[lsiq]

Banks create the money supply (~97% of it). A bank "loan" is not a legally a loan at all but a new security that is created and purchased by the bank. Furthermore, the money for that purchase does not come from any other account or "fed reserves" it is literally instantiated in the account. This "credit creation" theory of the money supply is what the article is about and was empirically proven by the work of Richard Werner.

This is a very important level of understanding, and one that is obfuscated by the central banks.

Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.

What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity to acquire FINITE real estate and SEMI-FINITE stock. You can see how that ratio will repeatedly create asset price inflation which inevitably implodes along with the banks who issued the loans.

The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie. If done, the economy would grow at a high clip with low inflation. The current system of credit creation for leveraged buyouts ad infinitum of a slow growing economic pie, has only one logical outcome....

[jasmer]

"Once understood, it is self-evident that banks are wholly responsible for asset bubbles. "

No, it's not remotely.

They are no more responsible than the counterparts to the loan.

Every loan a bank makes comes with risks to the bank.

This idea you have about what is a 'productive investment' or not is fairy interventionist.

Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive?

If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks.

The banks make the loan if the collateral and risk line up - that's what they do.

They are not in the business of deciding what is good for the economy overall, nor should they be.

Finally, that banks create the money is not 'obfuscated' moreover, the amount of leverage in the system is actually controlled by the central bank by setting reserve requirements.

I suggest there's a lot of misunderstanding in our comment.

[lsiq]

"When someone buys a building to lease out flats, is that not productive?"

That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally.

"it's the fault of those speculators for the speculating, not the banks." Both the speculators and banks respond to financial incentives and must work within the laws.

"This idea you have about what is a 'productive investment' or not is fairy interventionist." Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600?

It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.

[atq2119]

> When someone buys a building to lease out flats, is that not productive?

Why would that be productive? Would the previous owner have left the building empty? If so, why, and isn't that an issue that should be addressed first?

Maybe you have other scenarios in mind where a change of ownership isn't the only thing that happens, but then the productivity is, at least to the first order, due to that other thing, not due to the change of ownership.

[brabel]

> They are not in the business of deciding what is good for the economy overall, nor should they be.

> This idea you have about what is a 'productive investment' or not is fairy interventionist.

So, banks do not give a damn about what's good for the economy (while having enormous power to drive economies), but you believe interventionsim is bad anyway?

Also, if you don't know what a productive asset is, you just need to read a little bit: it's not hard to know.

[unity1001]

> If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks.

It doesnt matter whose responsibility is it if it screws up the entire economy. Breaking everything for everyone is not something that should be allowed regardless of justification.

[roenxi]

> Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive?

In theory there is a powerful argument here, but in practice I am suspicious because when people attempt to start settling trades in, say, gold the police will soon get involved.

If we're appealing to principles of freedom of opinion, there has to be a really good justification for why we all have to agree with the bank's opinions on who is creditworthy? I think somewhere in the mess I'm being robbed, and everyone being forced to participate in the system is not allaying my suspicions.

It is the old argument against socialism - while there is often not a good argument against the individual parts; it is the communists building the wall to keep people in. Looks kinda suspicious and the people controlling the monetary system see little reason to compromise or allow people to choose the best personal options.

[JumpCrisscross]

> bank "loan" is not a legally a loan at all but a new security that is created and purchased by the bank

No. Bank loans are legally loans in all competent jurisdictions and definitely not securities. (One can securitise loans, e.g. leveraged loans, but that's separate from lending.)

> a very important level of understanding, and one that is obfuscated by the central banks

What? Central banks somewhat consolidate credit creation. Credit has always been the basis of money, even in the commodity era.

[yxhuvud]

> definitely not securities.

Well, the obligation to pay back the loan itself may not be a security, but the receivership of the money that is paid back is usually packaged into a security, so that the entity that give out the loan may not be the one that is eventually paid back for it. Banks package and sell the rights to get the money back.

[lifeisstillgood]

The bit I don't get is where there can be An accurate (?) measure of the productive capacity of ... anything. So under MMT as Inunderstand it the idea is it's feasible to create money to level of productive capacity - via government purchase of that capacity to build roads and buy policing services etc.

Wartime economies get more "productive" because the government is able to divert resources to its needs (ie stop being a hairdresser and work in the arms factory) - thus increasing the productive capacity.

So, if the government wanted to (peacetime) redirect resources it would have to bid for services at a level that encouraged hairdressers to become munitions workers - and then create money to pay for that.

