Private banks and credit creation: if you make it seem complicated, you just create loopholes.

By Prof. Steve Keen at Forbes:

The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.

But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.

Nope. Let’s split this up into two separate cycles.

1. His description of how governments create money is broadly correct, but government spending should be judged on its own merits, not on how much ‘money’ it ‘creates’. Government debt is a necessary evil, but it can be put to good use as a) a handy unit of currency and b) somewhere for people to put their savings/surplus => full reserve banking.

2. And there are private banks. Strictly speaking, they hardly create any new money. Most of so-called bank lending is nothing of the sort, they are just glorified debt collectors – they collect debts from buyers of land on behalf of sellers of land.

Simple scenario: Mr B agrees to buy land and buildings from Mr S for £100, which Mr A does not have in ready cash.

If Mr B takes out a mortgage of £100, Mr S gets credited with a deposit of £100. These pop up on opposite sides of the banks’ balance sheet. Mr B has to pay that off in instalments over twenty years and Mr S can withdraw up to £100. But all depositors taken together cannot withdraw all their money at once and spend it. Collectively, they cannot withdraw their money any faster than all the mortgage borrowers are paying it in.

But there is no need for a bank. They could agree that Mr B will simply Mr S in instalments over the next twenty years. If Mr B defaults, then Mr S would take him to court, repossess the land and buildings, or employ a debt collection agency/firm of solicitors to enforce payment, by fair means or foul. Pretty much the same as what a mortgage bank would do.

So ultimately, what is the difference between banks and debt collection agencies? Not much. The added extra which banks provide is a risk-pooling exercise/insurance, so if Mr B’s loan goes bad, Mr S only has to bear a tiny percentage of it; similarly, Mr S has to bear the same tiny percentage loss if other buyers’ loans go bad. No doubt a debt collection agency could offer the same service.