Banking Buffoonery, Modeling Mysticism And Why Paul Krugman Should Be Sweatin' Bullets

Tyler Durden's picture

Submitted by F.F.Wiley via Cyniconomics blog,

old lady and krugman

We have a few things to say about the recent debunking of established monetary theories.

In case you missed it, the Bank of England issued a report in March explaining that standard textbooks get money and banking all wrong.

The authors point out that banks don’t wait for deposits before making loans, as often claimed by academics. It’s the other way around. Banks create new deposits when loans are made, for this is how loan proceeds are delivered to the ultimate recipients. The fact that deposits then slosh around from bank to bank has no bearing on future loan issuance, which is always matched with newly-created, not old, deposits.

Moreover, the role of bank reserves is badly botched by academics. Central banks don’t use the monetary base (currency plus reserves) as a tool to constrain lending, contrary to textbook descriptions of the so-called money multiplier. Rather, bank reserves are supplied by central banks “on demand”. The authors explain that policymakers normally don’t “fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

The media conveyed these points with unusual excitement for such a bland topic. But the bigger story goes beyond banking fallacies to a between-the-lines message about economic modeling.

Effectively, the BoE joined forces with the rebels in economics who’ve long argued that standard models are bunk. To see the connection, you only need to recognize that bank lending isn’t pure financial intermediation as assumed by modelers (leading them to ignore banks entirely), but a direct stimulant to spending because it creates purchasing power without prior savings.

Moreover, the BoE’s report discredits many well-known pundits, some more so than others. We’ll pick on one from the “more so” category: Paul Krugman.

Krugman is an obvious choice, for two reasons. First, we don’t expect his favorite methods to survive the BoE’s truthiness, as we’ll argue in a moment. Second, he’s surely one of the nameless “commentators and bloggers” referenced in the report, and whom the authors would like to set straight.

A fight that Krugman wishes he’d never picked

Consider the brouhaha that followed Krugman’s claim, in a 2010 paper co-written with Gauti Eggertsson, that he had built a model channeling the late Hyman Minsky. Apparently, Krugman had never read Minsky, or maybe he did but didn’t quite comprehend what he was reading. Minsky rejected the fallacies that Krugman embraces.

Here are a few telling pieces of the long exchange triggered by Krugman’s paper, beginning with the prominent Minskyite, Australian economist Steve Keen:

Keen:  [N]eoclassicals like Krugman read Minsky, and then proceed to build equilibrium models without banks, and think they’re modelling Minsky. … No they’re not: they’re creating an equilibrium-obsessed Walrasian hand puppet and calling it Minsky. … One key component of Minsky’s thought is the capacity for the banking sector to create spending power “out of nothing”—to quote Schumpeter.


KRUGMAN:  I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand … Banks don’t create demand out of thin air any more than anyone does by choosing to spend more; and banks are just one channel linking lenders to borrowers.


Keen:  [T]he empirical evidence overwhelmingly supports the case Krugman is trying to dismiss out of hand, that banks can and do “create credit out of thin air”, with the supposed regulatory controls over their capacity to do so being largely ineffective.


KRUGMAN:  I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; … This is all wrong … any individual bank does, in fact, have to lend out the money it receives in deposits.


Commenter Dan Nile:  I have worked in bank lending. Bank loan investors can in fact write checks out of thin air … they are different from other financial intermediaries in having the privilege of issuing credit (fungible with currency) at will.


Commenter Ron T:  Ms Kaminska from FT Alphaville laughs at one chap who “just discovered” that banks create money ex nihilo. She says this could have been “news” in 1913. Apparently, it is still news to Swedish Bank prize laureates 100 years later… Bankers know this full well, the street knows this, time for the ivory tower to catch up.


Commenter Neil Wilson:  I strongly suggest you spend some time at a bank and understand how they actually conduct operations … There is no reserve limit … Failure to understand the buffering nature of banks *will* lead you to the wrong economic model. This is why you missed the great crash.


Commenter hangemhi:  Paul – no shouting, and you’ve been rebutted, quite convincingly, about 20 times in 29 comments. What’s your reply?