And they create money through (ok lots of pieces I don't get but I think it's QE ala Richard Werner).

This is typified by a thought exercise: if the government simply replace fiat money with a crypto fiat (ie all money is in bank of englands blockchain ledger ) then suddenly private banks cannot make loans becaus they cannot create money on that blockchain. But the bank of england could ... and this is equivalent of QE except much cleaner and more obvious.

But ... and we eventually get to my point ... if money creation is taken away from banks (regulation, 2008 crash, crypto) and in theory banks are close to the real world and able to judge if loaning money for a factory is a good idea - then how does one judge how much money should be created ?

I am dubious of "we measure inflation" because not just lag but the fairly common view of "prices go up while RPI stays flat"

And since money creation is tied to collateral, and collateral is basically land, land absorbs all money creation in end - which is where we see our land price issues - and essentially means money creation is rich get richer.

If we could break the link between collateral and increasing productive capacity there might be a flowering of equality.

This is turning into a long ramble - apologies

[havnagiggle]

Just in the first half of your comment, it reminds me of Diane Coyle's long standing argument that the GDP, and many productivity indexes, are just very sexist and not for any real reason other than our patriarchal government, and economics specifically.

Here's an interview podcast with her, but I am not sure if that is the one covering her book on the subject or if that came later: https://pitchforkeconomics.com/episode/how-should-we-measure...

[imtringued]

The problem with land is that you can't produce it. Producers arbitrage the interest rate and the profit rate of manufacturing until the difference is almost zero. But you can't produce land so the cost of land goes up instead.

[abigail95]

This is like MMT inspired nonsense, lower interest rates from central banks aren't causing lower growth.

We have lower growth, so we have lower interest rates. Increasing rates would decrease the price of assets, as we've just seen from the past 12 months. The purpose of that was to handle the NGDP overshoot from covid.

> The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments

Just plain stupid. I don't even know what this means or what the policy would look like.

> new housing, factories, machinery, or firms, because those are not inflationary

Obviously wrong. What does inflation mean? An increase in the price level. If you increase demand all else being equal, what happens to the price of something?

By the way - that's the whole point of central banking affecting interest rates. To lower the cost of credit so aggregate demand increases (which is inflationary).

You need to give me a really good thesis on why increasing the cost of credit for """"semi-finite""" assets causes lower growth. The gall to end this with "only one logical outcome" smh.

Edit:

It's like you live in post 2008 fantasy land where aggregate demand is depressed forever. We do not live in this world.

[WalterBright]

Sorry, that's incorrect. Banks loan out money that is backed by collateral. This money is indeed created. But when the loan is paid back, the money is destroyed. The money tracks the value in the economy, so the inflation is zero.

What the fed does is create money that is backed solely by the fed promising to pay it back in the future. But the money is paid back by issuing more debt! Hence, inflation.

[yxhuvud]

This

> The money tracks the value in the economy,

Does not imply this

> so the inflation is zero.

I do agree that the assertion holds true in most cases, but it break down during extreme environments - widespread bank collapses or when the productive ability of the economy is sharply reduced. Loans that cannot be repaid break the equation at some point.

As for government spending, it greatly depends on what it does with the money, and also on taxation. The government promises to pay back money based on future taxation, and if the taxation grow faster than the debt then there won't be any inflation.

[csomar]

Theoretically, yes. Technically, however, these people are getting bailed out. That makes inflation. The government still have to pay for the debt, but it seems like it’s not happening anytime soon (the debt ceiling just keep getting higher and higher).

US government debt is around 31.5 Trillion $$ at the moment. If the US government were to pay its debt today, all that liquidity will be removed from the market and this will have enormous deflationary pressures.

In the same way for private individuals, if you can always keep renewing your debt and pricing your assets higher (a bubble would help), you’d create inflation.

[catears]

> The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie.

I struggle to see exactly what you are advocating for. If a family wants to buy a house, they will generally have to take out a loan to cover the upfront cost and pay off the loan over a long period of time. However, the loan is not a "productive investment" (no new assets are being created, only traded) and as such the central bank should regulate normal banks to not be allowed to issue loans for existing houses.

Without the ability to take out a loan for a house, I think we can all see how no normal family without 20-40 years of combined salary payments would be able to afford a house. Is this in line with what you are suggesting, or is it something else?

I'm not trying to be asinine, this is just my interpretation of your suggestion and I am trying to understand what you are suggesting.

