The Financial Crisis From An MMT Point Of View

[Sundial]

In economics, the definition of investment is quite strict.

Investment means an increase in the capital stock – Gross fixed capital formation.

When we buy shares or put money in the bank. This is not seen as investment, it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.

Definition: Investment, Investor and Savings | Economics Blog

I guess I shouldn't have wasted all that time getting a degree in economics. Everything I need to know can be pulled off the Internet, even if the web site is wrong. For example, an increase in the capital stock is not gross fixed capital formation. It is net fixed capital formation because the capital stock includes depreciation.

If you put your money in the bank, the bank then lends that money out for both investment - commercial and industrial loans, real estate loans, mortgage loans, etc., - or consumption - credit card loans, installment debt, etc. For example, commercial and industrial loans are used by businesses to fund operations and expand, which creates wealth and is expands the capital stock of the economy.

On share capital, it is true that buying shares is usually a transfer of ownership, but this misses the point. Corporations are net issuers of capital, and that capital is used for investment. When a company wants to raise equity share capital, it uses the market to price the cost of capital, which the company then assesses against the potential return of a project. If the cost of capital is perceived to be less than the return on the project, the company will issue share capital (or debt) which is then used to fund the new project. That new project, if successful, adds to the capital stock of the country.

Hope that helps.

I'm perfectly willing to accept that you have a degree in economics. Having said that, appeals to authority are generally a bad idea on the internet, because nothing anybody says here can be verified. In any event, "I have a degree" isn't a good basis for discussion, since there's nothing for me (or anyone) to say about it.

I understand that the conventional view is that banks take money from the public and lend it back to the public again. If you want to talk about why that's not the case, I'm happy to talk about it. If you want to that's how it is, because that's how it is, there's not much for me to say.

The question I'd ask is this: if banks need money from the public in order to make loans, where does the original, non-bank money come from? What mechanism does the public use to create money in order to fund banks?

The argument I'm making here, to be clear, is that the direction of causation is loans ---> deposits, not deposits ---> loans. If a bank wants to fund a project, the bank does not need to wait for a depositor to come in and make a deposit.

 

[California Girl]

The reaction to the crisis was to save more and spend less.

Why the crisis happened is another matter. My view is that it was caused by corruption among investment bankers, mortgage salespeople, and ratings agencies.

The crisis caused the recession, but they're two different things.

I prefer to base my views on reality... like facts and shit. Clearly you don't.

Idiot.