Don Brash promotes “flat earth economics”
Don Brash promotes “flat earth economics”
In his comment on Bryan Gould’s article on the Reserve Bank, Don Brash continues to perpetuate his “flat earth economics” view of the way the banking system operates.
He is at odds with numerous giants of the economics world who clearly state that banks do indeed create money (credit) out of thin air.
He endeavours to contradict the Bank of England which on its web site has a video and articles about money creation.
An article in its Quarterly Review Q1 2014 states "Money creation in practice differs from some popular misconceptions - banks do not act simply as intermediaries, lending out deposits that savers place with them..... Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."
It goes on - "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits."
The International Monetary Fund in its report of August 2012 titled “The Chicago Plan Revisited” is likewise at odds with his assertions.
Senior researchers Jaromir Benes and Michael Kumhof state "currently the economy’s money supply is created by banks, through debt, rather than being created debt-free by the government."
Michael Kumhof was recently appointed Senior Research Advisor in the Bank of England's new Research Hub. He co-authored, in March this year, with Zoltán Jakab, an economist in the IMF’s Research Department an article titled "The Truth About Banks".
In it they state "New funds are produced only with new bank loans….. through book entries made by keystrokes on the banker’s keyboard at the time of disbursement. This means that the funds do not exist before the loan and that they are in the form of electronic entries - historically, paper ledger entries - rather than real resources.
Mr Brash’s own Reserve Bank, in a letter I have, dated September 1994 states “...banks do create money and credit, adding to broad measures of the money supply….around three percent of M3 is created by the Reserve Bank ….with the remainder (97%) being created by commercial banks."
That statement is supported by the bank in its Bulletin, Vol. 71, No. 1, March 2008. "In a modern economy, money can be created either by the central bank ... or by private sector institutions – in practice, mostly registered banks."
Not just Kumhof, Jakab, and Benes, but by Lord Adair Turner, former head of Britain's Financial Services Authority, Martin Wolf - chief economics commentator at the Financial Times in London, and Professor Richard Werner, Chair in International Banking , Director, Centre for Banking, Finance and Sustainable Development; University of Southampton to name just a few, all concur.
Mr Brash throws in the red herring that “If individual banks really could create money by "the stroke of a pen or a computer entry", as Mr Gould contends, why do they bother paying interest on deposits, why do they borrow funds from parent banks overseas, why do they borrow funds in the international market, why do they need to hold some funds in government securities as a liquidity reserve, why do some banks occasionally run out of money when customers lose confidence in them?
Simple actually. The Reserve Bank requires them to hold a capital and a liquidity base to ensure they meet certain specified guidelines. They get it from the sources he lists, but it is not that money they lend out.
He seems unaware that same Reserve Bank that he was governor of for a time, advanced money to develop our nation’s housing and infrastructure back in 1935 without getting it from anywhere else.
As the 1949 Ministry of Works report “State Housing in New Zealand” records:-
“To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit……The sums advanced by the Reserve Bank were not subscribed or underwritten by other financial institutions. This action showed the Government’s intention to demonstrate that it was possible for the State to use the country’s credit in creating new assets for the country”.
Social Credit, way ahead of its time 60 years ago and through to its heyday in 1981 has had its views confirmed latterly by a host of heavyweights of the financial establishment.
In these challenging economic times of a growing poor, a diminishing middle class, rocketing house prices, a major infrastructure shortage, waterways requiring remediation, and a health system under stress, the truth is finally being told – and it’s not Don Brash’s version.
Perpetuating the fairy story that banks lend their depositors' money makes the tooth fairy look almost real – at least the recipient gets real money!