[neilwilson]

"Banks create the money supply (~97% of it). "

They create all of it. God knows where the 97% comes from. We don't have silver coins any more, and even they were tokens for a promise.

It was empirically proven by Keynes by in the 1930s. Werner was way behind the curve.

It's not new knowledge. Reginald McKenna published a book on it in the 1920s.[0]

"What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity "

Wrong. The entire system is a liquidity provision for existing stuff. It is systemically limited by physical collateral and risk limits within banks. If a bank takes on too much risk then it goes bust and the shareholder capital is wiped out.

There is no asset bubble. Artificially intervening in the market for money (which is what interest rate setting is) suppresses the price of assets, which means insufficient are produced.

We're seeing that now as the house builders go into hibernation - another round of stop start in the construction industry - which is one of the reasons why they tend to use subcontractors rather than hire and train employees.

Channelling the stability process via the banks, and thereby making them 'special' means we can't let the standard process of capitalism, bankruptcy and loss of capital, control the risk limits in banks.

[0]: https://new-wayland.com/blog/post-war-banking-policy/

[medion]

Out of curiosity, can you wax lyrical a bit more on construction? I’m about to build a house but I’m considering holding off for 12 months to see what happens with materials prices. Particularly steel. Not too concerned about contractors as I am building myself.

[bArray]

> Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.

This is probably the best part of what you wrote. Loans are typically given to help purchase a finite resource, helping increase demand for limited supply, having the overall effect of inflation.

The person who gets screwed is the person who saved their money. Now, when they withdraw it to buy an asset, it costs more, because the bank allowed somebody else to buy it.

An IRL example I see is tonnes of young people driving around in brand new cars on finance. Not a single one of them can afford the car they apparently own. Now I, as somebody who saved to buy their car, will need to pay more because the bank increased the demand for these cars so much.

The problem really occurs when high numbers of people start defaulting on these loans, and the things they purchased were highly inflated at the time of purchase. Even if the bank goes to collect the asset, they will find it's not worth what was originally paid, but they are still missing a large amount of money not originally factored into their risk.

Needless to say, 2023/2024 is about to get really bad.

[PragmaticPulp]

> The person who gets screwed is the person who saved their money. Now, when they withdraw it to buy an asset, it costs more, because the bank allowed somebody else to buy it.

I don’t know needs to hear this, but I should remind everyone that putting your long-term savings in cash is, and always has been, a guaranteed way to lose to inflation. Long-term savers should be using a mix of bonds, CDs, stocks, and money market accounts depending on time horizons and risk tolerance.

[eru]

In your theory, why do banks both with deposits at all?

[neilwilson]

Loans create deposits. Balance sheets have to balance.

The loan creates the advance, and the advance is transferred to the credit of another person - which is either directly the payee, or the bank where the payee has the account.

Simple double entry accounting.

[csomar]

They don’t which is why they have become hostile to customers in the last 10-20 years. Especially with negative interest rates, the customer is a net negative. Still, people with money are usually the people who generate most business for the bank (either via loans or by buying other products), but it helps to have your account there first.

[nobrains]

>> but a new security that is created <<

What is a "security" ?

[tomhoward]

A financial asset – a stock, a bond, a loan contract, a promissory note, a bank note, a warrant, a future, an IOU...

https://en.wikipedia.org/wiki/Security_(finance)

[JumpCrisscross]

> only solution is to get back to sound money

Gold buggery, now crypto, is an old scam. In truth, sound money has never existed.

And it cannot exist. Value is a subjective measure on reality. Transporting that across time requires work. Expecting to get that transport for free is the perpetual-motion problem of finance.

[neilwilson]

There never was any sound money. It's always been a promise.

Money is just "here's a pig, owe me one" in token form.

[pwdisswordfisha]

Sound, being ephemeral, is pretty useless as money. I'm glad we moved past it.

[mikaeluman]

You do realize that central banks decide the time value of money by setting interest rates?

This is the central issue causing the system to behave erratically.

The irony of it all: the only place for socialism in our economies is the monetary system. No surprise it doesn't work well.

[imtringued]

The central bank only controls the nominal "time value of money". The money holders have a big impact on the real "time value of money". Why haven't you looked there?

Also, the system behaves erratically even when there is no central bank. In fact, the erratic behaviour becomes even more frequent. That would imply that private market participants are a bigger factor in erratic behaviour than central banks.