[Steve_American]

Book Launch for The New Economics: A Manifesto. Talk to Economic Society of Australia

[I had to use the phrase "futurely clairvoyant" because I ran out of characters. It means "clairvoyant about future events" and not about distant events.]

In this video heterodox economist, Steve Keen, was launching his book from 2 years ago.

He does explain some of the content.
1] The mainstream econ. definition says that the "Rational Agents" can very accurately predict the future. This is, of course, a fantasy. Is it any wonder that MS econ. theories almost always predict future events that just do not happen?

2] He shows that the "Loanable Funds Theory of Banking" is totally false.
And that, therefore, the use of that theory to cancel out bank credit form having any impact on the economy or GDP is not valid.
That in fact, bank credit is the most volatile part of the economy, it can be positive or negative at different times, so it is the most critical for any model of the economy. Is it any wonder that MS econ. theories almost always predict future events that just do not happen?

. . . [Frankly, I lack the economic background to follow his explanation of how he adds bank credit to the model. I'm sure some of you can understand it better than I do.]

3] He shows that MS econ. using the loanable funds theory gets it backwards. He says that MS econ., if you do the math, predicts that a rising level of debt leads to a falling GDP, but [if I understand things correctly] in words MS econ. predicts the opposite. This prediction is correct, it's just that the math predicts the opposite. Steve does the math correctly and shows what his math predicts.

4] Steve explains just how and why the so-called science of Economics is no such thing, because it has not changed for over 140 years. I'd add that it is partly because the rich like it the way it was, and they fund universities.

5] Other things as well.

Remove the [==] to view it.
https://www.you[==]tube.com/watch?v=TtOxLhwxYx8&list=TLPQMjExMTIwMjPoDenQE9PSFw&index=3

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[Truth To Power]

[I had to use the phrase "futurely clairvoyant" because I ran out of characters. It means "clairvoyant about future events" and not about distant events.]

Someone more familiar with the English language would say, "prophetic."

That in fact, bank credit is the most volatile part of the economy, it can be positive or negative at different times, so it is the most critical for any model of the economy.

Because bank credit is money -- debt money -- and debt money implies a positive feedback loop that destabilizes the economy. That is why central banks have to constantly tweak interest rates to prevent inflation or recession.

4] Steve explains just how and why the so-called science of Economics is no such thing, because it has not changed for over 140 years. I'd add that it is partly because the rich like it the way it was, and they fund universities.

The rich definitely like mainstream neoclassical economics the way it is. But the problem is not that it hasn't changed in 140 years. The problem is that it was flat wrong 140 years ago and is still just as wrong.

[Puffer Fish]

2] He shows that the "Loanable Funds Theory of Banking" is totally false.

I don't see how he does that. Of course there are other factors that can go into what interest rates will be, like inflation and perceived risk.

To explain what real meaning "the loanable funds theory being false" has, you would need to go into some explanation why it is allegedly false.
Because obviously the loanable funds theory is not completely false. So what the claim really is is that it's not completely true, but we would have to look at how exactly it's not completely true.

[Puffer Fish]

3] He shows that MS econ. using the loanable funds theory gets it backwards. He says that MS econ., if you do the math, predicts that a rising level of debt leads to a falling GDP, but [if I understand things correctly] in words MS econ. predicts the opposite.

I find it strange that you are bringing this up, since this seems to conflict with what you've repeatedly claimed and tried to argue in the Economics section of this forum before.

You let us understand you clearly. You are claiming that rising debt levels will hurt the economy and result in falling GDP?

I don't have any argument with that, but it just seems diametrically opposed and inconsistent with everything you've seemed to try to argue for before.

[Truth To Power]

You are claiming that rising debt levels will hurt the economy and result in falling GDP?

Rising bank debt increases the money supply and is thus highly stimulative, but also inflationary. It is also destabilizing, as at some point borrowers have to take a breather, and then the money supply starts to contract. That's when governments have to step in and borrow from the banks to prevent a deflationary collapse.

