Yves here. This is deceptively important post. We’ve regularly mentioned that mainstream economists and the monetary economists at the Fed and presumably many other central banks adhere to the “loanable funds” theory of investment and lending. That model posits that loans come from a pre-existing pool of savings. The credit view, which the Bank of England, and even Greenspan and Bernanke have effectively admitted is how things really work, is that banks create loans out of thin air, and simultaneously, the related deposit. The check on this process is the cost of money (the central bank’s policy rate). This model, unlike the loanable funds story, explains how central bank policy influences credit and money supply growth.
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