Tuesday, April 29, 2014

Turner Turns (1) Credit Creation

The London School of Economics makes its public lectures available on MP3. Some interesting lectures are available. I have just listened to a talk given by Adair Turner at the London School of Economics called Creating Money – For What Purpose.

Adair Turner was the Chairman of the United Kingdom Financial Services Authority when the financial crisis broke in September 2008, and played a leading role in the redesign of the global banking and shadow banking regulation. He is now a Senior Fellow of the Institute for New Economic Thinking.

Apart from his accent, Adair Turner is an excellent communicator. This talk is a easy-to-understand summary of the latest thinking of economists about Monetary Policy. There is a basic flaw in this thinking, but it is good to understand how economists and central bankers are responding to the Global Economic Crisis. The comments are a summary of more detailed talks given at Frankfurt and Stockholm.

Credit creation by Banks
Turner began his talk by explaining the role of banks. He says,

Banks do not intermediate already existing money. The create money and credit ex nihilo de novo. When a bank makes a loan, it puts the loan on the asset side of its balance sheet. At the same time, it puts the money in the borrowers account. At that point, they have created money and credit. There may be constraints on how much due to the need for reserves at the central bank or to maintain equity.

The critical thing that created the credit is maturity transformation. If the tenor of the deposit and the loan was the same, nothing has happened. If both are instantaneous, nothing is achieved. If the borrower has a loan for a year that is available now, maturity transformation has occurred and money is created.
This is very different from the standard textbook explanation of money creation. It is good to get this clarified.

Turner says that the benefit of private credit creation is that is disciplined by the market, which allows credit to be allocated efficiently.

Orthodoxy says that if the interest rate is set to equal the natural rate of interest, the right amount of credit will be produced.

1 comment:

theyenguy said...

Life is an experience in sovereignty and seigniorage, where money is the credit and flow from sovereigns, who establish economic value. Money is created out of the trust in the policies and schemes of the prevailing sovereigns.

With the repeal of the Glass Steagall Act and the creation of the Euro, both in 1999, the Banker Regime provided policies of investment choice and schemes of credit, which established fiat money.

Jesus Christ opened the First Seal of the Scroll of End Time Events, and authorized the Rider on The White Horse to begin his ride over the earth on October 23, 2013. This enabled the bond vigilantes to wrest control of the Bow of Economic Sovereignty, that is the Interest Rate on the US Ten Year Note, ^TNX, from the Banker Regime, and use it to transfer sovereignty to the Beast Regime, specifically regional sovereign leaders, with the effect that credit has failed, and currencies are dying.

Debt deflation is causing disinvestment out of the most debt leveraged and currency carry trade leveraged investments, with the result that fiat money has died, and the Beast Regime is rising in power creating diktat money through policies of diktat and schemes of debt servitude. Diktat money is rising as the flag and standard of economic activity.

As is seen in Ephesians 1:10, Jesus Christ acting in the economy of God, perfected the former age and paradigm of credit and its seigniorage of investment choice, by producing peak wealth; and is now pivoting the world into the era of diktat and its seigniorage of debt servitude.