So, why did Northern Rock go bust then?
Because it expanded its loans faster than its deposit base. That’s what we’re told at least:
Had Northern Rock instead expanded its lending – and created the type of money used by the public – at the same rate as other banks, it would have found that its daily inflows of central bank reserves roughly matched its outflows (since the payments from its customers to other banks would be cancelled out by payments from other banks to customers of Northern Rock). It is unlikely that it would have become so dependent then on interbank lending to be able to make its payments. The very reason why Northern Rock went bust was the sheer speed at which it was creating money through issuing loans, which created a massive outflow of deposits which had to be settled by securing the reserves from somewhere.
Well, no, not really, because those deposits created by its own lending, they were heading out the door too – recall those lines waiting for their money back?
Still, their correction of my argument does end up confirming my argument.
Banks don’t create money, they create credit. It’s central banks that create money. The entirety of their confusion coming from money pus credit equals one measure of the money supply.
As a guide to their level of accuracy:
It’s worth considering who’s most likely to be accurate: a Daily Telegraph journalist and the commenters on his blog, or the Deputy Governor of the Bank of England and other banking officials quoted here.
They think I work at the Telegraph. Hmm…..