KRUGMAN (replying to commenters):  It’s obvious that many commenters don’t get the distinction between the proposition that banks create money — which every economics textbook, mine included, says they do (that’s what the money multiplier is all about) — and the proposition that their ability to create money is not constrained by the monetary base. Sigh.


Scott Fullwiler:  Krugman demonstrates that he has a very good grasp of banking as it is presented in a traditional money and banking textbook. Unfortunately for him, though, there’s virtually nothing in that description of banking that is actually correct.

We doubt that Krugman recognized how silly he looked when he called his adversaries “banking mystics” – the title of his second post excerpted above. Maybe he does now, though, considering that the mystics are backed by the authority of none other than the Old Lady of Threadneedle Street.

Modeling mystics

Once again, though, the bigger issue has to do with the way that banking feeds into models. Krugman’s challenge is that he hitched himself to the model that defined macroeconomics for three decades after World War 2 – the IS-LM model.

His more mathematical peers can hide behind the jumbles of equations known as DSGE models, which rule academia today. DSGE modelers can tweak assumptions and equations at will to deflect criticisms, even as none of their formulations actually work.

But Krugman swears by a framework that looks just as it did when introduced by Sir John Hicks in 1936, and one that’s easily explained to a layperson.

In Hicks’s IS-LM model, central banks are assumed to control the money supply, private banks are treated as mere intermediaries in the credit markets, and these two sides of the economy are thought to be separate and distinct. With these assumptions, IS-LMers can claim to find a happy equilibrium that brings together the presumably independent markets for money and credit.

If you believe in the model, you also have to believe textbook concepts such as:

  1. “Banks are just one channel linking lenders to borrowers.”
  2. “Banks don’t create demand out of thin air any more than anyone does by choosing to spend more”
  3. “Banks’ lending is limited by their deposits.”
  4. “Money is constrained by the monetary base.”

Conversely, if you understand that textbooks aren’t valid and money and credit markets are anything but independent, it’s ridiculous to put any faith in IS-LM. And while the model isn’t mentioned anywhere in the BoE’s report, it’s easy to make the connection.

The Old Lady will get her way

Make no mistake, the report got Krugman’s attention, notwithstanding his cool-as-a-cat response (which skirts the issues at hand and ignores the contradictions between his well-documented positions and the BoE’s reality check).

As possibly the profession’s loudest IS-LM advocate, he knows the stakes.

Even without the BoE, he was fighting a losing battle, considering the increasing attention on banks after the Global Financial Crisis. This was one takeaway from the early 2012 debate excerpted above. While most people interested in the economy are busy searching for the reality that lurks behind failed theories, Krugman defends the same old, same old, based on the inaccurate claim that bank lending is no different than other forms of credit creation.

With the BoE’s report, we expect economists to leave Krugman’s side more rapidly than they otherwise would. It’s uncomfortable to take a position on monetary matters that contradicts the world’s second oldest central bank and the first with a monopoly on currency issuance. Old-time Keynesians and Monetarists using IS-LM can easily ignore private bankers who point out that their assumptions aren’t valid, but the BoE is a different story.

What’s more, misconceptions about banking aren’t the only problems with the way that economists use IS-LM. The model was unhelpful from the start, as more or less agreed by Hicks when he called it nothing more than a classroom gadget. In time, we expect the rest of the profession to join Hicks in condemning the notion that IS-LM has any practical value. It may take awhile to weed out the stubborn holdouts, but if we’re right in expecting the demise of Krugman’s economics, it’ll be well worth the wait.

(Click here for an appendix with more discussion of the IS-LM model. Also, for empirical analysis of the differences between bank lending and other types of credit, see our earlier post, “3 Underappreciated Indicators to Guide You Through a Debt-Saturated Economy,” and the accompanying “technical notes.”)

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RacerX's picture

Krugman = asshole

Pladizow's picture

"By-2005-or-so-it-will-become-clear-that-the-internets-impact-on-the-economy-has-been-no-greater-than-the-fax-machines." - Paul Krugman

imaginalis's picture

Does Krugman spout his theories because he believes them or does he spout them because it brings him enormous benefits?

