Sunday, June 28, 2015

Universities teach the exact opposite of the truth, of how banks create loans.

Universities teach the exact opposite of the truth, of how banks create loans. New loans are simply ADDED to the bank’s deposit account.

BY IWB · JUNE 25, 2015

Two misconceptions about money creation
The vast majority of money held by the public takes the form
of bank deposits. But where the stock of bank deposits comes
from is often misunderstood. One common misconception is
that banks act simply as intermediaries, lending out the
deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households,
and banks then ‘lend out’ those existing deposits to borrowers,
for example to companies looking to finance investment or
individuals wanting to purchase houses.

In fact, when households choose to save more money in bank
accounts, those deposits come simply at the expense of
deposits that would have otherwise gone to companies in
payment for goods and services. Saving does not by itself
increase the deposits or ‘funds available’ for banks to lend.
Indeed, viewing banks simply as intermediaries ignores the fact
that, in reality in the modern economy, commercial banks are
the creators of deposit money. This article explains how,

rather than banks lending out deposits that are placed with
them, the act of lending creates deposits — the reverse of the
sequence typically described in textbooks.(3)

Another common misconception is that the central bank
determines the quantity of loans and deposits in the
economy by controlling the quantity of central bank money
— the so-called ‘money multiplier’ approach. In that view,
central banks implement monetary policy by choosing a
quantity of reserves.

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