Reply To: Another Bank in Crisis?
MMT theorists don’t say that individual banks can make money out of thin air.
They share the mainstream academic view that only the whole banking system centred on the government Central Bank can do this. In a sense this is true as the monetary authorities can issue as much money-tokens as they want. The trouble is that, if they overdo it, this will lead to a depreciation of the currency and so to a rise in the general price level. No new wealth will be created (only the application of human labour to materials that originally came from nature can do that). All that happens is that the price of already-existing wealth goes up. What these days is called “inflation”.
MMT say that this is not much of danger, at least not below the full employment (of resources as well as workers) level. It’s a new version (with a different theoretical justification) of the Keynesian view that a government can spend its way out of a slump. Which of course has been tried — and failed. So you could say that the policy has been tried even if not as such.
If applied again, the result is likely to be no more than a short-lived boost to production. The longer term result would be a rise in the general price level (“inflation”) like that that occurred in the 1970s. Stagnation + Inflation, or Stagflation.
The result wouldn’t be so bad as if the currency crank theory about banks causing problems by creating too much money out of thin air was to be implemented. Artificially limiting the amount of loans that a bank can make when it has the money to make them would provoke a financial crisis and slump because it would restrict business investment, the driver of the capitalist economy. It would be impeding banks’ role as financial intermediaries between those with money to lend and those who want to borrow money.