Sunday Mail discovers how banks work
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The classical saving banks were absorbed by the big commercial banks. The American Institute of Banking ( AIB ) which provided classes for peoples working for banks and financial institutions ( specially bank officers ) did not teach the theory of the thin air, they explained that banks needed depositors, They used to teach about Metropolitan Banking ( Savings, Checking and Loans ) and International Banking. The major in Finance does not teach that theory either, the theory was created outside of the banking industry and the academia
Despite regular evidence from the financial pages showing that banks do need deposits, whether from individuals or from other financial institutions, to be able to lend, the myth persists — and not only amongst open currency cranks — that banks can create the money they lend from thin air.
Yesterday. Close Brothers, which is a financial institution specialising in financing loans to buy a car, reported half yearly results:
One factor in the loss was a reduction in its net interest margin (the difference between the rate of interest paid to those who lend it money and the rate it charges borrowers). This is the source of a lending institutions’ income and, after paying running costs, of their profits.
“The group’s net interest margin reduced by 30 basis points to 7.2 per cent from 7.5 per cent.”
It is forecast to fall further this year to 7 per cent, so reducing its income.
Another reason is a fall in deposits from other financial institutions:
“Corporate and council treasurers are already voting with their feet. They pulled a net £700 million of their deposits from Close last year, reducing its non-retail deposits by 22 per cent.” (Today’s Times).
The obvious question to put to those who claim that banks don’t need deposits to make loans is: why would this matter?
“You Know Nothing About Economics” is the title of this article….
https://vocal.media/education/you-know-nothing-about-economics
That article has an appropriate title as the author does indeed know nothing about economics, at least not about monetary economics. He is a supporter of Modern Monetary Theory, or MMT. Which also stands, appropriately, for Magic Money Tree.
This theory claims that the government doesn’t need to impose taxes or borrow in order to finance its spending. It can simply create the money and spend it. True, the government could do this but it wouldn’t be creating new wealth only new money-tokens that could be used to buy existing wealth. The result of course would be Zimbabwe-style roaring inflation.
But to give them their due, they don’t claim that banks can create money out of thin air but only that the government can. In a sense this is true. Only the government can create money-tokens but if it wants to avoid debasing the monetary unit/inflating the currency then it needs to be careful how much it issues and try to guess how much the economy needs to maintain a stable (or slowly increasing) price level.
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