Saturday, May 5, 2018

Steve Keen on Banking and the Money Multiplier

Steve Keen gives a talk here on banking and the money multiplier (published on 2 May 2018):


  1. OK. Understand Keen’s main points re banks create new money and the multiplier theory is flawed.

    So, what’s the better alternative? Or is there one? It seems a bit disappointing if this realisation leads only to somewhat better economic models for predicting how the current system will operate.

    Huber and Robertson proposed that banks be prevented from creating mew money and operate in the way that most people imagine they do now - as intermediaries who loan out savers deposits.

    New money would be created by the Central Bank - in quantities managed to prevent inflation but keep the economy ticking over - and given to the government of the day to spend into circulation as it saw fit. Right leaning governments might use the money to reduce taxes, left leaning governments might increase spending.

    Do folks here have a view on this proposal, or others?

  2. Huh? I was taught Econ 101 decades ago, and taught that banks DO create money by lending, since they have only a fraction of their deposits in reserve. FRB. So a minute in it seems Keen is peddling a straw man. Mainstream Econ 101 teaches banks create money.

  3. I checked my old economics text book and it does say banks create new money. It also implies a limit to this process, ultimately, through the money multiplier effect - ie if banks can only lend 90% or whatever under FRB, then eventually they can lend no more.
    But Keen differs in that he says there is effectively no reserve and thus no limit. So banks are really unrestrained in their ability to create new money.
    Which is interesting and all, but I’d like to hear him come out and propose some concrete alternatives.

  4. As a non economist (yet) there is something that i cannot grasp at the moment, why is that the federal funds market exist in the United States? If banks can create money, why would they lend and borrow to each other at all?

    Please somebody help me with this.

    1. Nevermind, i read this:
      McLeay, Michael and Radia, Amar and Thomas, Ryland, Money Creation in the Modern Economy (March 14, 2014). Bank of England Quarterly Bulletin 2014 Q1. Available at SSRN: