The Truth about Banks
Article

The Truth about Banks

Michael Kumhof and Zoltán Jakab
Finance & Development Magazine, 2016
Read the article

Read or listen offline

Amazon Kindle
automatisch generiertes Audio
  • 0.5×
  • 0.75×
  • 1×
  • 1.25×
  • 1.5×
  • 1.75×
1×
automatisch generiertes Audio

Editorial Rating

7

Qualities

  • Scientific
  • Background

Recommendation

In the wake of the 2008 financial crisis, economists and policy makers have resorted to banking regulatory reform in the belief that new rules will adequately safeguard the financial system. But that thinking lies in part on the conventional wisdom that banks act as conduits to transfer money from savers to borrowers. Yet banks actually create money, as economists Michael Kumhof and Zoltán Jakab explain in this timely commentary. Their viewpoint is not new, just forgotten since the 1930s, but it suggests a fresh approach to economic management. getAbstract recommends this scholarly article to experts in banking, finance and economics.

Summary

Modern macroeconomics postulates that banks aggregate money that they then lend to borrowers. Yet such banking entities “do not exist in the real world.” In the real economy, banks don’t lend based on their deposits; they create money to lend. A bank funds a loan by making new balance sheet entries: First, it sets up an asset in the borrower’s name equal to the loan amount, and then it creates a liability representing a deposit underlying that loan.

Before the Great Depression, economists understood this “financing through money creation.” ...

About the Authors

Michael Kumhof is a Bank of England senior research adviser. Zoltán Jakab is an economist at the International Monetary Fund.

Comment on this summary or Diskussion beginnen