Banks are not mainly intermediaries

Here is a letter to the Herald sent recently but not published.

A M Chadwick (April 28) thinks bank profits come from lending margins. He says; “Banks simply borrow money and lend it on at a margin”.

If only that were the case. Michael Kumhof, IMF economist and ex Barclays Bank Manager says, “The key function of banks is money creation not intermediation. The entire economics literature that you see out there today is that it is intermediation, taking the money from granny, storing it up and then when someone comes and needs it I can lend it out to them.”

Of course no bank economist is going to disillusion the vast majority who believe that banks are just intermediaries; they salaries depend on propagating the myth.

More shame the universities, the supposed repositories of truth for their culpable silence and lack of effort to enlighten the public.

Last year Bank of England economists wrote a paper on modern money creation; “The majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them”

Our own Reserve Bank has promised a 2015 video explaining where money comes from.

With the ability to create and largely control the credit of a country it is no wonder private banks make huge profits.

Deirdre Kent (references supplied)

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