When mainstream economists arrive at ideas 50 or so years late & pretend to be adding to knowledge. - Politics Forum.org | PoFo

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When mainstream economists arrive at ideas 50 or so years late and pretend to be contributing to knowledge.


From Bill Mitchell's blog of 3/30/23
I regularly encounter mainstream economists who are confounded by the dissonance that the body of theory they have been working in introduces and then seem to think they have come up with new ideas that restores their credibility. The more extreme version of this tendency is called plagiarism in academic circles. But the less extreme version is to produce some work in which you conveniently ignore the main contributors in history but hold out implicitly that the ideas are somehow your own. As mainstream economics fumbles through this period where the fictional world they operate in and push onto students is increasingly being revealed as a fraud, several economists are trying to distance themselves from the train wreck by resorting to restating ideas that in a period past they would have criticised a ‘pop science’. This syndrome is an accompaniment to the well established ‘we knew it all along’ or ‘there is nothing new here’ defenses that are often used when new ideas make the mainstream uncomfortable. I saw this again in a recent article from the British-based Centre for Economic Policy Research (CEPR) which discusses the way modern banks work – How monetary policy affects bank lending and financial stability: "A ‘credit creation theory of banking’ explanation" (March 20, 2023). The problem is that heterodox economists knew this [this being that banks invest their depositors' money in safe assets and create new dollars with every loan] from years ago including with the seminal work in the early 1970s of Canadian economist – Basil Moore. The other problem is that the CEPR authors choose not to credit the seminal authors in the reference list, which I think is poor form.

From the article that Bill starts talking about,
In a recent paper (Bofinger et al. 2023), we provide an alternative and more direct theoretical explanation for the effect of central bank policy rates on credit growth. Our model differs from standard models in that it is not based on the ‘financial intermediation theory of banking’, but on the ‘credit creation theory of banking’ (Werner 2014). 1 The main differences between the two approaches can be illustrated by comparing the standard loanable funds model with a model of the market for bank loans.

In the loanable funds model, ‘funds’ are an all-purpose commodity that can be used interchangeably as a consumption good, as an investment good, and as ‘capital’ or ‘saving(s)’ that banks intermediate from savers to investors. 2 Households supply the good on the ‘capital market’, where there is demand from investors who use it to increase the capital stock. Thus, deposits drive loans. In this setup, the role of banks is limited to the intermediation funds, as they cannot produce or consume the all-purpose commodity. The same applies to the central bank, which therefore has no role to play in this model.

With the loanable funds model still the dominant paradigm in monetary macroeconomics, it is not surprising that Mian and Sufi (2018: 50), for example, are puzzled by the dynamics of private credit growth ...


This is different in our model of bank lending: the monetary sphere is not constrained by the real sphere, since ‘funds’ are liquid bank deposits. They are created by the banking system ex nihilo, i.e. completely independently of private saving(s). The mechanics of this approach have been explained in detail by the Bank of England (McLeay et al. 2014) and the Deutsche Bundesbank (2017). The logic is quite simple: by lending to a customer, the bank credits his/her deposit account. Thus, the very act of lending creates deposits (i.e. money).

Please note the 3 articles that I highkighted. They all said that banks create money with every loan. Yet, the part I put in bold, says that these mainstream economists were using the loanable funds theory until rcently. So, as Bill is pointing out, MS economists refused to be convinced by those 3 articles/papers. They, along with most other MS economists, held onto their theory even after Werner (2014) had proven that banks create money by making loans with an experiment in 2014, that had caused the BoE to write the article cited there (also in 2014) agreeing that it had been proven, IIRC.

This is a perfect example of what is wrong with MS Economics and MS economists. Namely, that it and they don't care about reality, that they cling to their fantacy world, even in the face of overwhelming evidence. It is exactly like a religion. Both MS Econ. and all religions start with assumptions and prove things using those assumptions. Religion assumes that its holly book is 100% true, and MS Econ. assumes things about reality as being true, when every other science or bookkeeping, etc., say they are false. You know that one can never use a false premise in a proof. If you are acccused of a crime, you will fight tooth a nail to not let the state use a false element of its case to prove the case against you. Yet, almost everyone who reads this post does let MS Econ. get away with doing exactly that. Even when it is causing the Gov. to adopt policies that are hurting you economically.
. . . Like right now, the Fed is increasing interest rates to control inflation that is currently being driven almost totally by corps price gouging you, so that they make more profit. It is almost totally price gouging becaue the supply chains are mostly back to normal, and in the US oil prices are falling, IIRC.
. . . Even in the EU, raising interest rates does nothing to control your cost of energy, which is being driven by the supply. Your Gov. could do what Japan has done, and directly give you money to spend on energy, money which then flows out of Europe to buy energy from overseas.

