Deficit Owls | The Money Multiplier Model Is Inconsistent With Accounting, And Therefore Wrong @deficitowls5296 | Uploaded September 2016 | Updated October 2024, 5 hours ago.
Professor Steve Keen (Kingston University) going through the detailed balance sheet mechanics of why banks can't lend out reserves in his Minsky software. This may be difficult to follow if you're not familiar with balance sheets and the Law of Accounting, so here is a brief explanation.
Balance sheets include 3 columns:
Assets: things you own
Liabilities: things you owe
Equity = Assets - Liabilities. Equity is the amount of money you'd have left over if you sold all of your assets, and used them to pay off all of your liabilities.
In order to make accounting easier to spot mistakes, the Law of Accounting just takes that equation and moves equity over: Assets - Liabilities - Equity = 0 (or, Assets - (Liabilities + Equity) = 0). Then, if you have any transaction that doesn't sum to zero, you've made a mistake and recorded something impossible. In this video, Professor Keen shows how the operation in which banks lend out reserves to their customers actually violates this law, it doesn't sum to zero.
What does this mean? Bank deposits are a liability of the bank: the bank owes you physical cash should you come claim it. But "reserves" (which generally refers to electronic accounts held by a private bank at the Central Bank, but can also include vault cash held physically at the bank) are an asset of the bank.
The operation of transferring reserves to a customer would be to decrease the bank's reserves, and increase the customer's account. But this means simultaneously decreasing your assets and increasing your liabilities: it would be like me trying to give you an IOU at the same time as I set some money on fire, and then claim that my net worth hasn't changed.
The money multiplier model only makes any sense if banks are giving cash to their customers. But banks don't make loans in cash (when was the last time you bought a house by taking out $300,000 in cash to buy it?!), they make them in bank deposits, which are an IOU of the bank, not an asset.
See the whole lecture here: youtube.com/watch?v=hcD3cpuecu0
Like Deficit Owls on Facebook: facebook.com/DeficitOwls
Professor Steve Keen (Kingston University) going through the detailed balance sheet mechanics of why banks can't lend out reserves in his Minsky software. This may be difficult to follow if you're not familiar with balance sheets and the Law of Accounting, so here is a brief explanation.
Balance sheets include 3 columns:
Assets: things you own
Liabilities: things you owe
Equity = Assets - Liabilities. Equity is the amount of money you'd have left over if you sold all of your assets, and used them to pay off all of your liabilities.
In order to make accounting easier to spot mistakes, the Law of Accounting just takes that equation and moves equity over: Assets - Liabilities - Equity = 0 (or, Assets - (Liabilities + Equity) = 0). Then, if you have any transaction that doesn't sum to zero, you've made a mistake and recorded something impossible. In this video, Professor Keen shows how the operation in which banks lend out reserves to their customers actually violates this law, it doesn't sum to zero.
What does this mean? Bank deposits are a liability of the bank: the bank owes you physical cash should you come claim it. But "reserves" (which generally refers to electronic accounts held by a private bank at the Central Bank, but can also include vault cash held physically at the bank) are an asset of the bank.
The operation of transferring reserves to a customer would be to decrease the bank's reserves, and increase the customer's account. But this means simultaneously decreasing your assets and increasing your liabilities: it would be like me trying to give you an IOU at the same time as I set some money on fire, and then claim that my net worth hasn't changed.
The money multiplier model only makes any sense if banks are giving cash to their customers. But banks don't make loans in cash (when was the last time you bought a house by taking out $300,000 in cash to buy it?!), they make them in bank deposits, which are an IOU of the bank, not an asset.
See the whole lecture here: youtube.com/watch?v=hcD3cpuecu0
Like Deficit Owls on Facebook: facebook.com/DeficitOwls
