newly created money ending up in the savings/deposits account, of those it has been invested in) - this upends the basis of a lot of economic thinking and economic models in yet another way (as they often assume S->I):
    Furthermore, if the loan is for physical investment purposes, this new lending and money is what triggers investment and therefore, by the national accounts identity of saving and investment (for closed economies), saving. Saving is therefore a consequence, not a cause, of such lending. Saving does not finance investment, financing does. To argue otherwise confuses the respective macroeconomic roles of resources (saving) and debt-based money (financing).

    The document also expands/clarifies, on the fact that the 'Money Multiplier' idea of banking is wrong, that banks face no reserve limits - that the quantity of bank reserves, is actually determined by the lending itself (of course, there are other limits, which the document goes into):
    This finally takes us to the venerable deposit multiplier (DM) model of banking, which suggests that the availability of central bank high-powered money imposes another limit to rapid changes in the size of bank balance sheets. The DM model however does not recognise that modern central banks target interest rates, and are committed to supplying as many reserves (and cash) as banks demand at that rate.
    The quantity of reserves is therefore a consequence, not a cause, of lending and money creation.


    Further into the document, there are statements such as this - that macroeconomic models of the economy, completely ignored the role of banks (and thus, the role of the monetary system - since banks are the main outlet of created money - and of the nature of money itself, since that is also central to banks) - this should make it clear to people, just how utterly backwards and insane economic teaching is, that something as important as banks, the monetary system, money creation, and money itself effectively, had been ignored by economists! (it is no wonder then, that we stumbled into the current crisis - economists were neglectful in a way that should have completely destroyed the professions credibility, for ignoring something so important, which - ignoring that - directly led to the economic crisis)
    In the wake of the 2007/8 financial crisis, the role of banks in the economy has attracted more attention than at any time since the 1930s, with policymakers clearly recognising the importance of a healthy banking system for the real economy. Macroeconomic theory was however initially not ready to provide much support in studying the interactions between banks and the real economy, as banks were not a part of most macroeconomic models. The reason is that for many decades the private banking system had not been seen as an important source of vulnerability, so that almost all interest in banks and in prudential banking regulation was of a microeconomic nature.
    ...
    The Great Recession changed this dramatically. Among policymakers, this culminated in the recent debates over the Basel III framework and other regulatory initiatives. Academic macroeconomics also started to pay attention to the role of banks and of prudential banking regulation. However, as emphasised by Adrian, Colla and Shin (2013), in this new literature there are many unresolved issues. We will show in this paper that many of these are due to the fact that this literature is almost without exception based on a version of the intermediation of loanable funds (ILF) model of banking.

    In a bit I cut out from the middle of the above, the document gives a shout out to the Post-Keynesian school of economic thought (Steve Keen, and MMT'ers - Modern Money Theorists - are some predominant Post-Keynesians), as the only economic school that did pay attention to this:
    This is in stark contrast to the preoccupation of the leading macroeconomists of the 1920s, 1930s and 1940s with the problems of banking, which after the 1950s continued only in a small part of the profession, with the work of some post-Keynesians.
    A lot of right-leaning posters on Boards like to mock Post-Keynesian views and try to shout them down (all of my own economic views are Post-Keynesian, and I'd identify as Post-Keynesian) - yet here is the Bank of England lending significant credibility to that school of thought, as being the only school of the 60 years prior to the crisis, to understand banks and money creation correctly.

    Another shout-out to PK's in the document:
    Charles Goodhart (2007), the UK’s preeminent monetary economist: “... as long as the Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians ... have been correctly claiming for decades, and I have been in their party on this.”

    So, this should be a good hint to budding economists and enthusiasts, to start analysing the Post-Keynesian school and learning its views, in great detail - I'd recommend Steve Keen as one of the best among them.


    Later in the document, it also expands well on the history of knowledge that banks create money - how it became accepted in the 1930's, yet thereafter the consensus view eventually reverted to 'loanable funds' again:
    However, this debate did not continue much beyond the 1960s, as the macroeconomic and monetary functions of banks disappeared almost entirely from mainstream macroeconomic theory. As a result, many important insights of the past have been forgotten, and need to be relearned today.

    Overall, the document does a thorough job of trying to address a lot of the common counterarguments and fallacies, surrounding the debate around bank money creation.


  • #58
    KomradeBishop
    Closed Accounts Posts: 4,981 ✭✭✭KomradeBishop


    Really excellent paper, from the inventor of Quantitative Easing, Richard A. Werner, evaluating the three different theories of money creation, and empirical tests which support credit/endogenous theory:
    "A lost century in economics: Three theories of banking and the conclusive evidence"
    Link


    Towards the end of the paper, there is an important evaluation of the state of economic teaching and research, which points to the corruption/censorship of economic research/narrative - though it points out that this needs further study:
    Progress in economics and finance research would require researchers to build on the correct insights derived by economists at least since the 19th century (such as Macleod, 1856).
    The overview of the literature on how banks function, in this paper and in Werner(2014b), has revealed that economics and finance as research disciplines have on this topic failed to progress in the 20th century.

    The movement from the accurate credit creation theory to the misleading, inconsistent and incorrect fractional reserve theory to today's dominant, yet wholly implausible and blatantly wrong financial intermediation theory indicates that economists and finance researchers have not progressed, but instead regressed throughout the past century.
    ...
    The analysis of the fractional reserve and financial intermediation theories in this paper and in Werner (2014b) provides indications that attempts were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and lead them away from the important insight that each individual bank creates new money when it extends credit.
    ...
    Many economists appear to have been aware of the fact that banks create money out of nothing, but chose to de-emphasise it, or even produce analysis that contradicts it.
    ...
    That such important insights as bank credit creation could be made to disappear from the agenda and even knowledge of the majority of economists over the course of a century delivers a devastating verdict on the state of economics and finance today.
    As a result, the public understanding of money has deteriorated as well. Today, the vast majority of the public is not aware that the money supply is created by banks, that banks do not lend money, and that each bank creates new money when it extends a loan.
    ...
    The question whether the sequential introduction of the incorrect fractional reserve and financial intermediation theories of banking [...] was intentional or not requires further research.
    Research should focus on the role of interested parties, especially that of internationally active banks, central banks and privately funded think tanks, in influencing academic discourse.

    It is worrying, for instance, that the topic of bank credit creation has been a virtual taboo for the thousands of researchers of the world's central banks during the past half century. As Cheng and Werner (2015) show, among the 3882 research papers produced and made available online by five major central banking research outlets (Federal Reserve Board Washington, Federal Reserve Bank of New York, Bank of Japan, European Central Bank, Bank of England) in the two decades to 2008, only 19 articles even included the words ‘credit creation’.

    Of these, only 3 seemed to use the term in the correct sense of bank creation of credit and money.
    ...
    A former central banker in a rare frank interview discusses this issue [...] and suggests that central banks have been engaging in ‘information management’, by purposely controlling and shaping the research they publish.

    Senior staff approve the research topics and check, modify and censor articles written by the central bank researchers before delivering them to the public.

    In this process, what is considered a ‘harmful truth’ gets weeded out, while what is considered useful for the central bank remains.
    ...
    ...investigative journalists have pointed out that the editorial boards of leading journals in economics and especially monetary economics are staffed by current or former employees of and consultants to central banks, particularly the US central bank. More research on the ‘information management’ policies of central banks, think tanks and even universities is called for.

    Even though this isn't conclusive and points to a need for further research, it's something that - in my opinion - every single economics and finance student should take singular interest in, as being the most important issue to focus on in both fields of research.

    If these fields of study are as corrupt as the above indicates, then students in this field have a responsibility to educate themselves about that and root it out (even if just for the sake of their own intelligence/knowledge) - because nobody else is better suited to.


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