Economists Ignore One of Capitalism’s Biggest Problems. Banks Create Money out of Nothing.

Banks don’t intermediate loans, they originate loans

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By Steve Keen

I like Joe Stiglitz, both professionally and personally. His Globalization and its Discontents was virtually the only work by a Nobel Laureate economist that I cited favourably in my Debunking Economics, because he had the courage to challenge the professional orthodoxy on the “Washington Consensus”. Far more than most in the economics mainstream—like Ken Rogoff for example—Joe is capable of thinking outside its box.

But Joe’s latest public contribution—“The Great Malaise Continues” on Project Syndicate—simply echoes the mainstream on a crucial point that explains why the US economy is at stall speed, which the mainstream simply doesn’t get.

Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”:

Between long-term savers (for example, sovereign wealth funds and those saving for retirement) and long-term investment in infrastructure stands our short-sighted and dysfunctional financial sector…

Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfill their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now.

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In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.

I can make the case empirically for non-economists pretty easily, thanks to an aside that Joe makes in his article. He observes that when WWII ended, many economists feared that there would be a period of stagnation:

Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In fact, the period from 1945 till 1965 is now regarded as the “Golden Age of Capitalism”.  There was a severe slump initially as the economy changed from a war footing to a private one, but within 3 years, that transition was over and the US economy prospered—growing by as much as 10% in real terms in some years (see Figure 1). The average from 1945 till 1965 was growth at 2.8% a year. In contrast, the average rate of economic growth since 2008 to today is precisely zero.

Figure 1: US Real GDP growth from 1945-1965 vs 2008 till now


I argue that a major reason for this unexpected Post-War turn of events was that credit expanded rapidly in the post-WWII period, and this provided a source of aggregate demand that economists back then hadn’t factored into their thinking—and as Joe shows, they’re still not doing it today. Credit grew more than 10% per year on average, fuelling an insatiable aggregate demand that drove the economy forward. In contrast, credit growth since 2008 has averaged a mere 1.4% per year—see Figure 2.

Figure 2: Rapid Post-WWII credit expansion versus anemic growth in credit today


 This might seem to support Joe’s argument that banks today aren’t “fit for purpose”, whereas in the post-WWII period they were—and that’s why we are experiencing “The Great Malaise” now, rather than another “Golden Age of Capitalism”.

But there’s a factor that Joe ignores (along with the rest of the economics mainstream) because the “banks are intermediaries between savers and investors” model tells him that it doesn’t matter: the level of private debt relative to GDP. Today, private debt is more than 4 times what it was in 1945—and at its peak in 2009, it was more than 5 times the 1945 level (see Figure 3). That’s why banks aren’t lending today, and that’s why aggregate demand is growing so slowly. The only way to get out of the “Great Malaise” is to bring this level of private debt down—without reducing aggregate demand in the process (and without anything as catastrophic as WWII either).


As I noted above, that’s probably enough to convince non-economists, but it won’t persuade Joe or the economics mainstream. Their riposte would be “why does the level of private debt matter?”—after all, that’s what Ben Bernanke, another mainstream economic guru, effectively said to Irving Fisher when he dismissed Fisher’s idea that debt-deflation caused the Great Depression:

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a re-distribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects. (Bernanke, Essays on The Great Depression, page 24)

According to the mainstream, the rate of growth of debt is generally irrelevant to macroeconomics, because lending simply redistributes spending power from savers to investors—it doesn’t create spending power in its own right. What matters is that socially useful projects are funded which then fuel economic growth. How much private debt changes every year is simply a side-effect of getting money from savers who don’t spend, to investors who do. And huge changes can occur in the level of private debt without any impact on the rate of economic growth.

 For decades now, a handful of rebel economists have been disputing this—including me of course, but going back to Irving Fisher and even earlier, and including modern non-mainstream economists like Stephanie Kelton (who now advises Bernie Sanders), and University of Southampton Professor Richard Werner. Oh, and a guy named Hyman Minsky too, whom the mainstream ignored until the 2008 crisis. But the mainstream ignored us before the crisis, and continues to ignore us after it, because their “banks as intermediaries” model tells them that we are just spouting nonsense.

We’re not, of course: the ordinary public tends to get that, and even The Bank of England has come out and said that it’s the mainstream that is spouting nonsense, not the rebels. But the mainstream rejects our analysis out of hand, because their model tells them that it’s OK to do so.

