Krugman seems to be on the
Krugman seems to be on the ball here, but even his opponents accept that if a bank made a loan without already having the money to lend then it would immediately have to borrow that money (a point crankier currency cranks miss)This quote from Krugman which you cite (from the New York Times of 30 March) is worth adding to the collection (I like his title too “Banking Mysticism”):
Quote:
As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.This is all wrong, and if you think about how the people in your story are assumed to behave — as opposed to getting bogged down in abstract algebra — it should be obvious that it’s all wrong.First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage.