Here’s he’s saying that Stiglitz is just all wrong:
As the Bank of England conceded in April 2014, the idea that banks act as intermediaries between savers and investors is just wrong. The fact that economics textbooks and economists still say they do does not, they argue, make that true: it just means that the textbooks and economists in question are wrong, they say. Which makes it all the more surprising and even shocking that here is one of the world’s leading economists making what should now be seen as an elementary error.
The reality is that banks technically do not need any deposits to make a loan: all money is created out of thin air through the process of money creation that occurs in the lending process. And money is cancelled by the repayment process. In that case banks do not allocate savers money to investment when they make loans: they create new money to provide to investors, and they have not been willing to do that.
The relationship between deposits and investment is much more remote and complex in that case. Effectively deposit taking is a service utterly distinct from lending although historically undertaken by the same institutions. What the deposit taking does provide is capital to underpin risk at very low cost. That is because money deposited in banks ceases to be the property of the depositor: it becomes the property of the bank. What the depositor is left with is a loan to a bank that may, or may not be repaid (hence the bank deposit protection schemes that would not, otherwise, be needed). So the cash deposited then becomes the bank’s risk capital in the event that they make poor lending decisions (as was seen in the case of Northern Rock). But that capital is a buffer to the bank, and not a source of funds for lending.
It is vital that these distinctions are understood now because if not serious policy errors and blame result, and we cannot afford to do that again.
He just still isn’t understanding that credit creation process, is he? By 4.30 pm on the afternoon of making a loan a bank has to have funded that loan from somewhere. That is, it must attract deposits to cover the advance it has made. It is indeed possible that the bank simply attracts back the deposit of the loan that it made, and that can be direct or through many levels of intermediaries. But it still must attract back some matching deposit. Thus there still is the matching of all deposits against all loans.
He’s got himself fixated on the very short term, what happens before the daily balancing of the books, and not grasped that there is even a longer term.