The German Bundesbank has recently released an interesting report on the role of banks, non-banks, and the central bank in the money creation process. We have a few issues with the Bundesbank article, however, the majority of the analysis is good. More importantly, the conclusions drawn from the report by news outlets and the blogosphere are misleading.
Frank Van Lerven
Around 1 in 10 people taking out a loan in Britain do so simply to make ends meet. The market for these loans is extremely unfair – and this is not coming from a consumer pressure group but from one of the bigger banks, TSB.
Most recent figures suggest that consumer prices are increasing, while average wages are stagnating – meaning that people across the country are facing higher costs of living. To finance higher costs of living, more and more people are borrowing.
This is the second part of our article dealing with the argument that bank lending must lead to escalating debt because banks don't create the money needed to pay the interest on the debt. Part 1 explained how the wrong conclusions have been drawn from the oft-repeated ‘banker on a desert island’ analogy. We showed that it is mathematically (and therefore logically) possible for both the principal and interest of a loan to be repaid.
There is a lot of confusion about the role interest plays in the current monetary system. It is often suggested that the fundamental problem is not the banking sector’s ability to create money, but the idea that “banks create the money to make the loans, but don’t create the money to pay the interest on those loans”.