This wouldn’t matter if we could ignore the mainstream of the economics profession, but we can’t, because they are the key individuals who influence the economic policies that are actually put in place by politicians. Keynes understood this very well in his day, noting that “the world is ruled by little else”:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” (Keynes, General Theory 1936)

If the mainstream is wrong on this point—and they are very wrong—then there’s no chance of politicians doing what is needed to overcome “The Great Malaise” (especially if the best remedy also challenges vested interests, which it surely does). So how to persuade the mainstream that, despite their Nobel Prizes, they might just be wrong?

One way, I thought, might be to develop a dynamic version of the mainstream “banks as intermediaries” model in my Minsky software, and show the mainstream that, if it is true that banks are just intermediaries, then they are right: the level of private debt doesn’t matter. But if banks do more than intermediate—if they in fact originate loans—then the level of private debt matters a great deal.

Figure 4 shows a run of the mainstream model where the rates of lending and repayment are varied. There is some change in GDP as a result, and some correlation of change in debt to the level of GDP, but in both cases these are relatively trivial: GDP sticks at $200 million a year for a 300-year-long simulation (because there’s no money creation in this model), and the correlation coefficient between the level of GDP and change in private debt is a relatively insignificant 0.2.

Figure 4: The mainstream model where debt doesn’t matter

image008The story is very different for the second model. The only difference between the two is that banks originate loans in this second model: rather than “intermediating” between savers and investors, they “originate”, by creating loans as assets on one side of their accounting ledger, and creating deposits (that their customers can spend) as liabilities on the other side.

Firstly, nominal GDP rises from $200 million to $600 million over the 25 years of the simulation—rather than remaining effectively constant for centuries as in the mainstream model (since there is growth in the money supply in this model: loans create deposits, which are the dominant form that money takes in our modern economy). Secondly, the correlation between the level of GDP and the debt ratio is 0.97: GDP booms when debt rises, and slumps when it falls.

Figure 5: The rebel model where debt matters a great deal


Of course, the real world is a far more complex place than this or any other economic model, and there are many other factors on which borrowed money can be spent in the real world than in this simple model. But for the last decade, I have been figuratively turning blue in the face showing similarly staggering real-world correlations between change in debt and macroeconomic variables—such as the minus 0. 65 correlation between change in private debt and the level of US unemployment since 1980 (see Figure 6), and the minus 0.82 correlation between the acceleration of private debt and the change in US unemployment (see Figure 7).

Figure 6: Change in private debt & level of unemployment (Correlation coefficient -0.65)


Figure 7: Acceleration of private debt and change in unemployment (Correlation coefficient -0.82)


In any genuine science, empirical data like this would have forced the orthodoxy to rethink its position. But in economics, the profession has sailed on, blithely unaware of how their model of “banks as intermediaries between savers and investors” is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.

A wit once defined an economist as someone who, when shown that something works in practice, replies “Ah! But does it work in theory?”

Well, here is a theory, with two models—one in which banks are just intermediaries, the other in which they originate loans—which show that bank lending matters in theory, as well as clearly mattering in practice (download and install Minsky if you’d like to check them out).

So Joe, can you please ditch the mainstream on “Banks as intermediaries” as you once ditched the mainstream on the Washington Consensus? Then help us develop the only real solution to the Great Malaise: a Modern Debt Jubilee as I call it, or People’s Quantitative Easing as others call it, to reduce the private debt burden without causing a Depression? Because if we don’t, no amount of exhorting banks to “Intermediate” will end the drought in credit growth that is the real cause of The Great Malaise.

Originally published here.

2016 April

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  • tenebrae

    Steve Keen, what do you think of David Graeber’s “Debt – The First 5000 Years”?

    Graeber seems to present an ex nihilo account of money similar to yours.

    • Derryl Hermanutz

      I don’t mean to answer for Steve, but Graber is describing the IOU model of credit-debt money. The ‘money’ is issued by a debtor and given to a creditor to acknowledge he owes the creditor a sum of grain or whatever. The debt is not payable in money. It is payable in the grain that the debtor borrowed from the grain lender. The money represents the amount of grain the creditor has given, and how much grain the debtor owes to the creditor. But the debtor is typically a sovereign treasury where all the grain harvest is stored. The sovereign charges taxes payable in grain, or payable in the ‘money’ the sovereign has issued to grain-creditors.

      On this view, all money merely “represents” somebody’s credit, and somebody’s debt, payable in real stuff like grain. When you have money, you have a “universal claim” on the output of the real productive economy. This view sees money itself as worthless, and only real economic stuff as having “value”.

