Goddamit, don’t these people think?

What is currently taught?

Economics textbooks across the world, some of them first published in the 1960s, continue to teach students a model of the monetary system in which commercial banks act as intermediaries, that only move existing money around the system, like lubricant in a machine. Many economics courses rely on the models in these textbooks, without recognising the empirical evidence that undermines them. This gives an unbalanced view of the way the monetary system functions and of the role of banks in the economy.

How is money created?

As research from the Bank of England, Bundesbank and numerous academics has shown, banks are not intermediaries channelling pre-existing funds from savers to borrowers. Commercial banks create the vast majority of money in circulation. Unlike other financial institutions, they create money when they extend loans to borrowers. In the process of extending a loan, banks do not move pre-existing funds from any other account but newly ‘invent’ the money by crediting the borrower’s account. Therefore, banks’ lending is constrained by borrowers’ demand, profitability considerations and financial regulations, not by pre-existing funds (i.e people’s savings) nor by central bank reserves. This reality is in line with the credit creation or endogenous money theory, which is absent from most current economics textbooks and teaching.

Banks create credit, or wide money, they do not create money, or base money. M4 that is, not M0.

But apart from that here’s an A level revision text:

How Modern Commercial Banks Create Credit

Banks create credit by extending loans to businesses and households – pure and simple!
They do not need to attract deposits from savers to do this
When a bank makes a loan, for example to someone taking out a mortgage to buy a house, or a business taking out a loan to finance their expansion it credits their bank account with a bank deposit of the size of the loan/mortgage.
At that moment, new money is created!

“Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.”

If it’s in the A level syllabus then I think we can assume that it is being taught, no?

30 comments on “Goddamit, don’t these people think?

  1. Hurrah, it is Friday so it is MMT day. We can create all the money we want, so Tuesday’s plan to steal everyone’s pension is no longer required, yes?

  2. Economics textbooks across the world, some of them first published in the 1960s

    I wonder if the penny will drop with him that books can be revised in later publishes…

    Who’s Who was first published in 1849 but I bet it doesn’t just contain famous people from 1849 any more, see?

  3. Oh dear, you said revision text. Does that mean it’ll get marked as correct? Please say no.

    Also did you also spot the possible opening?
    JOB BOARD
    Head of Economics
    The Haberdashers’ Aske’s Boys’ School, Elstree

  4. Economics textbooks across the world, some of them first published in the 1960s

    He’d be agitating for it to be shut down within a week of being employed

  5. without recognising the empirical evidence that undermines them

    Fuck me. Says the man whose entire shtick is undermined by evidence.

  6. “If it’s in the A level syllabus then I think we can assume that it is being taught, no?”

    Well up to a point Lord Copper…

    I’ll get my coat.

  7. OT, again. I was fascinated how in the UK the actual university degree didn’t matter that much, one could have geography degree and become a chartered accountant. Biochemistry from Oxford can make you a head of marketing in a hedge fund. I once knew a pharmacist who was an options trader, and a medical doctor ran a pharma fund. In Europe this is simply not done. How long does it take to teach a smart ambitious history BA from Cambridge to trade credit default swaps and understand the underlying economics and markets? One month.

  8. Jussi, there are plenty of examples of well-accredited academic economists who have little to no understanding of financial markets. However, an undergraduate history degree with a demanding syllabus will tend to provide many examples of the impacts of financial crises, exchange rates etc. Obviously these areas are not covered in courses focusing on wimmin or GLBT or aboriginal inhabitant history

  9. Also, in the 1970s, the oldest philosophy fellow at Magdalen College, Oxford, reckoned that he was able to keep up with economics (so that he could cover 2/3 of the PPE syllabus) simply by re-reading Adam Smith, Ricardo and Keynes in the summer vacation

  10. Diogenes

    The Philosophy fellows at Oxford colleges tend to far smarter than their peers in econ and politics.

    Jussi

    Not all humanities students can do trading – they do require some basic understanding of maths and stats. Historians and classicists tend to make quite good investors if they can do the maths- a sense of perspective helps.

  11. OT – fuck me… I thought the Yanks were all live free tough guys who wouldn’t put up with this shit?

    https://reason.com/2019/11/06/a-michigan-man-underpaid-his-property-taxes-by-8-41-the-county-seized-his-property-sold-it-and-kept-the-profits/

    ‘A Michigan Man Underpaid His Property Taxes By $8.41. The County Seized His Property, Sold It—and Kept the Profits.’

    Interested

    They are very tough guys, with their guns and no nonsense attitude to big government, and especially if the state was to practise such blatant extortion, not even Corbyn would go that far.

    Dennis himself regularly assures us of this – and I for one believe him. That article is simply fake news.

  12. It might be my growing senility but what was the name of the Pre-Newmania troll who always used to babble on about this on this blog? There was this wretched paper ‘Money creation in the modern economy’ which he used to quote ad nauseam

  13. If it were DBCR, he always used to quite sources but without ever managing to convince that he had actually understood them. In that, he was a step above Facepainter

  14. Ken

    It always amused me that PPE students tended to do as little economics as possible, probably because, after the first year, it seemed to mutate into a branch of mathematics? Was that the result of Samuelson and does he dominate economics teaching to the same extent today?

  15. It’s vastly worse than back then. I wouldn’t get into the LSE today. Couldn’t pass the maths requirements for entry.

  16. I’ve always thought economics is best thought of as a branch of moral philosophy, per Smith and one or two others.

    When I was at the LSE, I had to do stats for my pol science Masters. They really tried to treat it as a science.

    Interesting and useful but I confess it wasn’t my thing (ie. I was no good at it).

  17. My boss was a Cambridge maths graduate, 23 years old and was running options trading at Bankers Trust, and that was only the start, now I believe in Monaco with a cool 100+ million. Super smart. Loved spreadsheets, ever a problem, “Move over, let me do the riding…” bish bash boom, a few macros and bits of code in 3 minutes and he would give his verdict…either “yes, you’re right, close enough for cooking” or “nope, does not look right”. He would always provide a solution on the fly.

  18. @Diogenes

    “It always amused me that PPE students tended to do as little economics as possible, probably because, after the first year, it seemed to mutate into a branch of mathematics”

    Not just undergrad PPE students, but even MBA courses have tended to make their economics courses ridiculously technically heavy for the needs of many of their students. Yeah, someone managing something in a bank or insurance firm or whatever I could get the point. Someone on an MBA because they’ve spent years curating a museum / selling clothes online / got involved in the administrative side of the hospital or university department they worked at, and in the end have reached a point senior enough in the organisation that someone’s said “look, you’re really more of a manager now than anything else, isn’t it about time you got an MBA so you can climb higher up the tree?” is never going to spend their working life sitting down to write simultaneous equations for supply and demand, or numerically solving Stackelberg/Cournot/Bertrand competition models. Let alone need to grab their normal distribution table and have a bash at Black-Scholes. I’ve seen it at many business schools and it’s bananas, because even those who learn parrot-fashion how to solve the equations have no idea what any of it means in practice, whereas basic economic literacy – a solid conceptual grip on basics like inflation, interest rates, business cycles, exchange rate risk, implications of imperfect competition, elasticity and so on – would be genuinely useful for almost all of them. But it means I make a decent part of my living doing private MBA tuition for perfectly intelligent and successful people who just don’t happen to live in numberworld.

    Someone (ahem) changed the Oxford MBA economics syllabus to render it actually reasonable. Best job I’ve seen of one and I have tutored people from dozens upon dozens of unis. Which is great, though as I used to get a lot of clients from that course in its prior incarnation (a terrifyingly mathematical exam) this has proven quite expensive for me!

  19. “They do not need to attract deposits from savers to do this”

    Hmmmm well this isn’t really the full story is it? Because although they may not specifically need a deposit from a saver they do need to attract funding. Interbank borrowing, bonds, central bank facilities – whatever.

    Otherwise the bank could just print their own assets and not require liabilities, and therefore generate as much equity as they liked.

    Or am I wrong?

    The part that bugs me is that the ‘banks print money’ crowd tend to paint a picture like they just write their own cheques, so to speak.

    I’ve always found it more beneficial to understand credit creation through the borrower spending the money with a supplier, who then deposits it themselves with their own bank, which then permits the cycle to continue

  20. @Anon November 8, 2019 at 9:19 pm

    +1

    Fortunately we had Craig (Econ, Yale) on our MBA course who provided free Econ tutorials and recommended a “Common Sense” book which explained Black-Scholes

    Tim W is good at doing same

    Numbers: I believe arithmetic is more important than mathematics

    @Oblong

    +1

  21. Spud is in the FT letters section again this morning demanding that pension funds should be forced to invest in green state run projects…Stalinesque

  22. Oblong – “they may not specifically need a deposit from a saver they do need to attract funding”
    Correct, my understanding too. Northern Rock mortgage operation was effectively get international funding, flip it at a higher retail rate in the form of individual mortgages. Make margin and profit on the difference. The international market dried up loss of confidence over hidden liabilities, and massive defaults in the pipeline. Northern Rock could no longer flip so no margin to cover costs of business. So no business. The depositors bank run being the rational thing that happens when people twig the business is in trouble.

    I’m still holding out hope that this Study guide is not reflective of the exam board’s idea of a correct answer. Ideally an A level question which asks “how is money created and how did Northern Rock fail?” would tease out the clever pupils whatever they were taught.

  23. Having read the link, I think I know where the issue arises. Whilst it is trivially true that a bank making a loan to a borrower will credit their account with a deposit, that deposit is going to walk out of the door the next day. So it does not obviate the need for separate funding.

  24. Well, “Banks making loans and consumers repaying them” is probably the important bit, in that notionally the retail bank magics half a bar out of thin air on a wet Tuesday afternoon for your mortgage, but the amount of new money that persists after you’ve paid it back is negligible by comparison. And it could be negative.

  25. Oblong yes. they stop the story after the personal banker punches in some numbers in the banks system and say hey presto new money. Wind forward to the end of the day some trader is being told we need x amount from the markets to cover our sales—- get on it.

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