Many economists’ notions about banks and central banks are startlingly wrong
The New York Times’ Paul Krugman has a post highlighting some of the lessons we’ve learned since 2008.
He’s using a liquidity-trap model, which, regular readers know, I’ve been critical of. (See here and here for some exciting reading on this*.) But I wanted to highlight a different point: what have we not learned since 2008 that is holding us back:
1. The money-multiplier myth is still rampant. Unfortunately, Krugman’s liquidity-trap model perpetuates this myth. This results in the view that banks are choosing to hold on to reserves rather than to lend them out. Of course, this is completely wrong as I’ve highlighted time and again. Banks do not lend reserves to the non-bank public. The money multiplier is a total myth. And despite the fact that some rather prominent economists and institutions have admitted as much, we still see this myth in the mainstream econ work on an almost daily basis. In addition to this list of prominent economists who believe this myth, here’s Nobel Laureate Joseph Stiglitz just a few days ago saying the same basic thing. Why do mainstream economists downplay the importance of banking and the operational realities that influence the way it affects the real economy?
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