Sunday, 10 January 2016
What % of money for loans comes from intermediation?
Commercial banks which want to lend are forced to obtain some of the relevant money from savers, else those banks run out of reserves. At the same time, banks create a certain amount of money from thin air every year. So how much “loan money” comes from each of those two sources?
It could be argued that since the money supply expands at 5 to 10% pa, that the ratio is about 90% intermediation 10% origination. But is ONE YEAR the appropriate period? Probably not. I suspect the appropriate period is the duration of the average loan: say roughly 10 years, during which time the money supply would double roughly speaking (in nominal rather than real terms). So in that case we’re talking about an intermediation / origination ratio of about 50:50. But that’s very much a back of the envelope calculation.
It can be argued that when a loan is repaid, money vanishes, and when a new loan is granted, ALL OF the relevant money is created from thin air. That’s not a totally invalid way of looking at it. But it’s a bit of a silly way of looking at it, and for the reason given above, namely that a bank HAS TO attract some money from savers (including those who repay loans) else it runs out of reserves.
Thus the conventional view of banks adopted by those who have never opened an economics text book, namely that they are piggy banks which cannot lend until they receive savings, is not totally invalid.
The moral is that if you think philosophy is abstract, you ain’t seen nothing: try working out what banks are and what they do.