      Try telling that bit of mythology to every business owner on Earth, whose prime purpose is to earn more money out of the economy in sales revenues, than he invests into the economy as his costs, in order to earn a money profit. A business can produce a pile of stuff to the moon. But until the business “sells” that stuff for money, the business will be a money-losing bankrupt.

      Money is “real”. Money is not an abstract representation of the ‘value’ of real economic stuff.

      In modern terms, the “credits payable in real stuff” myth underlies the balance sheet accounting system of commercial bank credit-debt money we use today, except banks are not sovereigns who are able to tax their way out of debt. Our banks need bailouts. And debts are not payable in economic production. All debts are payable “in money”. If debts were payable in economic production, then the world could produce its way out of debt. We could haul our surplus production of cars and electronics and all kinds of junk to the bank and deposit the stuff in the bank to pay our debts. We would then live in the kind of barter economy that mainstream economics has been modelling since Adam Smith.

      But we live in a buy-sell money economy, not a value-for-value barter economy. Growing grain and assembling cars produces economic value, but does not simultaneously “produce money”. Banks “create money” — credit money — along with repayment debt. The debt is payable in money, not in the “value” of grain or other economic productions.

      Credit and debt are created as linked pairs of financial assets and financial liabilities — payable in money — on bank balance sheets.

      The bank begins with $0, then divides $0 into a new -$1000 loan account (the bank’s interest-earning asset) and a new +$1000 bank deposit (the bank’s money liability, because commercial bank-issued credit is convertible into central bank-issued cash money “on demand” of the depositor).

      The borrower spends the new +$1000 of credit-money into the economy where the other party to the buy-sell, spend-earn transaction receives the spent money as their sales revenue or income. The loan added $1000 of new spendable-earnable ‘money’ into the economy’s ‘money supply’. Which is really a supply of bank credit, that is owed as debt by the borrowers who originally spent the new bank credit-money into the economy.

      If the $1000 is spent by check or debit, the money never leaves the banking system. Commercial banks operate the central bank-anchored money payments system. The payment is debited from the payer’s deposit balance and credited to the payee’s deposit balance. If the payer and payee use different banks, then the payer bank’s reserve account is debited and the payee bank’s reserve account is credited. If payer and payee both use the same bank, then no reserves are needed to process the payment.

      The payment “clears” when the payer’s deposit account is found to have sufficient funds to debit. The payment “settles” when the payer bank’s reserve account is found to have sufficient funds to debit.

      A bank fails when it does not have and cannot get enough reserves to settle its customers’ payments of deposits out of the bank. Banks can withdraw cash from their reserve account balance, and the central bank will send an armored truck full of cash to the bank. But if the bank has no reserves, it can’t “convert” its reserve balance into cash deliveries. Just like you can’t withdraw cash from your bank account, if your deposit balance is $0. Banks can borrow reserves from each other and from the central bank, to make up temporary shortfalls.

      Commercial banks issue bank deposits which are bank credit. Central banks issue reserves and banknotes which are money: base money. Commercial bank credit is “payable in” central bank money. Bank deposits function as spendable money as long as the bank that issued the deposits is a going concern. When a bank fails, its deposits no longer “work” as money. They are just numbers in a computer in a failed business that issued more IOUs than it can redeem in money.

      Virtually the entire money supply begins its existence when a bank makes a loan or purchases a government security like a Treasury bond. We spend, earn and save commercial bank credit, not “money”. Governments use bank credit as money in the same way the private economy does. Which is why governments are trillions of dollars (and pounds and yen) “in debt”; just like their private sector households and businesses are trillions in debt.

      In a credit-debt money system, the spendable-earnable and savable ‘money supply’ is created by commercial banks as repayble debt. One party cannot accumulate credit-money savings, unless other parties owe that credit-money as unpaid debts.

      From the macro perspective where Steve is standing, the mountain of credit-money that savers “have” was excavated by the pit of debt that debtors “owe”. There really is a savings glut. It is matched by a debt pit. Savers have all the credits, debtors owe all the debts. If you bulldoze the mountain of savings into the debt hole, you level the ground. There would be no more credit-money and no more debt that is owed in the credit-money. To reduce total debt requires reducing total savings, because the saved credits and the owed debts are the two parts of a linked pair of assets and liabilities on a bank balance sheet. The total money supply and the total debt rise and fall in tandem.

