On 11/20/2013 6:31 PM, [log in to unmask] wrote:
> Avner Offer is here repeating Keynes's (1930) fallacious
> claim that I noted earlier.  What am I supposed to do
> with?  I also don't know who these "writers on finance"
> are who would claim that "a substantial portion of bank
> deposits are created by loans credited to borrowers." Now
> if a bank credits a borrower's account with, say, $10,000
> and the borrower writes a check for $10,000 to pay for
> a car.  The car seller deposits the check in the company's
> bank account and the bank sends the check for collection
> to the originator (bank) of the loan.  If the originator
> of the loan didn't have $10,000 to meet the claim, what
> happens to that bank?


James's response to Avner (and to Keynes) illustrates why
economics turned to formal modeling.  The verbal analysis
is too often obscure.  Avner (like Keynes) makes a pretty
simple observation about the money multiplier, and James
gives a response that seems to deny the entire deposit
creation process.  Of course we believe James is not denying
the money multiplier, so what on earth is he talking
about?  He certainly cannot be suggesting that the
high-powered money stock always fully backs deposits,
as that is demonstrably false. So what then?  It is likely
that we will never know unless he writes down a few equations.

So again, Keynes described something simple, James claims
it is fallacious, and to back it up his claim, James gives
a fallacious description of the banking system.  The point
must be awarded to Keynes.  Again.

Of course, since the Great Recession, the Fed pumped the
banking system so full of reserves and it remains so
reluctant to lend them (and why bother, now that the Fed
pays interest on reserves?) that the money multiplier has
been below unity.  But that is certainly not typical.

Cheers,
Alan Isaac