Lecture02A MoneyCreationAntiFractionalReserveBanking

Summary

The lecture challenges mainstream economic theories about money creation, arguing that textbooks' explanation of fractional reserve banking is incorrect. It highlights that contrary to popular belief, banks do not simply lend out deposits but actually create money through lending. The speaker criticizes the lack of acknowledgment of this perspective by economists and textbook authors, despite central banks like the Bank of England and the Bundesbank refuting the traditional model. The lecture emphasizes the importance of understanding the role of money and credit in economic cycles, suggesting that mainstream economists' disregard for money creation leads to flawed economic models.

Takeaways

• 📚 Mainstream economists are criticized for not understanding the true nature of money and its creation, contrary to what is taught in traditional economics courses.
• 🏦 The concept of fractional reserve banking is often misunderstood; banks do not simply lend out deposits but actually create money through the lending process.
• 📉 The Bank of England and the Bundesbank have both refuted the money multiplier model, stating that bank lending creates deposits, not the other way around.
• 🤔 Despite evidence from central banks, mainstream economic textbooks and educators have largely ignored these findings, continuing to teach outdated models.
• 💡 Money creation is a complex process involving interactions between banks, non-banks, and central banks, not just a passive multiplication of reserves.
• 📉 The importance of understanding money creation is underscored by its impact on aggregate demand, income, and the cyclical nature of economies.
• 📈 Empirical data shows a strong correlation between credit fluctuations and economic cycles, including unemployment rates, contradicting the mainstream view that money is unimportant.
• 👷‍♂️ The role of government in money supply is significant, as it controls the creation of cash and sets reserve requirements, yet mainstream economists often overlook this.
• 🧩 Neoclassical economists tend to separate the 'real' and 'nominal' aspects of the economy, underestimating the influence of money on real economic outcomes.
• 🛠️ An alternative model for understanding money creation is presented, emphasizing the importance of accounting principles and the role of banks in the economy.
• 💻 The software package 'Minsky' is introduced as a tool for modeling the dynamics of money using double-entry bookkeeping, providing a more accurate representation of financial transactions.

Q & A

What is the main argument of the lecture regarding mainstream economists' understanding of money?

The lecture argues that mainstream economists do not understand money, as they often teach and adhere to the fractional reserve banking model, which has been contradicted by central banks.

What is fractional reserve banking according to the lecture?

Fractional reserve banking is a model where banks are said to lend out a fraction of their deposits while keeping a reserve, thereby supposedly creating more money through a money multiplier effect.

How does the lecture describe the Bank of England's stance on the money multiplier model?

The lecture mentions that the Bank of England, in a 2014 paper, stated that the money multiplier model is wrong and that banks do not act as intermediaries lending out deposits nor do they multiply up central bank money to create new loans and deposits.

What does the lecture suggest about the real process of money creation in the economy?

The lecture suggests that bank lending creates deposits, rather than banks lending out existing deposits, which is a perspective that contradicts the traditional fractional reserve banking model.

How does the lecture characterize the mainstream economic models' treatment of money?

The lecture characterizes mainstream economic models as treating money as a 'veil over barter,' suggesting that they view money as nominal and not affecting the real side of the economy, which is a perspective the lecture criticizes as flawed.

What role does the lecture suggest the government plays in the money supply?

The lecture suggests that the government is seen as being in control of the money supply through the creation of cash and setting the required reserve ratio, which has been used to blame the government for monetary problems.

What is the significance of the Minsky software package mentioned in the lecture?

The Minsky software package is significant because it is designed to model the dynamics of money using the rules of double-entry bookkeeping, providing a tool to understand and demonstrate how banks create money.

How does the lecture relate the creation of money to the cyclical nature of the economy?

The lecture relates the creation of money to the cyclical nature of the economy by stating that fluctuations in credit, which is influenced by the creation of money through bank lending, are the dominant factor behind the booms and busts of capitalism.

What is the lecture's view on the correlation between credit and unemployment?

The lecture suggests a strong negative correlation between credit and unemployment, indicating that as credit expands or contracts, it has a significant impact on unemployment, which contradicts the mainstream view that money doesn't matter.

What is the 'R square' value mentioned in the lecture, and what does it imply about the relationship between credit and unemployment?

The 'R square' value mentioned in the lecture is a statistical measure of how well the variation in unemployment can be explained by variations in credit. A high R square value implies a strong relationship, contradicting the mainstream view that there should be no relationship according to their theory.

What does the lecture suggest is the fundamental flaw in mainstream economic models regarding money?

The lecture suggests that the fundamental flaw in mainstream economic models is their naive and false models of money, which ignore the role of banks, debt, and the creation of money in the economy's cyclical nature.