      Next time the banks fail, G20 nations plan to bail-in depositors’ savings rather than bailing out the banks with taxpayer money. Banks will reduce their cash deposit liabilities, by using their depositors’ savings to buy on their behalf newly issued equity shares in the bank. Instead of having money in the bank, you will own shares in your (failed) bank. Banks are obligated to cash out their deposit liabilities on demand of the depositor. But corporations (banks are corporations) are under no obligation to buy back the shares they sell to shareholders. Banks’ total liabilities will not change, but the structure of the liabilities changes from cashable to noncashable liabilities.

      Bail-ins reduce total savings, by converting money savings to equity ownership shares. Banks don’t “get” the depositors’ money. Bail-ins simply convert a cashable liability into a non-cashable liability. Adding to equity adds to a bank’s paid-in capital. Bail-ins reduce the banking system’s debts, by (effectively) using your money to pay their money debts that they owe to you the depositor. They “sold” you shares in the bank — you used to own ‘money’, now you own shares — so it’s all fair and square, right?

      There’s a better way. Instead of reducing total credit-money savings, increase total money. To reduce debt without reducing savings, governments (via their central banks) could issue (effectively) debt-free money and distribute it into their economies. Maybe by money-funding a Universal Basic Income paid in equal monthly sums to every citizen over 18 with a SS number.

      Debtors could use their “free money” to make their bank loan payments. The repayment money and the debt are both extinguished, without extinguishing the credit-money that was created along with the original debt. That credit-money is “our savings”. Adding debt-free government money into the equation solves the savings-debts imbalance that stalls the spending-driven economy and crashes the banking system, without eliminating savers’ savings to pay debtors’ debts.

      When loans are being paid on time, the commercial banking system doesn’t collapse in illiquidity that exposes its insolvency.

      Steve calls this “adding money” solution a modern debt jubilee, which it is. I call it a sane fiscal-monetary policy solution to failure of the credit-debt financial system that is caused when earners-savers have all the credits and borrowers-spenders owe all the debts.

      Unless you keep your savings in cash under your mattress, you don’t really have “money” savings. Savers really have uncollectable IOUs for money that is owed by bankruput debtors. When debtors can’t pay, the credits become worthless. Your bank fails, and your bank deposit balance no longer functions as spendable money. Adding debt-free money into the macro equation is better than losing what you thought was your money savings, agreed?

  • I think this article like most articles that I read on this group of thinking is stuck in the past trying to make sense of the future. That train left the station in 1967 when the world went on atomic time. The real issue in all parts of our life today is really very simple made complex by the complexities of the number of relationships and the interrelationships that happen in any given moment of life time.
    How does a economist make sense of a single transaction that can produce millions of dollars in a single stock trade made in less than a second?
    Is the real function of a bank to monitor and distribute money?
    If so,how does a bank resist not playing the bigger game money making money?

    I seems to me a bank is in the business of money flow and makes money by flow transactions. Instead we have banks creating capital assets as a priority when the real task of a bank in a economy is to create flow and monitor Omni-transactions of flow.

    To me the problem with most economist is the eye of Mordor is facing in the wrong direction. The answer is not in the past statistical thinking rather the created futures of Vital now.

    All I see in my minds eyes is “-Nero playing the fiddle as Rome is burning.+”

    Time to wake up Steve and realize the world changed.

    The calibration measurements are fast, have greater Volume, more width, and greater density on a daily bases than any time in the history of our kind.

    Economist are using the incorrect measuring system. Time to turn the eye of Mordor into the renewable commons. We our now in the world of renewal anything. as Buck Minister Fuller would say the Ever More Ever Less world. JDS

    • tenebrae

      These sound like intriguing ideas. Your talk of “the renewable commons” sounds like you are sympathetic to the post-Capitalist paradigms of economic thinking.

      Could you please elaborate on how you conceive of banks in a post-Capitalist world?

      • I’m not sure what you mean tenebrae. I”m really very simple in my view of business and Capitalism.
        All exchange must have a flow and flow will create Capital for Intergenerational Wealth- Responsible-Accountable-Viable-Sustainable.
        1. Business is always about money exchange
        2. Business must make a profit to repeat being in business
        3. All businesses must have a margin of Money exchanged for product or services.
        4. There must be value added in every business transaction
        5. Value is always in the mind of the client
        6. Value’s only true measurement is profit
        7. Profit is only really measured by repeat processes of sales Transactions. (Because the client perception of value.)
        8. Regulations that exist today get in the way of true value added business.
        Regulation lead to profiteering and interfere with real business practice.
        I would say I’m an Emphatic Capitalist. I believe business is the true endeavor of money exchanged.
        Corporations/Banks are always about profiteering not value adding. It is the compliance to regulation that force the profit not value.

