Summary of The Truth about Banks

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In the wake of the 2008 financial crisis, economists and policy makers have resorted to banking regulatory reform in the belief that new rules will adequately safeguard the financial system. But that thinking lies in part on the conventional wisdom that banks act as conduits to transfer money from savers to borrowers. Yet banks actually create money, as economists Michael Kumhof and Zoltán Jakab explain in this timely commentary. Their viewpoint is not new, just forgotten since the 1930s, but it suggests a fresh approach to economic management. getAbstract recommends this scholarly article to experts in banking, finance and economics.

In this summary, you will learn

  • What conventional macroeconomics assumes about banking,
  • How banks create money and
  • Why policy makers should include the financing function of banks in regulatory considerations.
 

About the Authors

Michael Kumhof is a Bank of England senior research adviser. Zoltán Jakab is an economist at the International Monetary Fund.

 

Summary

Modern macroeconomics postulates that banks aggregate money that they then lend to borrowers. Yet such banking entities “do not exist in the real world.” In the real economy, banks don’t lend based on their deposits; they create money to lend. A bank funds a loan by making new balance sheet entries: ...

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