,
6 tweets,
2 min read
Read on Twitter
Very insightful post on the evolution of the financial system structure in the US (and later arround the world) , basically since the 70s when portfolio theory approach led to see banks equal to any other financial institution, downplaying their special role in creating money 1/n
Tobin(63) paper was instrumental in this although it was basically saying (correctly) that banks do not have a “widow’s cruse” to create money without limit. Regretably, that was interpreted (incorrectly) as implying that banks were not much different from other institutions 2/n
Banks are the only institutions that create money(deposits) when they grant credit, in the sense of creating liabilities with fixed nominal value generally accepted as means of payment for all transactions. That is THE reason why banks are more heavily regulated. 3/n
By having that power banks ensure the functions of maturity transformation and liquidity services before any savings materialize, which are essential to growth dynamics (see Schumpeter). Bank credit does not require previous saving. Btw, savings do not “finance” or fund. 3/n
Considering banks equal to others, as @csissoko shows, facilitated, since the early 70s in the US, the creation of MMFs as banks without capital, thrifts saving account subject to Rate caps (Reg Q) and banks allowed to go into long term housing loans funded by deposits 4/n
The Great Mortgaging(NBER20501) increased financial vulnerabilities. The Efficient Market Hypothesis, contributed to views favourable to light regulation and we had the Glass-Steagall repeal; Basel II and internal models; SEC (2003) allowing use of ABS in repos etc..5/5 (for now)