TheFourthStooge-ing's picture


Krugman = asshole

In the illustration at the top of the page, he looks like Paul Buttplugman.

Combine the illustration with your correct observation, and the conclusion one reaches is that Krugman is full of himself.

Dewey Cheatum Howe's picture

And after being shot with bullets Mr. Krugman's medical records will be avaliable to the Federal Government for Biosurvelliance purposes for reasons of 'national security'.

The federal government is piecing together a sweeping national “biosurveillance” system that will give bureaucrats near real-time access to Americans’ private medical information in the name of national security, according to Twila Brase, a public health nurse and co-founder of the Citizens Council for Health Freedom.

The Department of Health and Human Services’ (HHS) Office of the Assistant Secretary for Preparedness and Response is currently seeking public comment on a 52-page draft of the proposed “National Health Security Strategy 2015-2018” (NHSS).

The deadline for comment is 5 pm EST on May 21st. (See Draft National Health Security Strategy 2015-2018.pdf)

“Health situational awareness includes biosurveillance and other health and non-health inputs (e.g., lab/diagnostics, health service utilization, active intelligence, and supply chain information), as well as systems and processes for effective communication among responders and critical health resource monitoring and allocation,” the draft states.

But Brase warns that the NHSS proposal would allow the federal government to monitor an individual’s behavior before, during and after any government-defined health “incident” – which could be anything from a local outbreak of the flu to a terrorist anthrax attack.

“It’s very broad. It doesn’t seem to have any limits, except they say something about, you know, properly protecting the data. But from our perspective, if the government gets access to this kind of data, [and] is allowed to do research with the data…then our privacy has already been compromised. The government has already said that our data is their data for their purposes of national health security,” Brase told

“It’s very clear to us that really the government is moving toward real-time access, toward close collaboration of government and doctors for ready access to the electronic medical record and then to conduct research and analysis.”


But Brase warns that the government’s biosurveillance plan is much more intrusive than the data collection currently being done by the Centers for Disease Control and Prevention (CDC).

“We’re of the mind that the Fourth Amendment actually means something, so you can’t access everybody’s patient’s medical record just because you say there is a security threat or just because you say it’s good for the American public,” she told

“But the fact of the matter is that [the Health Insurance Portability and Accountability Act] HIPPA already allows the federal government and the state government and the local government and anyone who is a public health agency to have access to our medical records - identifiable medical records - without our consent. It’s in the HIPPA Privacy Rule, which has the full force and effect of law. But that wasn’t actually put in by Congress. It was put in by the Department of Health and Human Services.” (See HIPAAPrivacyRegs_EconomicStimulusChanges.pdf)

One of the dangers, Brase pointed out, is that this vast amount of medical data warehoused in a giant electronic database will only be available to government-approved researchers.


“Is this a juggernaut that’s unstoppable at this point” asked Brase.

“It is not unstoppable,” she replied. “HIPPA is a data-sharing law. It has noting to do with privacy. HIPPA and the HITECH Act (part of the 2009 stimulus bill) together already allow 2.2 million entities to have legal access to your private medical records without your consent, and that is a federal number in the 2010 federal regulation.”

Those entities include hospitals, pharmacies, physicians’ offices, diagnostic imaging centers, medical equipment suppliers, home health services, outpatient care centers, health insurers, third-party administrators and any of their business associates.

“But the one thing that HIPPA says is that if the states create a stronger privacy law, then  everyone in that state must conform. Minnesota and Iowa are two of the states that have stronger privacy laws with more restrictions on access. And every state could do that and make it difficult for the federal government to implement this entire thing.

“For instance, they’d have to get your consent before they put you in a health information exchange. They could require consent for any kind of public health purpose, and therefore challenge the federal government to tell them exactly where the federal government thinks they have a right to gather all this information for public health purposes,” Brase told “There’s all sorts of things states could do if they had a mind to do it.”


Australian Economist's picture

Jeez, is nothing sacred?


If it's recorded, the government want's it.



