Invincible Ignorance and Shouting
The studied ignorance of some folk, whom one would expect to know better, leads to much head shaking at times. The latest disappointment is Bryan Gould who is a former UK Labour MP and former vice-chancellor of Waikato University. Sadly, Mr Gould has offered an unintended explanation of why the Left is held in such disrepute these days.
Mr Gould has ventured into print to expose his ignorance of the banking system and how it works. For these schoolboy errors he has been taken to task by Dr Don Brash, who has had a long career in the banking system.
But Mr Gould went further . . . He said banks like to pretend they provide a useful service to the community by channelling resources from those who have no immediate need for them (savers) to those who do need them (borrowers), charging a modest spread for rendering that service.One suspects that Mr Gould is reflexively drawing upon old-fashioned Marxist dogmas, commonly believed in the nineteen sixties.
But, said Mr Gould, this "benign view of [bank] operations is inaccurate and misleading. The banks do not lend you mortgage money deposited with them by someone else. They lend you money they themselves create out of nothing through the stroke of a pen or, today, a computer entry. The banks make their money, in other words, by charging interest on money that they themselves create". [NZ Herald]
Dr Brash, however, acknowledges that the current banking system in one sense indirectly creates money--thereby increasing the money supply--by what is called the fractional reserve banking system.
The banking system does create money. When Bank A lends money to one of its customers, the customer may use those funds to buy something from somebody who banks with Bank B. Bank B then finds itself with an additional deposit, a part of which it can lend out to its customers (keeping some of the additional deposit as a liquidity reserve). So an initial loan may end up considerably increasing the total lending by the banking system.Consequently, within modern banking systems, there is a constant bias towards increasing the money supply--which, in turn, produces a systemic impetus to inflation. It was partially this realisation which has led to reserve banks around the world concentrating upon inflation as the key systemic monetary risk.
But Bryan Gould went way beyond this reality. He actually believes that banks can create money out of nothing anywhere and everywhere. Don Brash goes on to expose the woeful ignorance of one who should know a great deal better.
But from the point of view of each individual bank, it can only lend out a part of the money which its customers deposit with it, or money which it borrows from other sources, possibly overseas. If individual banks really could create money by "the stroke of a pen or a computer entry", as Mr Gould contends, why do they bother paying interest on deposits, why do they borrow funds from parent banks overseas, why do they borrow funds in the international market, why do they need to hold some funds in government securities as a liquidity reserve, why do some banks occasionally run out of money when customers lose confidence in them?One has come to expect a certain systemic ignorance amongst the denizens of the Left. One shrugs the shoulders and moves on. What can you do in the face of invincible error? But every now and again the extent of the ignorance is surprising. Possibly it helps explain why the Left so quickly degenerates into public protests over every little thing and where people bray inane slogans, spraying spittle on the wind. When one's argument is weak, shout loudly.
As well as being a former Governor of the Reserve Bank, I now chair the small New Zealand subsidiary of the Industrial and Commercial Bank of China, the largest bank in the world. It would certainly make life very much easier if we could, "by the stroke of a pen or a computer entry", simply create the money which we lend out to New Zealand borrowers. Unfortunately, we can't.