"Mickey Mouse Models" of Economics

Controversial Professor of Economics Dr. Peter Bofinger refers to the models of his profession as to the “caricature of the reality” in an interview for the german version of the Financial Times.

Dr Peter Bofinger - 2nd from left

The interesting part is, that Prof. Bofinger is no “heretic”, but one of the most renouned economists in Germany and a member of german council of economic advisors since 2004.

Here´s the key passage:

(FTD = Financial Times Deutschland, german version of the FT)

FTD:  You reproach to your colleagues that they fail to adjust their thinking to the new reality (post financial crisis). Are there any aspects that you personally see in a different light today?

Bofinger:  Yes. What I completely underestimated prior to the crisis is what a dangerous role the financial sector can play to the real economy. Banks, through extending the loans, control how high is the level of investment and where [in which sectors] investments takes place.

FTD:  Is that aspect not covered at all in the [economic] textbooks?

Bofinger:  In the textbooks models banks act purely as intermediaries, they collect savings and then hand them back to the economy in the form of loans. These Mickey Mouse models [fantasy models] are far removed from reality.

The financial sector does not need deposits to extend loans, over the years prior to the crisis the banks where able to create loans out of nothing.

Due to this has the financial system almost broke down. This active role that banks play has neither been included in textbooks up to today, nor is it taken into account by the ECB when formulating monetary policy.”