[Truth To Power]

Because obviously the loanable funds theory is not completely false.

It is pretty much completely false. Banks do not have to have any deposits to originate loans: all they need is a willing, credible borrower and enough capital to satisfy the BIS capital adequacy ratio. A private commercial bank can borrow any reserves it needs from the central bank. Now, obviously, it would rather borrow from depositors at a lower interest rate, but that comes with its own problems, especially unpredictability.

[Puffer Fish]

It is pretty much completely false. Banks do not have to have any deposits to originate loans: all they need is a willing, credible borrower and enough capital to satisfy the BIS capital adequacy ratio.

I think you may be mistaken about that.
I am assuming the above claim is based on your claim below.

A private commercial bank can borrow any reserves it needs from the central bank.

That may be true. It is a little more complicated than that. When the central bank expands the money (giving loans that the market would not, or providing loans for lower interest rates) then it causes inflation.

So this comes back to the Central Bank's policies and doesn't really have so much to do with policies of private banks.

It's not like the Central Bank is going to automatically print out more money because they see the private banks want to borrow more from them.
Expanding the money supply and making more loans is a very intentional policy decision by the Central Bank.

[Potemkin]

I think you may be mistaken about that.
I am assuming the above claim is based on your claim below.


That may be true. It is a little more complicated than that. When the central bank expands the money (giving loans that the market would not, or providing loans for lower interest rates) then it causes inflation.

So this comes back to the Central Bank's policies and doesn't really have so much to do with policies of private banks.

It's not like the Central Bank is going to automatically print out more money because they see the private banks want to borrow more from them.
Expanding the money supply and making more loans is a very intentional policy decision by the Central Bank.

Private banks create money ex nihilo when they lend it to a borrower, but that money is destroyed again when the loan is repaid. Problems only arise, of course, if the borrower defaults, in which case the extra money has been created but not destroyed again. If there are too many bad debts like this, then the entire financial system could be in trouble. This is essentially what happened in 2008.

[Steve_American]

I don't see how he does that. Of course there are other factors that can go into what interest rates will be, like inflation and perceived risk.

To explain what real meaning "the loanable funds theory being false" has, you would need to go into some explanation why it is allegedly false.
Because obviously the loanable funds theory is not completely false. So what the claim really is is that it's not completely true, but we would have to look at how exactly it's not completely true.

Obviously, you didn't watch the video.

OK, the loanable funds theory is completely false because banks can not by law lend out their depositors' money. They create new money with every loan. This was proved in 2014 by an experiment that included a 100K euro loan in Germany. This was followed by a paper from the Bank of England agreeing that the experiment did prove it.

In the video Dr. Keen shows that with the loanable funds theory in place, bank loans cancel out and have no effect on the economy. But, with the true theory that banks are licensed by the Gov. to create dollars or euros in place the bank loans (he calls "credit") do not cancel out. This makes a lot of difference, because the total of all new bank loans (less old loan repayments) can be positive or negative at different times in the business cycle.
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Part of the loanable funds theory is that Gov. deficits crowed out the loanable funds in banks by sucking savings out of banks to buy the bonds being sold to "fund" the deficit spending. The opposite is true Gov. deficits add to deposits in banks. Gov. deficits do not make interest rates increase by making banks choose between loaning to the Gov. or to businesses wanting to borrow to invest in increasing output. So, the theory is totally false.

[Steve_American]

I find it strange that you are bringing this up, since this seems to conflict with what you've repeatedly claimed and tried to argue in the Economics section of this forum before.

You let us understand you clearly. You are claiming that rising debt levels will hurt the economy and result in falling GDP?

I don't have any argument with that, but it just seems diametrically opposed and inconsistent with everything you've seemed to try to argue for before.

