Mathew Forstater writes:
"In terms of bank finance and credit, etc., I should probably just
say that
if it was not obvious I had in mind the literature on endogenous money and
finance, which views private banks and the Central Bank in a fractional
reserve banking system as having the ability, through various institutional
mechanisms at its disposal and financial innovations induced by profit
opportunities, to accomodate the demand for credit.(see, e.g. Wray's book
_Money and Credit in Capitalist Economies_)
So, crudely put:
the demand for credit by investors leads banks to extend credit as long as
there are profits to be made. Investment takes place which increases
incomes in the economy. Some of the new higher income is spent on
consumption, some is saved. The savings are deposited in bank accounts,
replenishing depleted accounts and creating new ones."
This invokes the incredible fairy tale we (some economists) tell our
students, but which is not true. I already suggested in my response
to Anne that she check the impossibility of banks creating credit
literally from thin air with the bank balance sheet. But Mathew
avoids doing this, and comes back repeating one of the "lies my
teachers told me," to borrow a phrase from Larry Boland's recent book.
Also talk to someone versed in the field of finance or accounting,
and you'll find that few besides some economists believe the fairy
tale. So here it is again: Banks as INTERMEDIARIES transfer
purchasing power deposited with them by savers to borrowers. And
they do NOT, repeat NOT, lend more than they have received from
savers. In fact, because they have to keep legal reserves in most
countries, and also their own economic reserves (aka excess
reserves) for their day-to-day operations, they lend a lesser amount
than they receive in deposits. A good textbook in money and banking
will also show this. I believe a careful reading of Adam Smith's
Wealth of Nations on the role of banks will also confirm the point.
James Ahiakpor
CSUH, Hayward
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