        If that is post capitalist world I’m all for it…JDS

  • 1Robert4

    Steven you praise Stiglitz But I see his stupidity in stories he writes at times like ~ Same day IMF Christine Lagarde is saying much the same as I said earlier of Stiglitz stupid ideas to shift debt from Govt. & Corporate debt to Private foreclosure starter and 2-008 then 1929 repeats. See also Money and Banking Part 5 on Helicopter money.
    Ben S. Bernanke | April 11, 2016 10:00am
    What tools does the Fed have left? Part 3: Helicopter money
    “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.” (Milton Friedman, “The Optimum Quantity of Money,” 1969)

  • John M Legge

    If Steve’s graphical pyrotechnics leave you dazzled, there is a much more folksy summary in my Chapter 4:
    Happy reading!

  • Andrew

    Steve, Minksy looks like very interesting, but sourceforge is so 1990’s. Please, for the love of all that is open source, move it to github. 🙂

    • wideEyedPupil

      possibly, they don’t want to share the source code. that’s not uncommon even for code that will eventually be available as free to use and/or open source.

  • red_slider

    There’s a bigger problem than the creation of money. It is the calculus that determines what is of value that is the real problem. The current formula use market-valued formula. They have no calculus for real-value worth. Non at all.

    monetary system that is disconnected from what values went into its calculus of real-valued worth is corrupt by definition. It is only the labor and investment that actually does good that has any real value. If you wish to calculate the real national debt of the U.S., then add up the costs of war, planet endangerment, human suffering and deprivation, mass incarceration and control, gluttony and greed, redundancy and waste, and you will have an idea of what the real-valued national debt looks like. What is left, what is complained about as ‘debt increasing’ (education, healthcare, living wages, personal well-being, etc.), is really the legitimate accumulation of a real valued GDP. That’s how one pays off national debt. Unfortunately there is very little of that being produced by the American economic portfolio. Of the value of the money we create, in real-valued terms, almost all of it is actually national debt.

    • Ralph Musgrave

      “There’s a bigger problem than the creation of money.” The fact that cancer is a bigger problem than chicken pox (if that’s the case) is not a reason for not dealing with chicken pox.

      “It is the calculus that determines what is of value that is the real problem. The current formula use market-valued formula.”. Really? Actually in the case of about a third of GDP we as a society have decided to override market forces and produce a whole string of items that would not be produced (or not produced in the same volume) were things left to market forces: e.g. free education for kids, free health care (in some countries) and so on.

      • red_slider

        My point exactly. “…we as a society have decided to override market forces”. That is, we ignore, or must fight against market-values in order to (politically and socially) achieve real-valued investments. It is not a market-valued calculus that promotes such socially worthwhile investments. And that is fundamentally because we have a monetary unit that is attached to a market valued calculus (what can be sold) rather than one that achieves real-valued production by asking what is worth buying? Look at any pie chart and realize that even the third that goes to such public expenditures still manages to spin off the largest portion of that slice in the form of corporate welfare, tax incentives and loopholes and other market-valued concessions which, again, have little real-valued return for our society other than to make the wealthiest, obscenely wealthier.

  • Ralph Musgrave

    This comment of mine is a bit technical and even pedantic, but here goes.

    Steve says (as is quite common nowadays) that “Banks don’t “intermediate loans”, they “originate loans”…”. Actually I suggest it’s more accurate to say they don’t JUST intermediate: they originate as well.

    If one starts from the position of a barter economy converting to a money economy for the first time, private banks would set up and offer people “money units” (pounds, dollars etc) in exchange for collateral. That’s obviously a form of “origination”. However, once in existence, that money remains in circulation for ever: witness the fact that the stock of privately issued money expands year after year.

    Thus so far as “already existing” money goes, I suggest banks do actually intermediate. However, IN ADDITION, they clearly create a certain amount of entirely new money every year, and that’s ORIGINATION.

    It could be argued (against that latter point of mine) that when a loan is repaid money vanishes, and when a loan is granted, money comes back into existence, and hence that EVERY LOAN involves origination. That’s certainly a not totally invalid way of looking at it. However, when a loan is repaid to a bank, that bank is undoubtedly in a better position to make additional loans next day because its reserves will have risen. So I’d argue that what’s going on there is actually intermediation.

    • wideEyedPupil

      I think you’re completely missing Keen’s point about the macro economic effects of bank lending. That’s why originating is a more useful description than intermediation.