Miffed Microbiologist's picture

I'm tired of being right. I screamed from the roof tops HIPPA was the first step of government intrusion into patient privacy. Everyone rolled their eyes and told me this was simply security for unauthorized release of info. Then mandatory e- records occurred. Get a fucking clue people can't you connect the dots? Oh Miffed, why are you such a negative Nellie all the time? E records will make health care more efficient and prevent medical errors you simple wit. Better up your meds and don a tin foil hat with all that doomer talk.

So, I said fuck it, your on your own people. I rarely visit a dr, take no meds and invest in my own health through proper nutrition and exercise. I don't participate in the "voluntary" health screening at work every year,where in exchange for BMI analysis, BP, glucose, and cholesterol screening, they pay $50. They assure all their info will be kept private. Out of 70 people I'm the only non participant. Once info is in the hands of this government there is no going back.


centerline's picture

The information will be used as they see fit of course.  As has been demonstrated over and over again.  The necessary legal framework has already been put into place.  It really is that simple.  Organic growth is dead and we are squarely in a new era.  It scares the shit out of those whose power is derived from existing systems/organizations.  


nmewn's picture

"I don't participate in the "voluntary" health screening at work every year,where in exchange for BMI analysis, BP, glucose, and cholesterol screening, they pay $50."

Yeah, that bullshit became mandatory IF you wanted THEIR benefit (health insurance) while being employed by them there this a crock...nothing like sticking an ice pick in the eye of the morale of 80% of your employees...its only a small minority that participate, "voluntarily".

It is of course, a group policy, so we know what the fuck is going on. HR will skim through the individual results (which they're not supposed to have because a third party did the screening and stated INDIVIDUAL results would not be shared with the company), to find out who the sickest are, the overweight, the drinkers, the smokers, the diabetics etc. and when the next layoff rolls around, off with their heads.

Unfortunately for them, they put that shit in writing (that I printed out & saved) as to the anonymity of the screening process...guess who's number the third party vendor "coach" called (that only corporate has) that they are not supposed to have access too?

I'm not sickly...but I am pretty good at laying in the weeds , it'll be fun ;-)

Miffed Microbiologist's picture

Their intent is so obvious to anyone that understands history or plays chess. Do they teach logic any more in schools? The writing has been on the walls for many years but people are just uninterested. When checkmate occurs it will be interesting to watch. Nice to know another is watching as well. Stay alert.


MeelionDollerBogus's picture

In skool they now teach law-jik. Whatever people in charge say is a rule or law you follow or you get punished. Sing, Obey and kill yourself with a proud smile for a slow-motion flag.

slipperyPete50's picture

I've taken it one step further, I'm fifty and have been miffed since my father wrote little numbers on my first check when I was 14. That's what you have to pay the govment for being allowed to work for me he says. I never got over it. Rarely visit a doctor? I'm never going to a doctor ever again. I've currently got a cancer expanding on my forehead. Feck doctors feck uncle sam feck em all. I have to work, they get the option to steal from me since I do. They ain't getting anything from me when I have a say so.

TheSecondLaw's picture

Nothing comes from nothing. There ain't no such thing as a perpetual motion machine. Energy cannot be created. And there endeth the lesson.

orez65's picture

"Nothing comes from nothing."

Except fraudulent fiat money.

Americans in the 19th Century would think that we are idiots who believe that paper notes are money.

Our "great public school teachers" have failed us!

hbjork1's picture

"..great public school teachers"?  The great teacher has become the "Boob Tube".  This generation is also unlearning vocabulary, writing and spelling skills and has reverted to Morse Code like "texting".  The really great teachers have an uphill struggle.

Duc888's picture



Love it.

They pull money out of their ass, loan you debt and charge interest.

I can't wait until EVERYTHING is financialized!


Sheer genius.


cpzimmon's picture

I thought everone already knew that Krugman does'nt understand what the word "bullshit" means.

withglee's picture

To see the connection, you only need to recognize that bank lending isn’t pure financial intermediation as assumed by modelers (leading them to ignore banks entirely), but a direct stimulant to spending because it creates purchasing power without prior savings.


There must be infinite ways to get it wrong. Spending "is" a "promise to complete a trade". Since it's simple barter for FRNs or accounting balances, it happens like all simple barter ... on the spot.

