IMF GFSR Analytical Chapters


One reply on “IMF GFSR Analytical Chapters”

About a year ago I had an e-mail debate with The Central Bank of Ireland trying to get them to abandon the phrase ‘credit intermediation’. I suggested ‘credit creation’ would be more appropriate or better still ‘money creation’ because only 3% of euros exist as cash & coins, the other 97% being the banks’ liabilities.

To my frustration my contact there insisted that banks did intermediate credit, first taking money from depositors before lending it out to borrowers. I explained that if you get a loan today you leave with a higher bank balance and a new debt to the bank. Hence at the very least a bank will credit your account and debit their Debtors account. I asked, ‘What account does the bank credit the money from?’ and ‘What would be the corresponding debit entry?’. Cue some backtracking and vague replies. I was eventually told they didn’t have the resources to debate at such length with me and suggested I read some well regarded textbooks in this area, all of which gave the false money multiplier description of money creation.

Anyway, I see the phrase ‘credit creation’ more now and it’s dotted throughout the document.

Since money comes from banks loans this means every euro has a matching debt. In fact credit creation creates more debt than it does money as banks seek the principal plus interest back. Is this not the root cause of the debt crisis? Creating every euro with an even higher debt it’s no surprise that all economies are over indebted.

The authors are obviously intelligent as are the contributors here. By what logic can we resolve a debt crisis when every new euro can only be created with an even higher debt? Bear in mind that money is destroyed through loan repayments so ‘paying off existing debts first’ is not a viable precursor.

Regarding the document itself:

1. The authors are understandably obsessed with getting people to take out more credit never explicitly highlighting that this means taking on more debt. They write;

“The first step is an attempt to identify the constraints to credit through the use of lending surveys—trying to disentangle whether banks are unwilling to lend (on the supply side) or whether firms or households are reluctant to borrow (on the demand side).”

I’ve been arguing that if no-one is willing or able to organise a bank loan the lifeblood of the economy slowly dwindles. If we can demonstrate that, for the foreseeable future, it’s not feasible that enough money will originate via bank loans then why not look at other ways in which we could create money?

2. “Well-functioning credit markets make major contributions to growth and macroeconomic stability, and restarting credit plays an important role in economic recovery after a downturn. Recent studies show that creditless recoveries are typically slower than those with more robust credit growth.”

This should be obvious. Ignoring recessions prior to the 1970s because economies before that had more of a state-created cash ‘buffer’, recessions in recent times have been resolved by getting people to borrow even more. Indeed the money supply has doubled about every decade since the 80s until now. It should be obvious that we cannot maintain that level of expansion of the money supply. This system only works well when when the money supply is expanding and perhaps a growth rate of less than 7% a year might suffice, as long as it’s growing, but perpetual growth cannot be the solution to every financial crisis on our finite planet. At what point do we start discussing other methods by which money could be created?

3. “Debt overhang in banks, firms, and households is the key factor constraining credit volume in Spain.”

I would think it’s a key factor everywhere and the debt overhang is caused by the fact that we have such a debt based system in which money is created in tandem with interest-bearing debt. How can a problem of over-indebted be solved by getting people to take on more debt which is all the credit creation tactic would do?

4. “Jiménez and others (2012) underline the importance of supply constraints for Spain using bank-firm matched loan-level data and provide evidence that banks’ capital and liquidity ratios matter for their ability to extend loans to firms.”

I’m surprised by this and I must read the original paper because from my research everything that happens to the banks’ reserve accounts is largely inconsequential to those who work in the real economy. A central bank will always create enough reserve-account-money to keep the system going. The amount of reserves is not a big factor in the banking sector’s money creation decisions. Indeed the subsequent line in the report would seem to support my argument. Spain addressed its banks apparent lack of reserves and still the recovery in Spain is non-existent.

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