    • David Pich

      When a bank originates a loan, only the principle is created, not the interest to pay back the loan. P<P+I. The principle will always be less than the principle plus interest. So, where does one get the interest to pay back his loan? By capturing principle from other's loans, of course. And where to those people find the interest to pay back their loans? Again, by capturing the principle from other people's loans. And on and on it goes. 100% of all our money in circulation is originated by loans. If we paid back all out debts, there would be no money left, and we would still have the interest to pay. This is why, everyone, every state government, the federal government, any group will always be short of money.

  • curatingsex

    Very good piece. This does appear to be how the economy works. The Capital as Power folks have shown other critical operating factors for the capitalist economy using a similar — that is, data based using scientific analysis w/o recourse to ideology — approach. And of course, as ever, data and science work.

    The question I would append to this analysis, though, is: so what? The implications of this analysis are much bigger than its findings, imho. The only problem with the last bail out of the economy in 2008 was that not only were the banks printing HUGE amounts of money but they were also disbursing it. Which means we saw inflation where they sent it (into housing and the stock market) while everything else languished. The much-vaunted recovery occurred only in those two areas of the economy (plus of course the banks and their financial cronies themselves).

    What if next time, Obama (or Sanders if the next crash occurs later than now expected) decides to let the banks print money again to recover the economy b/c it works as they just demonstrated with the 2008 ‘recovery’ BUT this time disburses the $$ to the people – in any of or all of multiple ways. As food stamps, as housing credits, as educational benefits, as health benefits, as extended social security benefits, as climate change rebates, or as something altogether new (guaranteed annual income for all?!),. BINGO the economy will recover b/c when real people who are mostly poor get ‘real’ money in whatever form they spend it. No need for Trumpian disruption of the US and global economies through cancelling of trade agreements and artificially (even diabolically) forcing manufacturers to return home … just do it by forcing the banks to give their QE funds to real people for real expenditures next time- and do it quickly. The US economy saves the world again!

    best to all,


    P.S. For more read my Morphing Capitalism into an Economy for Humanity? – and note well the question mark!

  • Leslie Bianchi

    The assumption overlooked is the origins of capitalism ties to slavery, which lingers in its view of workers vs top management, owners and investors. Workers are viewed as a cost to be minimized, when it’s their buying power that fuels the economy. If you change to equality, as in equality rights based on just bring human, then workers as people are seen for what they really are, which is profit makers snd consumers.

    To fix capitalism we need to shake off our notions that people are paid what they are worth and recognize that people need a livable wage that keeps them independent of government assistance. Government should be investing in infrastructure that makes living affordable. And as it values humanity, it ought to supplement the elderly and disabled and marginally able when they are unable to live above poverty independently.

    The simplest way to begin a change in viewing workers is through profit sharing quarterly bonuses in lieu of some portion of taxes and a minimum wage that rises with the cost of living. So that the lowest wage earners working at a marginally profitable company, make a livable wage independent of government assistance.

    Who pays for health care and education snd childcare can be structured many ways, but in the end these are all basic needs of workers, and whether through taxes or wages that are high enough to afford these, they are necessary to a thriving economy where humanity lives with dignity.

    We also need to end the predatory nature of banking that caters to the wealthy and screws the majority with high interest rates and exorbitant fees which are completely ridiculous and make it profitable to lend to people unable to pay back timely.

    There should be the sane rates for lending for everyone. It’s up to the banks to determine how much a person can afford to be lended. They’d get damn good at not overkending if they had to absorb the loss. And as for overdrafts, that should be a simple interest loan. Banks and stores could know if you have the ability to pay and not sell or loan if you don’t. But when you give them $27 if they deposit a bad check (per check) from someone else and penalize the bad check writer that fee as well, where is the incentive for banks or credit cards to lend smartly!

  • X-7

    Dr. Keen, okay, I guess. It’s hard for me to look at current economics that closely, at a scale I see as myopic, and therefore not that useful for passing natural selection tests.
    Trying to see using a lens like this: “We need scarcely add that the contemplation in natural science of a wider domain than the actual leads to a far better understanding of the actual.” Sir Arthur Eddington — “The Nature of the Physical World”

    This isn’t a complete explanation, but trying to put code, including monetary code, in an physics / evolution context. But first:
    The New Natural Selection Tests
    Natural selection tests have become more complex for many species. Genetic codes remain on the exam; human culture codes have been added. For example, elephant and dolphin survival are no longer merely a function of their biological genomes, but also a function of the human cultural genome, that is, of moral, legal, monetary and other coding structures.
    Now, re code …
    “The story of human intelligence starts with a universe that is capable of encoding information.” Ray Kurzweil – “How to Create a Mind”
    Code is relationship infrastructure in bio, cultural & tech networks: genetic, language (sound pattern, alphabet), math, moral, religious, legal, monetary, software, etc.