No, I'm not claiming that. Again, you didn't watch the video, or you didn't understand Dr. Keen's argument.
. . . He shows that the math says that growing private debt damages (by increasing interest payments IIRC) the GDP and so "the economy", but that economists say the opposite is true (i.e. the economists didn't do the math right). Dr. Keens shows that the opposite is true. Growing private debt does stimulate the economy by increasing spending. [You do know, I hope, that the GDP total incomes, and total spending are 3 names for the exact same thing, right?]

[Steve_American]

Private banks create money ex nihilo when they lend it to a borrower, but that money is destroyed again when the loan is repaid. Problems only arise, of course, if the borrower defaults, in which case the extra money has been created but not destroyed again. If there are too many bad debts like this, then the entire financial system could be in trouble. This is essentially what happened in 2008.

Actually, problems also arise when either people reduce their borrowing or banks tighten their lending policies.
. . . In the business cycle, during the boom, the total of new loans is more than the total of repayments on old loans. So, more is loaned out each week than is paid back on different loans. This adds income for some persons to the economy each week. [Persons is people and corps.]
. . . However, as a recession is starting, the same amount needs to be paid back each week, but people borrow less and/or banks choose to lend less. So, less can be or is loaned out each week than is paid back. This destroys dollars and so income for some persons.

[Truth To Power]

I think you may be mistaken about that.

But in fact, I'm not.

That may be true. It is a little more complicated than that. When the central bank expands the money (giving loans that the market would not, or providing loans for lower interest rates) then it causes inflation.

No. The central bank lends to private banks. It does not originate loans to retail borrowers at lower rates, it lends reserves to banks at the prime rate. It raises or lowers the prime rate to get private banks to originate more or fewer loans, and it is the private banks' excessive loan originations that cause inflation.

So this comes back to the Central Bank's policies and doesn't really have so much to do with policies of private banks.

Wrong. If a private commercial bank needs reserves to honor the demand deposit created by a loan, it can borrow them from the central bank at the prime rate. That is why private banks do not need ANY deposits to lend, and the loanable funds theory is therefore utter hogwash.

It's not like the Central Bank is going to automatically print out more money because they see the private banks want to borrow more from them.

It is actually exactly like that. It is the central bank's function to print out exactly as much reserve money as private commercial banks want to borrow.

Expanding the money supply and making more loans is a very intentional policy decision by the Central Bank.

And they do it by adjusting the prime rate, which encourages private banks to borrow more or less reserves from the central bank to originate loans. The central bank creates the reserves private banks borrow from it, just as private banks create the loan proceeds for retail borrowers, so the loanable funds theory is just false.

[Truth To Power]

Private banks create money ex nihilo when they lend it to a borrower,

No, they create it out of the borrower's legal obligation to repay it. The bank's new demand deposit liability -- the newly created money -- balances its new loan asset.

but that money is destroyed again when the loan is repaid. Problems only arise, of course, if the borrower defaults, in which case the extra money has been created but not destroyed again.

A default destroys the money (i.e., the outstanding principal) all at once, because the bank has to write down the loan asset and balance its books by commensurately reducing its demand deposit liabilities.

If there are too many bad debts like this, then the entire financial system could be in trouble. This is essentially what happened in 2008.

Yes, huge amounts of money were being destroyed by defaults, so governments had to step in and borrow enough to stop the money supply from collapsing.

[Potemkin]

No, they create it out of the borrower's legal obligation to repay it. The bank's new demand deposit liability -- the newly created money -- balances its new loan asset.

The borrower’s legal obligation to repay the money makes it sensible for the bank to create the money, but does not itself create the money. The bank does that when it credits the borrower’s account with it. This is a subtle but important distinction.

A default destroys the money (i.e., the outstanding principal) all at once, because the bank has to write down the loan asset and balance its books by commensurately reducing its demand deposit liabilities.

No, this is a fundamental misunderstanding. If the borrower defaults, then the money still exists - after all, he had it and he spent it on goods and services which he consumed, and somebody else now has that money, which is still out there.