There is no "stimulant" for trade. A trader sees an opportunity to take what he is willing to give up and offer it for what he wants. He can do this in simple barter on the spot. Or he can do it over time and space (like buying a house with monthly payments). He "creates money" by getting his trading promise certified. When he delivers on his trading promise he returns this money and it is extinguished. In the meantime it circulates as a valued item of simple barter ... because it works.Under proper management it is guaranteed zero INFLATION. Under improper Fed management it is targeted at 2% leakage and delivers 4% leakage ... both tolerable in short time frames (days or weeks) but not over long time frames (like a 30 year promise to trade for a house).

Purchasing power comes from trader's ability to deliver on their trading promises. It has nothing to do with banks and stimulants. Banks can only restrict trade. They cannot stimulate it.

malek's picture

You will never stop sprouting your nonsense here, will you?

Also the article talks mainly about lending, not spending.

withglee's picture

You will never get it will you?

The article talks about "lending" as "creating money". In actual fact, "traders create money by making trading promises". Lending certifies those promises in the form of money or account entries. When the trader delivers on his trade he returns the certificates (i.e. pays down the loan) and the certificates are extinguished.

Local banks are just the retailers. Regional banks tend more toward wholesaling. Central banks are central supply depots. And international banks are the factory (nearly all owned by Rothschild). All serve to restrict trade. They cannot stimulate it (just restrict it less than usual). They all enjoy government protected monopoly status.

It doesn't have to be that way.

centerline's picture

A world circled endless by trades that cannot ever be unwound demonstrates that creating money is not by traders.  Else, the world would have already hyperinflated into oblivion.

Actual money creation begins when someone who is actually on the hook for something signs on the dotted line which occurs at the local level... the retailer per se.  The resevese are sought after the fact... and in modern banking, leveraged far beyond ever imaginable limits.

St.L Fed charts speak for themselves.  They have nothing to hide because the real damage is off stage (shadow banking).

Nice try.

withglee's picture

Actual money creation begins when someone who is actually on the hook for something signs on the dotted line which occurs at the local level... the retailer per se.

Have you ever been to a house closing? You are not "on the hook" until you, and everyone else involved in the deal, signs everything. At any point in that process, someone can refuse a term and the whole deal is off ... with no money ever created.

Maybe you should try buying a house before you make such silly comments that are false on their face.

centerline's picture

Own one.  Many actually.  I was the one on the hook in the end for every one.  Everyone else got paid by my signature.  If the deal did not close, no one else was on the hook except the seller, who had the asset/equity in the first place.

The money was "created" by MY signature and nothing before that.  period.  As claimed.   Not by traders.  Only "leverage" is added after my signature... recursive gains.

And your position is what?  That money creation occurs somewhere else in the structure?  By traders?  Remind me again of your point since it seems lost.


edit: you rmistake is thinking that "trading" is creation of money.  It is in fact only an intermediary step.  A commitment for the creation of money.  Not actual money creation.  Actual producers and consumers are the level at which real economic activity takes place and the only level at which real money creation can actually take place.  In complex systems, different layers of systems are necessary.  When they become predatory, we have a problem.


withglee's picture

The money was "created" by MY signature and nothing before that.

So you do get it. You, the trader, created the money that went to the buyer. You did it with a promise to make monthly payments. I think you need to expand your view of what a trader is. A trader is anyone who makes a trade. You and I and everyone else make dozens of them every day, mostly in simple barter where we exchange "money" for goods and services. But that money is first created by traders (e.g. you when you sign on the line ... i.e. make a promise ... to complete a trade). Any one who buys a car or a house with a promise to make periodic payments is a trader ... creating money.

Bernanke, doing QE is "not" a trader. He is making no trading promises whatever. He is a counterfeiter.

Don't try to make this so difficult.

centerline's picture

I would prefer to narrow it actually, because it too easily includes those who only work with leverage.

withglee's picture

A world circled endless by trades that cannot ever be unwound demonstrates that creating money is not by traders.

