Daily Archives: September 3, 2015

Banks are Not Intermediaries of Loanable Funds – and Why This Matters

Yves here. Over the years, we’ve regularly criticized economists like Bernanke and Krugman, who rely on the so-called loanable funds model, which sees banks as conduits of funds from savers to borrowers. Despite the fact that many central banks, such as the Bank of England, have stressed that that’s not how banks actually work (banks create loans, which then produce the related deposit), central banks still cling to their hoary old framework. For instance, when I saw Janet Yellen speak at an Institute of New Economic Thinking conference in May, she cringe-makingly mentioned how banks channel scarce savings to investments.

 

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