The Financial Times published an excellent letter from Prof Richard Werner, Chair in International Banking, School of Management, University of Southampton, UK on March 5, 2013 entitled “Hitch-hiker’s guide to monetary infrastructure”
In the letter R Werner responds to the recent Paul Tucker’s suggestion that negative interest rates on reserves might encourage banks to lend more. He says this suggestion is likely based on textbook descriptions of “fractional reserve” banking, which belongs to the world of fiction.*
Here is a short extract from this article:
But they [the banks] don’t lend existing money. Instead, they newly invent the money that they lend, by pretending that the borrowers have deposited it and thus crediting their accounts without transferring any money there, by simply inputting the desired number. … This is how the bulk of the money supply is invented into existence.
R Werner further discusses another way of quantitative easing that would create a “full-blown recovery within six months” while we have “this peculiar monetary system”.
* Most university economics courses still teach a model of banking that hasn’t applied to the real world for decades. Please watch our video course ‘Banking 101′
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