Monday, April 30, 2012

Bailey's Home Loans (III)

I really should read Real-World Economics Review Blog more often.

Here's an interesting collection of quotes by central bankers about how banks really work. It is dated January 26, 2012, well in advance of the Keen/Krugman debate.

Jesse Frederik, its author/compiler, opens the selection with these words:
"Does the ‘money multiplier’, this core concept of monetary theory, exist? Do banks need reserves before they create money? Not according to central bankers. Banks can create money at will, even without reserves, though they will have to find or borrow these reserves afterwards. But as the central bank has to provide these, this is not any kind of  constraint, even when the central bank increases the rate of interest.
"Some quotes which imply that central banks can not control the amount of money by influencing reserves"
. (Emphasis in the original)
My preferred quote, as it is more direct and concise:
"In the real world, banks extend credit, creating deposits in the process, and look for the reserves later." Alan R. Holmes, Federal Reserve Bank of New York (1969)
It seems Holmes agrees with good ole' George Bailey, then (see here and here).

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