Yes, huge amounts of money were being destroyed by defaults, so governments had to step in and borrow enough to stop the money supply from collapsing.

No, that QE money was to a large extent being used to destroy the money the banks had created by lending money to borrowers who could no longer (or never could) repay it and thereby destroy it. The banks used the QE money to balance their books by cancelling out their bad loans.

[Truth To Power]

The borrower’s legal obligation to repay the money makes it sensible for the bank to create the money, but does not itself create the money. The bank does that when it credits the borrower’s account with it. This is a subtle but important distinction.

It's a subtle and important distinction that you get wrong. It has nothing to do with being "sensible." The bank creates the new money as a demand deposit liability to balance its new loan asset. It CANNOT do the former without the latter as a matter of accounting principle. That is why it is false to claim that banks create money "out of nothing" or "ex nihilo." There has to be a new asset to balance their new liability.

No, this is a fundamental misunderstanding.

Yes: yours.

If the borrower defaults, then the money still exists - after all, he had it and he spent it on goods and services which he consumed, and somebody else now has that money, which is still out there.

That money still exists, but the bank has to destroy an equivalent amount of other money to balance its books when it writes down the loan and ensure the money it created with the loan does not enter the money supply permanently.

No, that QE money was to a large extent being used to destroy the money the banks had created by lending money to borrowers who could no longer (or never could) repay it and thereby destroy it.

That's what I said: the banks had to destroy other money to ensure the bad loan money didn't just permanently increase the money supply. But they did it mainly with TARP money, not QE money.

The banks used the QE money to balance their books by cancelling out their bad loans.

Please describe the ledger entries you imagine were effected to achieve that.

[Steve_American]

It is pretty much completely false. Banks do not have to have any deposits to originate loans: all they need is a willing, credible borrower and enough capital to satisfy the BIS capital adequacy ratio. A private commercial bank can borrow any reserves it needs from the central bank. Now, obviously, it would rather borrow from depositors at a lower interest rate, but that comes with its own problems, especially unpredictability.

Commercial banks can also borrow from other banks in the "overnight market" at a pretty low rate". So, they usually choose to do this. In 2008 this market ceased to work, because all banks were suspect, and they were all marking down nonperforming loans.

So, the central banks had to step in and bail out the banking sector.
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Someone said that in the US this was mostly done with money from the TARP law.
I have good reason to doubt this. It is that TARP was only about $780B, IIRC.
However, after the dust settled, someone filed a freedom of information request with the Fed Res. The number that the Fed gave them for how much money it created in the crisis was about $27T, IIRC.
Because $27T is far more than $780B, I doubt that the TARP money was enough.

On the question about banks needing to destroy "other money" equal to the amount of the loan that can't be repaid. OK, I get that for normal times. The banks must reduce the entry on their books for that loan, often to zero. (OTOH, when the bank forecloses on the collateral it gains some amount of other assets (like the cask from selling the house).
However, after the GFC/2008, the Fed loaned out or spent $27T to bail out banks worldwide, mostly in Europe. IIRC, it did this in large part by buying the nonperforming loans at par (not at a discount).
If this is so, then the banks were not writing off entries on their books. They were selling illiquid assets to the Fed for newly created dollars that the Fed just created. This meant that in the GFC the money loaned out by the banks, that became unpayable, was not removed from the economy, because the Fed created dollars to add to the banks' balance sheets to keep the banks solvent.

[Truth To Power]

If this is so, then the banks were not writing off entries on their books. They were selling illiquid assets to the Fed for newly created dollars that the Fed just created. This meant that in the GFC the money loaned out by the banks, that became unpayable, was not removed from the economy, because the Fed created dollars to add to the banks' balance sheets to keep the banks solvent.

Right. The banks didn't have to write down the loan assets because the Fed bought them, so it was the Fed that then had to eat the defaults and cancel the money. But unlike the private commercial banks, the Fed can just create money as it pleases; so it erased the bad loan money with one hand and created replacement money with the other, avoiding the deflationary collapse that was otherwise in the cards.

