Economics

A Bill to Fight Crony Capitalism

Steve Baker MP has an article in today’s Wall Street Journal entitled “A Bill to Fight Crony Capitalism”:

If you borrow a friend’s painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank’s investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.

WSJ subscribers can read the whole article here.

2 comments to A Bill to Fight Crony Capitalism

  • Does MP stand for MuPpet these days?

    Using Steve Baker’s example, I would only have committed fraud had I specifically promised not to lend the painting on, and couldn’t produce it on demand.

    Banks lend out deposited moeny to make a return – which they pay (part of) to said depositors. Banks still have to borrow the money they lend though (through money markets) – they don’t create money out of thin air.

  • Manuelgar

    Hello Tyler,

    The problem is on this statement: “banks create money by extending credit”

    a) They don´t create money. As of Menger definition of money: “The most marketeable commodity”, money is a present good, so it can not be created in a balance sheet.

    b) The bank does not extend credit, the bank intermediates credit. The one that extends credit is the agent that provides the present goods.

    Unfortunatly, confusing money and credit whith is one of main flaws of the monetarist and Keynesians have penetrated on the Austrian School too.