Authored by Steve H. Hanke of The Johns Hopkins University.
Since the Great Recession, politicians have obsessed over bashing banks and bankers. According to Pols of all stripes, bankers caused the 2008-09 crash and ensuing slump. To make the world safe from banks, the “all-knowing” have given us Basel III, Dodd-Frank, and a plethora of banking regulations. This has, among other things, provided Bernie Sanders and his ilk with an open field.
Analyzing the effects of bank bashing requires a model of national income determination. A monetary approach is what counts. The link between growth in the money supply, broadly determined, and nominal GDP is unambiguous and overwhelming. The accompanying chart for the G20 countries makes this clear.
So, why has the post-crisis recovery floundered? Because the growth in broad money has remained well below its trend rate. Indeed, Divisia M4, which is reported by the Center for Financial Stability in New York, is only growing at a 4.0% year-over-year rate. Since the crisis, the policies affecting bank regulation and supervision have been massively restrictive. By failing to appreciate the monetary consequences of tighter, pro-cyclical bank regulations, the political chattering classes and their advisers have blindly declared war on bank balance sheets. In consequence, bank money, which accounts for 80% of broad money in the U.S., has contracted since the crisis (see the accompanying chart). Since bank money is the elephant in the room, even the Fed’s quantitative easing and the ensuing surge in the growth of state money has been unable to fully offset the tightness that has enveloped banks and bank money growth.
Looking at the U.S., there is a ray of hope: credit to the private sector has finally started to grow above its trend rate, and the 4.0% Divisia growth rate is higher than it was in 2014 and the first half of 2015. The accompanying chart shows where we are. The growth rate for nominal final sales to domestic purchasers, which is a good proxy for nominal aggregate demand, and the growth rate for broad money are depicted. It is clear that the U.S. remains in a growth recession. The economy is growing, but at less than its post-1987 average rate.
Since early 2013, however, the growth rate of broad money has accelerated. If this continues, nominal aggregate demand growth rates should remain roughly where they are at present. The biggest risk we face is that the relentless attacks on banks continues and intensifies.