All trading promises are unwound on delivery ... when the money is returned by the trader and extinguished. If the trader does not deliver, the money is left circulating with a DEFAULTed trading promise. As you suggest, it must be recovered or it will circulate forever diluting all the other trading promises in the marketplace. This is mitigated by INTEREST collections equal to the DEFAULTs. This guarantees zero INFLATION of the Medium of Exchange by the relation: INFLATION = DEFAULT - INTEREST. Simple arithmetic.

Now, when governments roll over their trading promises they are DEFAULTing. And when they pay INTEREST far below these DEFAULTed amounts, they are INFLATING. In other words, the government (and the Fed that controls it) are deadbeat traders.

With a properly managed MOE their trading promises would incur such large INTEREST collections that they would obviously not be viable. Thus governments would have to resort to taxes, tariffs, and fees for funding. The "borrowing" option would be eliminated through their own abuse.

malek's picture

Hello Paul, is that you?
You are stuck in the IS-LM thinking just as he is.

centerline's picture

The sheer notion of actual credit creation debunks your nonsense.  Let alone the idea of globalization - competing currencies - Greshaw's Law - etc.  Oh, unless of course you believe in the same already-proven-as-bullshit concepts of how banks really work and closed system analysis.  lol.

Christ-almighty... you arent even in the same zip code to begin having a conversation around here.

Fuck off.

Cognitive Dissonance's picture

Watch Krugman finally change his position, which in turn will win him a second Nobel prize.

<His second failure will be rewarded, as was his first.>

malek's picture

Devil's advocate: How come Obummer hasn't already received a few more then?

Cognitive Dissonance's picture

We won't know the magnitude nor the entirety of his failure until near the end of his second term.

Stay tuned to this channel for future updates.

TheFourthStooge-ing's picture

Funny how one of the commenters on Krugman's blog obliquely insulted him by referring, correctly, to Swedish Bank prize laureates.

Bay of Pigs's picture

Paul Krugman is a sorry sack of shit.

Eternal Complainer's picture

Krugman - meet egg on face!

What a dolt!

centerline's picture

Steve Keen, in a supreme dumbass move, attempted to take on Krugram on his own slanted, closed-system turf.  Got his ass handed to him.  Serves him right.

That is where my personal opinion of Mr. Keen went down the toilet.  Up to that point, he seemed to have real promise.  Now retracted into his world of economic simulation (cool work though).  Chasing the wrong angle IMO.  Just another wannabe Mises.

malek's picture

I cannot condemn Steve Keen for not realizing that Krugman feels validated when the majority of people believe his message, while more reality-based people only claim to be right when their message correctly stated current relationships and/or predicted future developments.

It took me a while to realize it too.

centerline's picture

Lost me man.  Sorry.  I dont want to misinterpret here.

I listened to alot of Steve Keen back around 2009 and so.  Watched him say some really smart things that transcended modern economics.  Watching him make some real basic tactical errors and then retreat was a real disappointment.  As an engineer with extensive systems analysis background, I appreciate what he is trying to do - but I also see it's flaws.

malek's picture

There is this famous analysis about forum discussion members:
"Some people are trying to win the argument to win over the group, others are trying to win over the group to win the argument (the first type are usually men, the second women.)"
Look to understand this sentence first, and it's implications.

Krugman is knowingly spreading lies, mostly cleverly concealed through half-truths and omitting facts, to win over the group (his column readers). He doesn't give a shit if his argumentation holds water or is fallacious and on some latter day clearly turns out to be false, he only wants his followers now to swallow it hook, line, and sinker - then he has won!
[And I must add Krugman is too intelligent to fail to understand he is writing drivel that can never work in the medium to long term - so this is deliberate by him.]

People like Steve cannot argue with him on a rational basis because Krugman isn't interested in being right in a rational way.

And I'd be careful about demurring tactical errors - in the end honesty would most of the time be a tactical error too.

centerline's picture

Thanks for the clarification!  I agree regarding Krugman of course.  As for Steve, it was a big tactical error - but borne of something other than honesty.  He tried to take on the BS from a BS master.  Steve is better than that.

WMM II's picture

"The Old Lady will get her way"



that's the only part of the article i understood.



BrosephStiglitz's picture

See also:  Why deflation is unlikely, and why real, liquid assets are so important in a state of shrinking global growth.

