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>As far as I can understand seanhunter asserts that bank lending doesn't create money - pointing to the definition of M1/M2 money - and claims that bank lending

>As far as I can understand seanhunter asserts that bank lending doesn't create money - pointing to the definition of M1/M2 money - and claims that bank lending is not different from me lending you $100 and that the amount of M1 or M2 money in supply doesn't changed in either case. Right. That is the basic definition of the financial intermediation theory of money. It's actually a predominant view in the literature: for example, the Diamond-Dybvig model is based on the assumption that banks are not special as intermediaries; and it won the Nobel Prize for its authors in 2022.

kgwgk 4y ago
I don't know if the financial intermediation theory of money has its own definition of M1 and M2 but the one given by seanhunter is the standard one. If we're using the same definition [are we?] then it either changes or it doesn't. If money supply is "currency in circulation plus deposits[, etc.]" how does bank lending not increase the "currency in circulation plus deposits[, etc.]" amount? (Of course lending between friends doesn't: the $100 bill in circulation is the same as before and the friendly IOU is not a deposit nor included in the [, etc.]")
- NovemberWhiskey 4y ago
  A loan only increases the money supply if it's made without replacing the deposits that were loaned out. The financial intermediation theory is that that doesn't happen: a bank is just a place where money flows come together to find allocations to investments, and that the benefit is that the size mismatches between those in surplus and those who need to borrow can be reconciled, so banks that do this skillfully are economically valuable and make profits. This is not, prima facie a bad theory, right? Go take a look at JP Morgan's balance sheet. The asset and liability sides of the sheet are basically loans and investments (on the asset side) plus deposits and outstanding debt (on the liability side), and these balance.
  - deleted 4y ago
    [deleted]
  - kgwgk 4y ago
    Sure one thing can be offset by another. One may also say that turning up the heater doesn't increase the temperature of a room - because I open the window at the same time. Anyway, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense. M1 would change if it was defined as "currency in circulation plus debts between friends" and the "oh, but my friend would sell the debt to the central bank or whatever in the end so there is no change in money supply" argument seems goalpost moving. The original analogy doesn't work and bank lending does increase money supply everything else being equal.
    - NovemberWhiskey 4y ago
      >Still, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense. On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees. On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR. Can you not see why there are some who would say "it is obviously wrong to suggest money has been created in the second case, but not the first" or indeed "in neither case has money been created"? By the way, in case it is not obvious: the fact you don't have a compelling rationale to make me believe your description of the world, and I don't have a compelling rationale to convince you of my view of the world is why there are multiple competing theories. I am not trying to tell you that you're wrong; just that you're not right.
      - kgwgk 4y ago
        I don't debate any of that! I'm just claiming that saying that M2 money supply doesn't change in the second case is wrong because it has been defined to measure exactly that. Under the assumption that money has been created in the second case, but not the first - whether we find that obviously wrong or not is irrelevant. > the fact you don't have a compelling rationale to make me believe your description of the world I'm only trying to make you believe that the thing that seanhunter wrote is seems incompatible with his own definition of money supply which makes the bank loan situation different from the friend loan situation.

kgwgk 4y ago

I don't know if the financial intermediation theory of money has its own definition of M1 and M2 but the one given by seanhunter is the standard one. If we're using the same definition [are we?] then it either changes or it doesn't. If money supply is "currency in circulation plus deposits[, etc.]" how does bank lending not increase the "currency in circulation plus deposits[, etc.]" amount? (Of course lending between friends doesn't: the $100 bill in circulation is the same as before and the friendly IOU is not a deposit nor included in the [, etc.]")

NovemberWhiskey 4y ago
A loan only increases the money supply if it's made without replacing the deposits that were loaned out. The financial intermediation theory is that that doesn't happen: a bank is just a place where money flows come together to find allocations to investments, and that the benefit is that the size mismatches between those in surplus and those who need to borrow can be reconciled, so banks that do this skillfully are economically valuable and make profits. This is not, prima facie a bad theory, right? Go take a look at JP Morgan's balance sheet. The asset and liability sides of the sheet are basically loans and investments (on the asset side) plus deposits and outstanding debt (on the liability side), and these balance.
- deleted 4y ago
  [deleted]
- kgwgk 4y ago
  Sure one thing can be offset by another. One may also say that turning up the heater doesn't increase the temperature of a room - because I open the window at the same time. Anyway, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense. M1 would change if it was defined as "currency in circulation plus debts between friends" and the "oh, but my friend would sell the debt to the central bank or whatever in the end so there is no change in money supply" argument seems goalpost moving. The original analogy doesn't work and bank lending does increase money supply everything else being equal.
  - NovemberWhiskey 4y ago
    >Still, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense. On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees. On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR. Can you not see why there are some who would say "it is obviously wrong to suggest money has been created in the second case, but not the first" or indeed "in neither case has money been created"? By the way, in case it is not obvious: the fact you don't have a compelling rationale to make me believe your description of the world, and I don't have a compelling rationale to convince you of my view of the world is why there are multiple competing theories. I am not trying to tell you that you're wrong; just that you're not right.
    - kgwgk 4y ago
      I don't debate any of that! I'm just claiming that saying that M2 money supply doesn't change in the second case is wrong because it has been defined to measure exactly that. Under the assumption that money has been created in the second case, but not the first - whether we find that obviously wrong or not is irrelevant. > the fact you don't have a compelling rationale to make me believe your description of the world I'm only trying to make you believe that the thing that seanhunter wrote is seems incompatible with his own definition of money supply which makes the bank loan situation different from the friend loan situation.