I’ve been intrigued, and troubled, by the concept that “banks literally lend money into existence” ever since I first heard it.
Today a very occasional contributor to Front Porch Republic lays out how it’s done and how the confluence of that and some other factors leaves the economy in great structural peril still. Better yet, he tells how we can get out of it with minimal pain – at least initially.
The contributor, Eric Zencey, is a novelist, essayist, and Visiting Associate Professor of Historical and Political Studies for Empire State College in Europe and New York. His writing in environmental history and political theory has been supported by grants from the Rockefeller, Guggenheim, and Bogliasco Foundations. Today’s essay is a glimpse into his forthcoming book The Other Road to Serfdom: Essays in Sustainable Democracy (University Press of New England, Fall 2011).
That banks lend money into existence is not necessarily a secret worthy of outrage. It is a conscious policy decision at the national level to loosen the federal grasp of a traditionally sovereign prerogative, seigniorage: the difference between the face value money and its cost of production; the profit that comes from creating money.
But outrageous or not, allowing banks into the game changes it pretty fundamentally, especially when the banks are backed by the FDIC is they get so far out there as to create a crisis of confidence and consequent “run on the bank.”
Zency lays it out well if you’re interested. It seems to me that this is a major factor in our manic-depressive economic mood swings.