Devotional's picture

BES - one of Portugal's biggest banks: It has been found that they laundered money for terrorist groups. This news came out about an hour ago. Yes, the bank is in the crapper apparently.

This is a big deal in Portugal, this is a TBTF bank over here. 

free_lunch's picture

The only news there is about southern banks in our local press is that the banks of spain confiscated 50.000 houses in 2013, wich is 11% more then in 2012..

centerline's picture

OK.  Another round for shit and giggles...

Krugman, like most other notable economists, lives in a closed system where the math makes sense.  In said realm, he is actually more correct than he is wrong... which says alot about how very smart he really is.  Seriously.  No shit.  Anyone who calls him stupid is the idiot.  Rather, he is just a player...

Like other economists and mathematicians before him, he is a political tool.  He knows it.  And plays along.  Nobel prize should be shoved up his pompous ass for it.

Shit, I have even watched Steve Keen fall from grace via similar mechanisms.  Shame on him too.   Fucking wanker sell-out.



DOGGONE's picture

ALL of the powers-that-be keep nearly unseen by the people these compelling histories:
The Public Be Suckered
MASSIVE deception by omission, from sea to shining sea. It is repulsive what silence money can buy in our USA ... today.

Spungo's picture

"There is no reserve limit"

That's not true at all. Modern banks do not have CASH reserves, but they are required to have CAPITAL reserves. Big difference. The bank doesn't need cash reserves because liquidity is provided by borrowing money from the central bank. The central bank creates new money to do this. When the money is paid back to the central bank, it is destroyed. The bank's capital reserves are things like government bonds, corporate bonds, and mortgages. Suppose the bank is sitting on $10 worth of government bonds but they have no cash. The bank can still issue $100 of credit to someone (newly created money) because they have $10 of capital in reserve. They are not allowed to issue an unlimited amount of credit. The credit is constrained by capital reserves.

Every country has different capital requirements. I was looking at the 2013 annual report for CIBC, a Canadian bank, and it said they have 9.4% capital reserves. That's actually quite high compared to US banks, and the reason is that Canada has higher capital reserve requirements for their banks, but their banks do not have cash reserve requirements.

Relating to deposits, banks are not constrained by how much money is on deposit. The cash you give to the bank is only one form of capital. A huge majority of the bank's capital is in the form of mortgages. They don't like to sit on cash because cash doesn't have cash flow. Why keep $10 cash as reserve when you can keep $10 worth of government bonds in reserve and collect interest on those reserves? It almost sounds criminal when I'm forced to write this down. You give the bank all of your money and they pay you zero interest. The bank uses that money to buy government bonds that pay 3% then it creates money out of thin air when you ask for your money back. It's so criminal that I want to buy some bank stocks after they see a major price correction.

I guess this could theoretically lead to an infinite loop of money creation. I put $10 in the bank. On their balance sheet, it shows they have $10 of capital in the form of cash and they have $10 liability to pay me back. From that same bank, I get a $100 loan; this is newly created money using the $10 capital as reserve. Now their balance sheet says they have the $10 I gave them on deposit plus the $100 loan (the loan is a bank asset because they are collecting interest on it). They still have a $10 liability if I ask for my deposit back. Now the bank has $110 in reserve. Now I can ask them for a $1000 loan. Repeat this cycle an infinite number of times and you have a situation with infinite money creation. 
The cycle is limited by how many loans the bank can issue, and the loans are risk weighted. 

Uh so yeah, banks are do not just bridge the money creation process. The banks are probably the biggest part of money creation.

GreaterFool1965's picture

Good points, only one correction - deposits at a bank are a liability of the bank, not capital.  That's the point most ppl don't get, you deposit money at a bank, you are making a loan to that bank.  At a bank:

Loans = Assets

Deposits = Liabilities

The other thing most ppl don't understand is that preferred stock of the TBTF banks is counted as tier 1 capital of thousands of smaller banks.  If the TBTF banks fail, that preferred stock becomes worthless and thousands of smaller banks also necessarily fail because their capital has just evaporated, even if they aren't suffering from high delinquency rates.  That's the real reason the TBTF banks are TBTF.  If they fail, all US banks fail.