    Life, survival, evolution, physics, i.e., reality: it’s all about information processing.
    From physicist David Deutsch: “Any final state contains information about the system’s initial state and about what has happened to it since. So, the motion of any physical system, because it obeys definite laws, can be regarded as information processing.”

    Code is relationship infrastructure that is part “constructor” or builder, part information processing technology.
    Code collapses quantum information potentiality, distilling the parameters of relationship interaction.
    Marriage? Funeral? Religious code collapses, distills relationship information re how to order, how to process the various relationships that comprise these rituals.
    Religious code: an app for marriages / funerals / explanation of our origins, etc.

    World culture’s dominant information processing mechanism (app) to order, to process relationship-value information in-and-across geo eco bio cultural & tech networks, and across time – humans using monetary code – can’t process those relationships with sufficient reach, sufficient speed, accuracy & power.

    This efficacy of this archaic cultural information processing mechanism (culture app) has been crushed by exponential complexity so thoroughly that we, world culture, are converting the sky and ocean into terrorists, arming these commons with weapons of mass destruction. That’s how weak, how wrong our culture code is for processing these complex relationships.

    Think we’re past reform and policy adjustments being sufficient. Think we need to redomain (significantly restructure) our / the cultural organism’s manner of reality interface.

    Re a supra-national coding structure so we can process information with GRASP, greater reach accuracy speed power:
    Software code is to monetary code as alphabet code was to pictograph code.
    More here:

  • bba

    Thanks for the article above — great ideas, well written, very easy to understand.
    Re: Joseph Stiglitz:
    I was stunned when I saw a fairly recent video on YouTube that showed Joseph Stiglitz and Robert Reich discussing the Wall Street bail outs and bonuses since 2008. Stiglitz actually took it upon himself to defend the corporate banks’ contribution to the 2008 collapse, and stated they were not culpable and they deserved the huge “unconditional” loans and bonuses paid to them during the meltdown. When Reich asked why they all should simply be ‘forgiven’, no model change demanded and no indictments and no repayment to the looted US treasury — Stiglitz replied that the Banks/bankers “acted in good faith” and truly believed in the “trickle down Theory” (his exact words!) and therefore they cannot be held accountable for their disastrous decisions, nor the further misuse of the enormous amounts of money transferred to them.

    It was a sad and ridiculous spectacle to watch a full grown man, much less a well known Nobel prize winner, spout on about “trickle down economics” and other discarded shit from the dumpsters of economic history. And why was this supposedly disinterested economist ‘taking a stand’ and insisting that no bank/banker should be indicted or forced to repay? What the hell was going on? You will see the outrage and disbelief rising up in Reich, the audience, and yourself if you should decide to watch this video.

    I truly do not understand what has happened to Stiglitz or what could possibly motivate him to dump such garbage into the public arena and all over his own reputation! At this point, my only conclusion is that I don’t believe I can ever take Joseph Stiglitz (and perhaps even the Nobel prize) seriously again.

  • Brian Gladish

    How novel. Credit expansion was not the source of an unsustainable boom and the misallocation of resources, but supplies us with a route to a never-ending party. Wahoo!

  • cscoxk

    A private debt jubilee would reduce the immediate symptoms. But will not solve the underlying problem. The underlying problem is that we have made the money system too complex in the sense of complexity theory. Banks creating money for a single loan works well. Linking all the money created for all the loans across all institutions increases costs; because the interactions between loans increase costs.

    To understand this take a look at Promise Theory by Mark Burgess.

    Creating and administering debt with tight connections between loans is expensive. The overheads overwhelm economies of scale. The overheads take the form of increased risk, endemic inflation, cost of ownership change, and market manipulation.

    Making each loan with its own money gives loose connections between loans. This reduces the cost of debt by removing many of the overheads.

    Here is one way to do it for houses.–p4dc4vQ

    (Rent and Buy can reduce the cost to buy by 25% and increase the return to the saver by 25% over a 30 year loan). The overhead costs of tightly coupled loans doubles the cost of transferring ownership.

  • David Burns

    I do not understand what the author’s idea of banks as originators of loans means. Did I skim over the explanation or was it just left out?

