by Bill Mitchell
The Bank of England released a new working paper on Friday (May 29, 2015) – Banks are not intermediaries of loanable funds – and why this matters – which further brings the Bank’s public research evidence base into line with Modern Monetary Theory (MMT) and, thus, further distances itself from the myths that are taught by mainstream economists in university courses on money and banking. The paper tells us that the information that students glean from monetary economics courses with respect to the operations of banks and their role in the economy is not knowledge at all but fantasy. They emphatically state that the real world doesn’t operate in the way the textbooks construe it to operate and, that as a consequence, economists have been ill-prepared to make meaningful contributions to the debates about macroeconomic policy.
Here are the two substantive conclusions of the BoE first so you know where we are heading. The authors conclude that:
1. “The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist.”
In other words, the mainstream economic models that pervade textbooks and teaching programs in economics are fantasy – they analyse institutions that “do not exist”.
2. “in the real world, there is no deposit multiplier mechanism that imposes quantitative constraints on banks’ ability to create money in this fashion. The main constraint is banks’ expectations concerning their profitability and solvency.”…….
Bill viitab Mark Thomale:
….So while a few years ago, MMT was vilified by US macroeconomics academic Mark Thoma who said ““I think it’s just nuts” (Source), the large central banks are now letting Dr Thoma and his mainstream ilk know just what they think of his viewpoint.
Thoma and Mankiw, both academic commentators with prominent public profiles represent what is wrong with economics. They teach and prosletyse theories that are not applicable to the real world we live in……
Mul oli endal ka oma mäletamist mööda Thomaga kokkupuude tol ajal ja ta teatas, et keeldub suhtlemast kõigiga, kes rahakordajat ei aktsepteeri. Ma siiski astuksin Mark Thoma kaitseks välja, sest täna on ta oma meelt muutnud:
One of the biggest mistakes we made in fighting the recession was the failure to target and repair household balance sheets. Bank balance sheets were restored, but household balance sheets were left in shambles. The result is that the economy has suffered as households have used their paychecks to restore what has been lost, and pay off debt instead of consuming goods and services …
It isn’t easy to admit mistakes, especially when they look so obvious in retrospect. But the alternative to admitting and learning from mistakes is to cling to incorrect beliefs and risk repeating the errors. After all, there are plenty of new mistakes to be made, and I’m sure I’ll make my share.
Mark Thoma, respekt