Aarhus Universitets segl

Ib Ravn

How financial bubbles are fueled by money creation a.k.a. bank lending: An explanation for public education

Publikation: Bidrag til tidsskrift/Konferencebidrag i tidsskrift /Bidrag til avisTidsskriftartikelForskningpeer review

[No abstract]
[Introduction:] It is widely acknowledged that the build-up of a financial bubble coincides with and may even be caused by excessive bank credit or lending (e.g., Reinhart and Rogoff, 2009; Kindleberger and Aliber, 2011; Jordà, Schularick and Taylor, 2015). Equally well understood, at least to the readers of this journal, is the fact that commercial bank lending involves money creation (Werner, 1997, 2014a, b; Ryan-Collins et al., 2011; McLeay et al., 2014; Jakab and Kumhoff, 2019).

Somewhat less frequently discussed is the possible causality implied by the conjunction of these two facts: If bank lending really is a process of money creation, and bank lending precedes the bursting of financial bubbles, then money creation by banks may be hypothesized to be a main driver underlying the rise and bursting of financial bubbles (e.g., Werner, 2005; Turner, 2015; Keen, 2017; Huber, 2017a).

In this paper I shall proceed from the assumption that future research will bear out this proposed connection between “bank lending (that is, money creation)” and “financial bubbles inflating and bursting”. Instead of showing this link to be the case I will set an historical and conceptual context for it that may help the expert readers of this journal explain it to their students and lay audiences. The inability of most neoclassical economics to embrace this link between money creation and financial bubbles suggests that an alternative, non-neoclassical interpretation of the monetary and banking context is required. Once supplied, such an explanatory context will render the link readily meaningful, even to beginners, and, thus, I hope, contribute to public education (cf. Ravn, 2015).

The context to be proposed is that of money being continually created, by such agents as pre-Renaissance merchants and then by banks and, especially, banks interconnected through clearing systems...
TidsskriftReal-World Economics Review
Sider (fra-til)143-154
Antal sider12
StatusUdgivet - sep. 2021

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