  • wally

    If banks create the deposit they loan out, why do they use wholesale or offshore funding costs as an excuse to raise interest rates? Ie, are they lying when they say they are sourcing funds elsewhere if they are just created on a computer

  • Loans do not “originate” if there is no lender and no borrower. As long is there is a demand for credit the loans will continue to propogate inside the major banks. The banks borrow money from depositors to pay off their debts; that is why interest on a savings account (and sometimes checking) is paid. And the same for brokerage accounts where dividends are paid. The banks are less likely to raise interest rates on their own if foreign bankers do not. If there is any sourcing of funds offshore, then the interest rate will rise on its own regardless of what micro and macro economists say. Stuff does not “spring to life” out of nothing. The transactions carried out between banks and lenders is far more complex than we are led to believe, so saying that they are lying is nothing more than a bagatel.

    • wally

      My understanding is that in a fractional reserve banking system banks only maintain a small amount as a deposit against a loan, are u saying the remaining amount is as a result of peoples savings deposits? I find it hard to believe that people would be putting that volume of money into bank savings accounts when real interest rates are negative in many countries and the large number of people have no money left over once the bills are payed.

      • You are thinking of the prime interest rate, not the interest rate paid on people’s savings accounts. The more money people put into their accounts, the more interest is paid on the balance in the accounts. It used to be that an incentive to save was a good way for a depositor to earn on the account, about 5.25 percent. Unfortunately, banks now pay only about 1% or less on the savings accounts, so they are free to pay more to whatever obligations they hold.

        They also earn interest on the loans at a much higher rate than what they pay on savings balances. This is how they can afford to maintain branches, tellers, and whatever else is needed to stay open. The money does not grow by itself. But banks cannot make up the loans. They can only try to attract more borrowers.

        Now the banks are getting ready to stop paying interest on the savings accounts altogether because the prime interest rate is almost zero, and because there are enough loans to keep them solvent to begin with. After all, a bank is like any other profit based business.

      • José M. Sousa
      • José M. Sousa
    • José M. Sousa
  • DeepThought

    Keynesian economics has been proven wrong in all cases. It has not led to growth or financial stability…so why do economists still quote this man? No wonder economics is a running joke in private industry. Only in academia, where people are protected from their failures, do Keynesian economics, and those who support these ideas, still have a voice.

    After working decades in a Fortune 50 company in management, I do not need any economist to tell me how the real world works, I live it.

    • José M. Sousa

      What!? I suppose you know little about economics or Keynes! To start he wasn´t just an academic!

    • José M. Sousa

      Really? You must be a genius! Anyway, you may be right about most economists, I admit!

    • plasmacutter

      Keynesian economics has been proven wrong in all cases

      You are woefully ignorant if you believe what is deliberately misattributed to Keynes today is “Keynesian”.

      The man was a brilliant conservative. When FDR wanted to try “QE” in the 30’s Keynes wrote a stern letter warning him of the liquidity trap it would create: The very liquidity trap we are now in today.

      If Keynes saw what was going on today he would probably put down his pen and pick up a gun.

  • David Pich

    All money is debt. All of our money is created when someone or some government, takes out a loan. The problem is, when the loan is created, only the principle is created, but not the interest needed to pay back that loan. So, where does one get the money to pay back the interest on his loan? You must capture principle from someone else’s loan to pay back your principle plus interest. Consequently, one can get out of debt, but collectively, we can not. Failure is built into the system. Once you pay back your loan, that new money ( the principle ) that was created to give you that loan, is extinguished, it’s gone, it’s no longer in the money supply. Does anyone out there see any problem with this? Below is a petition, I have sent to the Whitehouse:
    In an effort to control the economy, this petition is in support of new law requiring all money to be created by private commercial banks and loaned into circulation to the people for the personal profit of the banks. The banks will decide how much money they create, for who and when and under what terms.
    No one has signed this. Is this or is this not the worst petition you have ever seen? No one would ever agree to something like this. However, this is the system we currently have. So, by default, we HAVE agreed to this system. Get off the couch and do something. Please check out: or listen to the radio show: blogtalkradio/wealthmoneyradioshow. Here is an episode with Richard Wolff; enjoy.

  • jothwu

    Bernanke was correct when he said we suffer from a saving glut. The following two page essay suggests a remedy:

  • Andy White

    Not had time to read the full article yet…. but my question is….


    Where does that fit into considering the POST WAR Period? The Marshal plan was the opposite of the post 08 response, where huge sums of money where invested into rebuilding post WW2, to the benefit of business across the Western World….