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Banking Money Creation Explained Simply

Banking Money Creation Explained Simply

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Banking Money Creation Explained Simply
Steve Keen
Steve Keen (born 28 March 1953) is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay.


  1. It feels misleading to say nothing has to be there. Banks need capital for requirements and they need reserves to keep up with the billions of dollars they transfer to other institutions a day. They don’t need it literally at the point of deposit creation but at some point they need the reserve to make that payment. It’s typically why banks prefer having a lot of deposits over millions of customers as it’s cheap funding for this process. US flooded banks with reserves in 08 and now pay IOR so it’s hard to see on a singular level – but I like to think of it as creditworthiness determines whether a loan is made not only a banks reserve position

    • In a sense that's true. A bank must meet regulatory requirements, it must start with positive equity, and the accounts and relations between them need to be established. But what is meant by "nothing has to be there" is "there is not another account out of which a bank lends": there is no other account (apart from the bank's gross equity, which must be positive) involved in a bank granting a loan. Once it does, that also creates a deposit.

      The mythical mainstream model of Loanable Funds, OTOH, requires that there is a "saver" whose funds are lent to a "borrower". In that case a saver must have savings to lend. No savings, no lending.

      But a bank can simply credit both its loans and a customer's deposit account. Both Loans and Deposits can start from zero. Then the act of lending increases them both at the same time.

      That's in fact the key insight of the "endogenous money" model of money creation–which I prefer to call "Bank Originated Money and Debt" (BOMD). In real-world lending, Assets (Loans) and Liabilities (Deposits) both increase. In the false model of banking that Neoclassicals cling to (because otherwise their paradigm would unravel), one account goes down ("Savers" falls by the amount of the loan) and another goes up ("Borrowers" rises by the amount of the loan). The former creates money, the latter does not.

    • @@ProfSteveKeen thanks for deep dive! Makes sense – credit creation theory of money!

    • Exactly@@jaymills1720 . There's over a century of theorists and bankers and empirical researchers trying to get the mainstream numbskulls to accept this, but they refuse because their whole paradigm crumbles if they accept that lending creates money, and money creation adds to aggregate demand and income. They end up in a non-equilibrium world when their whole religion (for that's what it is) is based on equilibrium.

  2. @ProfSteveKeen I love this! Please keep doing discussions like this.

  3. @jayjaymcfly7475

    Hey can you when uploading shorts link to the original video?

    • I don't produce them, but I'll see if I can get the producer to add them in a reply. This is with George Gammon, so just search for the two of us on YouTube and you'll find it.

    • @jayjaymcfly7475

      @@ProfSteveKeen Hey thanks! Have you ever had a discussion with Anwar Shaikh? I am a big fan of his work and I think both of you could have a very interesting talk.

    • Ha Ha@@jayjaymcfly7475. Therein lies a tale.

      We respect each other these days–I regard his "The Humbug Production Function" as one of the great works of economics. He respects me for Debunking Economics, and my model of Minsky's Financial Instability Hypothesis. But he wasn't exactly enamoured of me when we first met!

      My original contribution to economics was my Masters Thesis on Marx, in which I showed that his dialectical philosophy contradicted the "Labour Theory of Value" (see I presented it to the New School in the early 1990s and had a vigorous row with Anwar.

      The next day, I was looking for a computer shop in that section of New York, couldn't find it (this was pre-smartphones) and thought I'd call into the New School and ask Ed Nell to let me find its location on his computer.

      I got about six doors away from Ed's office, and I could hear Anwar expounding to Ed, very loudly, about my presentation. He was still white hot with rage.

      I decided to leave things as they were and went off to meander my way to the shop.

      Thirty years later, I think Anwar is somewhat less vigorous a defender of the Labor Theory of Value.

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