So, please, wake up and reject mainstream econ. This is just one example of where MS Econ gets to totally wrong. There are many, many others. Find a better theory to believe. I like MMT but you can look at Steve Keen for his theory.

BTW --- the loanable funds theory of banking also leads directly to the "crowding out theory of Federal deficits".

That is the idea that there is a set amount of savings in the economy, and the Gov. deficit sucks up some of that limited amount of saving when it sells bonds to 'fund' the deficit. And tis drives up interest rates in general, which makes money for corp investemnt cost the corp more.

This is totally false. The defict is not funded by bond sales. Even if it was funded by bond sales, the bonds are sold days later, so the checks that are the deficit spending have already cleared. This fact means that the total of all banks' deposits have increased already by the exact amount of the required bond sales. That is, the US Gov. always kites its checks and the Fed always pays them anyway.

I googled 'crowding out' and got this =>
What Is the Crowding Out Effect?
The crowding out effect is an economic theory that argues that rising public sector spending drives down or even eliminates private sector spending.

To spend more, the government needs added revenue. It obtains it by raising taxes or by borrowing through the sale of Treasury securities. Higher taxes can mean reduced income and spending by individuals and businesses.

Treasury sales can increase interest rates and borrowing costs. That can reduce borrowing demand and spending.

All told, these government activities are thought to result in the crowding out of spending by private individuals and companies.

1] The crowding out effect theory suggests that rising public sector spending drives down private sector spending.
2] To spend more, the government needs more revenue, which it gets through higher taxes and/or sales of Treasuries.
3] This can reduce private sector income and loan demand, thus decreasing spending and borrowing.
4] There are three main crowding out effects: economic, social welfare, and infrastructure.
5] Crowding in suggests that government borrowing and spending can increase demand.

The part I highlighted is just false. Gov. spending adds to the total income of the nation. Adding to the income will obviously increase spending by part of the people. For examle, the Gov. hires 1 new Gov. office worker. That worker gets paid and spends all the 1st pay check she gets. Her spending is an increse in total spending. The theory must be assuming that the money that the Gov. used to pay the new office worker had to come from somewhere/some person. However, as I explained, the money comes either from thin air or from a bond that will be sold in the furture. The money to buy the bond was added to the banking system a week ago to pay the new office worker.

In fact, every element of the reply is false. The Gov. does not need to get dollars to spend dollars; just like banks do not need money in the vault to make loans. The Gov. can and has sold bonds directly to the Fed. It can with a law change just direct the Fed to honor its checks without money in its account. Where do you think the money to pay the $5.5T in payments for covid came from on the day the checks were cashed?

Let me leave you with this thought. The rich who own the banks are telling you that it is OK for their banks to create dollars or euros out of thin air, but the Gov. can not do this, actually can not do it. Not that it is bad, rather that it is impossible.
. . . IMHO, the resulting private debt is much worse than public debt will ever be. The rich just want you to owe them more money, so they own you also. Debt slavery is a thing.

Lurkers, please notice that the posters here who have disagreed with me and argued that banks do loan out their depositors' money have not replied yet. I have been pointing out the article by Werner in 2024 for about 7 years here. Very few could grok that an experiment had been done. That in a science an experimental result trumps a previous theory, but apparently, not in Economics. I'd suggest that this lack of responce by professional economists for 9 years (2023-2014=9) to an experiment points toward the conclusion that Economics (as practiced by MS economists) is nor a science in any proper sense of the word, science.

So, I'm waiting for some replies.

Bill Mitchell wrote in his blog Thursday,
The absurdity of the current monetary policy dominance exposed.

Bill says that a big wig in the BoE gave a speech and published the transcript, and there said that the BoE had raised interest rates too high, and it will need to cut them fast and deep to avoid a crippling recession. Bill thinks that it will not do it, though. The big wig will be out voted.


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