[Steve_American]

The borrower’s legal obligation to repay the money makes it sensible for the bank to create the money, but does not itself create the money. The bank does that when it credits the borrower’s account with it. This is a subtle but important distinction.


No, this is a fundamental misunderstanding. If the borrower defaults, then the money still exists - after all, he had it and he spent it on goods and services which he consumed, and somebody else now has that money, which is still out there.


No, that QE money was to a large extent being used to destroy the money the banks had created by lending money to borrowers who could no longer (or never could) repay it and thereby destroy it. The banks used the QE money to balance their books by cancelling out their bad loans.

AFAIK, the QE money was created by the Fed and used to buy the nonperforming illiquid assets of the banks, so the banks didn't have to write off the bad loans. As a result, the QE money was used to avoid destroying the money in the economy. The money was destroyed on the Fed's books, but it doesn't matter at all what happens on the Fed's books.

So, no, the QE money was not being used to destroy the money where it mattered, which is what you said seems to imply.
. . . In the GFC, the money that had been created by banks making stupid loans was not destroyed while it was still in the economy. The Fed used about $27T to do that. Some was in the form of loans that were repaid and some used to buy bad loans so their current owners didn't have to take the loss of writing them off.

BTW -- the fact that what happens on the Fed's books doesn't matter at all to the economy is another reason that the Fed is not "owned" by its member banks. This adds to the facts that 97% of the Fed's revenue in typical year is paid to the US Treasury, and that its Board is appointed by the US President. Therefore, MMTers are correct to treat the Fed, the BoE, the RB(o)A(ust), and the BoJ, etc. as a part of the Gov. of those nations.
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[Puffer Fish]

OK, the loanable funds theory is completely false because banks can not by law lend out their depositors' money. They create new money with every loan.

But that money is backed by someone else's debt. We've discussed this before in other threads many times.

I'm not sure why you think handing one person an "I owe you" note would cause inflation when at the same time someone else is handed a "You owe money that you must pay at this future point in time" bill.
Just as one person will spend more, the other person will spend less, having in mind the future when he must pay.

[Steve_American]

But that money is backed by someone else's debt. We've discussed this before in other threads many times.

I'm not sure why you think handing one person an "I owe you" note would cause inflation when at the same time someone else is handed a "You owe money that you must pay at this future point in time" bill.
Just as one person will spend more, the other person will spend less, having in mind the future when he must pay.

You are just wrong, and here is why.
1] I'm not going the use the example of the 30-year mortgage to buy a home because most times the seller is going to use the cash payment to buy another house.

2] So, I'll use the example of a guy buying a new car. He gets a loan to repay the amount over the next 5 years. It is insane to claim that he will be saving money now to help make the payments in the last year of the loan. IMO, he will make every payment when due and not save any money to make payments later. Doing this would defeat the whole purpose of getting the loan in the 1st place.
. . . OTOH, the car dealer will often use the total amount of the loan to pay an obligation to pay some bill now. It could be to meet payroll, to pay the rent on the building, or to pay the corp (e.g. Ford Motors) for the cars he is going to sell, etc. In all these cases the entire amount of the cash payment made to buy the car will have been put into the economy to circulate just as if the buyer had taken the money out of his savings account or won $30K in the lottery.

I have Dr. Steve Keen on my side. In the video that apparently you didn't watch, he shows that you can't cancel out credit when the banks create money to make loans. But, when banks are loaning their depositors' money the 2 +& - credits do cancel each other out.

I have said this less clearly before. You said as much. I never convinced you, and you never convinced me. If this explanation doesn't convince you, I hope it convinces some lurkers.

Finally, P_F, have you ever saved to pay a bill that you know you will get in 4 or 29 years? Or, do you assume that you will continue to have the income then, to make the payments then? I'll say that I have always assumed the latter.

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