Re: Modern Money Theory and You
Posted: Mon 01 Oct 2018, 18:29:37
A few ears ago I never thought I'd ever say that, but monetary theory might be more important to our future than 99% of topics discussed on this site. A few years ago I still thought that central banks create all money, because I never cared to read about it. In case anyone is still interested, here's more on MMT, money creation and the modern banking clusterfuck:
https://positivemoney.org/2018/09/moder ... ive-money/
https://braveneweurope.com/positive-mon ... y-and-debt
"One important point should already be clear: both MMT and Positive Money constitute part of a much broader trend that began to accelerate rapidly following the global financial crisis. The capacity of the banking sector to disturb the entire economy no longer lying in doubt, many economic reformists concluded that a new perspective on money, banking and finance should be placed front and centre of the push to construct a better world.
An important fight for those who have been working for years in the heterodox economics space has been to deny the so-called ‘loanable funds’ model of how money cycles round the economy, and the attendant ‘money multiplier’. A loanable funds account claims that there is a stock of available savings in the economy that aspiring borrowers can access. As in all things according to orthodox economics, the equilibrium between the demand and supply of such funds determines the interest rate. Banks in this theoretical world act only as neutral intermediaries for this process and the central bank is able to influence the money supply by issuing reserves; loans grow in some fixed proportion to reserves – the ‘multiplier’ – as set out by reserve requirements.
According to Adair Turner, former head of the UK’s banking regulator, this model is ‘completely mythological’. This way of understanding money and banking is by now utterly discredited: the Bank of England, Bundesbank and US Federal Reserve have all released papers explaining just how far the facts of modern banking diverge from the loanable funds paradigm.
Nevertheless, the model somehow retains a hold on the academic economics establishment in the remaining bastions of orthodox practice. (For instance, papers occasionally emerge that make an attempt to salvage the theory: we know, for example, that it only works as a model ‘when there is no uncertainty and thus no bank default.’ Under what real-world conditions we can expect there to be no uncertainty is unclear from the paper in question.)
For now, suffice to say that both MMT and Positive Money are committed to a denial of the loanable funds model and a description of the much more accurate endogenous theory of money. Endogenous money creation means that the money supply expands and contracts according to decisions made within private financial entities. One major source of new money is the process of bank lending. When banks write new loans, they assign a new liability (the customer’s new deposit) and a corresponding asset (the loan) to their books. New money is created. When a loan is repaid, money (and the spending power that deposit represents) is destroyed.
What MMT and Positive Money both maintain (and here both are in line also with Post-Keynesian economists, another major heterodox school) is that because the current system works along the lines described by endogenous money theory, the orthodox approach to reforming finance and money is irremediably flawed. Money can be created, but at the moment the primary actors doing so are private banks. The next step is to urge a solution.
..."
That's where the plot thickens.
https://positivemoney.org/2018/09/moder ... ive-money/
https://braveneweurope.com/positive-mon ... y-and-debt
"One important point should already be clear: both MMT and Positive Money constitute part of a much broader trend that began to accelerate rapidly following the global financial crisis. The capacity of the banking sector to disturb the entire economy no longer lying in doubt, many economic reformists concluded that a new perspective on money, banking and finance should be placed front and centre of the push to construct a better world.
An important fight for those who have been working for years in the heterodox economics space has been to deny the so-called ‘loanable funds’ model of how money cycles round the economy, and the attendant ‘money multiplier’. A loanable funds account claims that there is a stock of available savings in the economy that aspiring borrowers can access. As in all things according to orthodox economics, the equilibrium between the demand and supply of such funds determines the interest rate. Banks in this theoretical world act only as neutral intermediaries for this process and the central bank is able to influence the money supply by issuing reserves; loans grow in some fixed proportion to reserves – the ‘multiplier’ – as set out by reserve requirements.
According to Adair Turner, former head of the UK’s banking regulator, this model is ‘completely mythological’. This way of understanding money and banking is by now utterly discredited: the Bank of England, Bundesbank and US Federal Reserve have all released papers explaining just how far the facts of modern banking diverge from the loanable funds paradigm.
Nevertheless, the model somehow retains a hold on the academic economics establishment in the remaining bastions of orthodox practice. (For instance, papers occasionally emerge that make an attempt to salvage the theory: we know, for example, that it only works as a model ‘when there is no uncertainty and thus no bank default.’ Under what real-world conditions we can expect there to be no uncertainty is unclear from the paper in question.)
For now, suffice to say that both MMT and Positive Money are committed to a denial of the loanable funds model and a description of the much more accurate endogenous theory of money. Endogenous money creation means that the money supply expands and contracts according to decisions made within private financial entities. One major source of new money is the process of bank lending. When banks write new loans, they assign a new liability (the customer’s new deposit) and a corresponding asset (the loan) to their books. New money is created. When a loan is repaid, money (and the spending power that deposit represents) is destroyed.
What MMT and Positive Money both maintain (and here both are in line also with Post-Keynesian economists, another major heterodox school) is that because the current system works along the lines described by endogenous money theory, the orthodox approach to reforming finance and money is irremediably flawed. Money can be created, but at the moment the primary actors doing so are private banks. The next step is to urge a solution.
..."
That's where the plot thickens.