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Paul Krugman doesn’t understand banking

March 29, 2012

The influential U.S. economist Paul Krugman may think that he understands banking, however his comments in two very recent articles — in response to Steve Keen’s criticism of him — reveals that he does not.

References:

http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/

http://krugman.blogs.nytimes.com/2012/03/27/banking-mysticism/

For example Paul writes:  ” If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. ”

The simple fact is than none of a bank’s retail deposits are ever loaned out, nor are the associated reserves ever loaned out to retail customers. Banks create new credit money when they advance retail loans. It amazes me that Paul does not understand this.

John Hermann

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2 Comments
  1. most bankers and economists refuse to acknowledge the existence of free money and see it as their god-given right to never think about the lack of real accounting that is going on – nor are the auditors and accountants.

    Se 100% registered money by TWD Daies.

    Yes it is a comparatively small amount each year – but over the life of a loan it amounts to a pay-back of (devalued) money and due to the payment of interest the interest payments are very substantial.

    The shocking thing is that by allowing banks to put whatever mark-up they want on low-base-rate money, we are losing control of the whole financial system. it is a world-wide problem stoking the super-rich, it is holding back investment, etc etc.

    In 2006 the estimate was £80 billion of free money (James Robertson) very thoroughly researched) just for the UK.

    Stoking property price inflation which had been around 10 % compounding to as straight line equivalent of 100% property price inflation EACH YEAR in some areas. No wonder we have such a divided society. Regulate the interest rates around 1.5 % markup for housing, 2% for commercial and return base rate interest to the Treasury on any free money (and maybe principal as well for a happier and well-motivated society, with less extreme wealth and less crime or excuses for crime.
    ian.[dot]reenwood[at]phonecoop[dot]coop

  2. further to above post YES that is 3000% in 3 decades for the UK in some areas – making a mockery of Treasury and bank of England targets for “hard to control” inflation at the time. We’d control inflation a lot better if we took the money away at source and reduced the NEED for a social security budget – better explanation leads to less mental stress. Also we need less digital, more activity, etc.

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