“How is it possible that for the largest part of the past century erroneous and misleading theories have dominated the economics discipline?” - Richard Werner, "A Lost Century in Economics"
That is a really good question. I imagine quite a few banking executives do not know how banks create money, but instead hold (loosely) the old Paul Samuelson model of fractional reserve banking, which I regard as silly.
Here are a few points supporting the hypothesis that very few bankers understand. 1) I was for many years the head of a group of analysts that analyzed financial institutions for a large equity investment firm. One of my team members was a crack MBA graduate from a prestigious university. He had previously been an analyst for the Federal Reserve. At that time, neither he nor I fully understood money creation. (I held the Samuelson view.) In addition to my team's ignorance, no one else in this very large and successful firm understood how it works. 2) Very few politicians understand, as evidenced by data in a 2022 paper by Prof Andrew Hook, which I cited in a footnote to my last essay. These are the same people who sit on bank regulatory committees in Congress and in Parliament. The don't know because they were taught incorrectly in college. The same college professors taught the bankers and the journalists. 3) I have personally heard well-known CEOs of banks say "banks borrow short to lend long." You can get away with believing this because nothing about managing a bank really depends on it. The best explanation I can give you is that the knowledge of credit creation was lost about the same time the West was transitioning off he gold standard to fiat (or semi-fiat) money. John M. Keynes was becoming very popular at the time. I don't know the full connection, but that is where I am looking. Richard Werner chronicles this history of lost knowledge very well in "A Lost Century In Economics," also cited in my last essay. I strongly recommend that piece. Thanks.
I don’t find it scary to learn that I didn’t know precisely how something work but I do see it danger when those who should be in the know flail about helpless in ignorance. only when outrunning the lion should one act with their fingers crossed.
I will finish reading, Lost Century when I have more time. -
It is astounding to read that so few economists are knowledgeable as to how the system works but my question would be, how many bankers don’t know?
That is a really good question. I imagine quite a few banking executives do not know how banks create money, but instead hold (loosely) the old Paul Samuelson model of fractional reserve banking, which I regard as silly.
Here are a few points supporting the hypothesis that very few bankers understand. 1) I was for many years the head of a group of analysts that analyzed financial institutions for a large equity investment firm. One of my team members was a crack MBA graduate from a prestigious university. He had previously been an analyst for the Federal Reserve. At that time, neither he nor I fully understood money creation. (I held the Samuelson view.) In addition to my team's ignorance, no one else in this very large and successful firm understood how it works. 2) Very few politicians understand, as evidenced by data in a 2022 paper by Prof Andrew Hook, which I cited in a footnote to my last essay. These are the same people who sit on bank regulatory committees in Congress and in Parliament. The don't know because they were taught incorrectly in college. The same college professors taught the bankers and the journalists. 3) I have personally heard well-known CEOs of banks say "banks borrow short to lend long." You can get away with believing this because nothing about managing a bank really depends on it. The best explanation I can give you is that the knowledge of credit creation was lost about the same time the West was transitioning off he gold standard to fiat (or semi-fiat) money. John M. Keynes was becoming very popular at the time. I don't know the full connection, but that is where I am looking. Richard Werner chronicles this history of lost knowledge very well in "A Lost Century In Economics," also cited in my last essay. I strongly recommend that piece. Thanks.
I don’t find it scary to learn that I didn’t know precisely how something work but I do see it danger when those who should be in the know flail about helpless in ignorance. only when outrunning the lion should one act with their fingers crossed.
I will finish reading, Lost Century when I have more time. -