Brash vs Gould vs Brash

Former UK Labour MP (and academic administrator) Bryan Gould, and former Reserve Bank Governor (and political leader) Don Brash have been engaged in a fairly robust exchange of views in the op-ed pages of the Herald.

Gould began it a couple of weeks ago with a column, initially prompted by some combination of the initiatives from both the Minister of Finance, and the Labour Party, that may lead to governance reforms at the Reserve Bank, and Sonny Bill Williams’ Islam-inspired objections to interest, and hence to sponsorship by the BNZ.   The politicians being not very radical at all, Gould pointed us to Williams.

Sonny Bill, however, has succeeded, if we are thoughtful enough to recognise it, in throwing a spotlight on the entire role of the banks in our economy and our society.

Gould’s specific concern?

It is the willingness, not to say keenness, of the banks to lend on mortgage that provides the virtually limitless purchasing power that is constantly bidding up the prices of homes in Auckland and, now, elsewhere.

It is the banks that are fuelling the housing unaffordability crisis, a crisis that is leaving families homeless and widening the gap between rich and poor.

Gould isn’t keen on operational autonomy for the Reserve Bank, whether on monetary policy or banking regulation, at all.

Why should the Government be able to hide behind the Governor of the Reserve Bank and duck responsibility for a policy of the greatest importance to so many Kiwis? Why should ministers not be held to account in Parliament and to the country for failing to deliver outcomes they were elected to deliver?

And actually, I have some sympathy with him on that.   Banking regulation should be administered by the Reserve Bank, but approved by the Minister of Finance or Parliament itself.

But Gould’s argument isn’t some abstract one about the optimal assignment of powers within the Reserve Bank Act.     His concern is that banks create credit, and in so doing create new deposits, as a profit-making business.

They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.

The banks make their money, in other words, by charging interest on money that they themselves create. Not surprisingly, they are keen to lend as much as possible.

In fact, most businesses are keen to increase volume, at least for as long as they can make money on the marginal addition to their sales.   Supermarkets are typically keen on selling you more groceries, health food shops on selling you more health food, fashion outlets on selling you more clothes etc.  But Gould’s bugbear is banks (and, presumably, other lending institutions).   To read Gould, you’d think that banks crammed money down the throats of unwilling borrowers.  There doesn’t seem to be any role for demand in his story (let alone for the regulatory restrictions that artificially inflate urban land values).  Banks, as currently structured, don’t appear to serve any socially useful purpose.

As you might expect, Don Brash –  a former Governor, a former ANZ director, and currently chair of one of the small Chinese banks in New Zealand –  disagreed.   Writing of Gould he notes

He then goes on to blame this money creation for the housing affordability crisis which Auckland now finds itself in, and to attack the Government for washing its hands of this aspect of the housing crisis.

Mr Gould is not alone in peddling this nonsense, but that certainly doesn’t make it correct.

Don Brash isn’t disputing the rather obvious point that the banking system, in the course of lending, also create deposits.  As he says

The banking system does create money.

But at this point he rather veers away from the substance of the issue (Gould’s claim that bank credit creation at the root cause of the housing affordability problems – dismissed by Brash as “peddling this nonsense”) to make a correct, and useful, but in this context perhaps subsidiary, point.    What is more or less true of the system as a whole, just isn’t true for any individual bank.

If individual banks really could create money by “the stroke of a pen or a computer entry”, as Mr Gould contends, why do they bother paying interest on deposits, why do they borrow funds from parent banks overseas, why do they borrow funds in the international market, why do they need to hold some funds in government securities as a liquidity reserve, why do some banks occasionally run out of money when customers lose confidence in them?

….I now chair the small New Zealand subsidiary of the Industrial and Commercial Bank of China….. It would certainly make life very much easier if we could, “by the stroke of a pen or a computer entry”, simply create the money which we lend out to New Zealand borrowers. Unfortunately, we can’t.

Individual banks, and their managers and boards, have to worry (sometimes a lot) about the funding side of their balance sheets.  If Don Brash’s bank increases lending to New Zealand borrowers, that process will indeed create new deposits for the New Zealand banking system as a whole.  But there is no guarantee any of those deposits will come back to his bank.  In the immediate term,  if one bank increases lending more than other banks do, that will lead to a loss of liquidity from the lending bank.  In boom times, it might be easy to fund such rapid lending growth.  In times of crisis, funding can be almost everything.  I was heavily involved in these issues in the midst of the 2008/09 financial crisis, and recall banks telling us then that no matter what initiatives the government or the Reserve Bank took, they’d be reluctant to increase lending if they couldn’t count on secure on-market funding.  Their Boards just wouldn’t let them.

But in a way, Brash’s response didn’t actually deal with Gould’s point –  that for the banking system as a whole, deposits don’t usually constrain lending. Rather the two typically grow as part of a simultaneous process (with some exceptions about changes in the current account deficit etc).  If so, perhaps the credit creation process could be the root cause of the (housing) problem?

Gould returned to the fray in a column in yesterday’s Herald.   But, oddly, he doesn’t attempt to defend his view that banks are the cause of the housing problem.  Rather he tries to teach the former Governor to suck eggs, offering lay lessons in monetary economics, and suggesting that Brash doesn’t really know what he is talking about.

In fact, he first misrepresents what Brash said

…..I said the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.

But, as you can see from the quotes above, Brash seems to be mostly using the “peddling nonsense” phrase to respond to the housing affordability argument.  Moreover, he explicitly states (see above) that the banking system creates money  (personally, I’d prefer he’d used “deposits” rather than “money”).

In fact, in the entire latest Gould column there is not a single mention of the housing issue.  Instead, there are extensive quotes from a very good –  but entirely conventional –  Bank of England Bulletin article from a few years ago on how the credit and deposit creation process actually works, and how that process is quite different from the very stylised approach that often lingers in elementary economics textbooks.     In fact, our Reserve Bank made many of the same points in an article in their Bulletin a few years earlier.  A (then) Reserve Bank senior manager was making these points in a speech 15 years ago.  But the Bank of England article is very good.    Then again, recall that the Bank of England runs things pretty much exactly the same way our Reserve Bank does.    There simply isn’t any stunning fresh insight in the BOE piece to up-end how best to think about monetary policy and banking regulation.

So when Gould quotes the BOE piece

They then go on to say, “Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money – the so-called ‘money multiplier’ approach…[but that] is not an accurate description of how money is created in reality.”

They go on. “Banks first decide how much to lend depending on the profitable lending opportunities available to them – which will, crucially, depend on the interest rate set… It is these lending decisions that determine how many bank deposits are created by the banking system.

Anyone who knows anything about this stuff is simply drumming their fingers, and going “yes, yes, tell us something we didn’t know”.   But do notice the mention of interest rates in that second paragraph.  The way central banks choose to manage the monetary system these days relies on adjusting an official interest rate, not on attempting to directly manage quantities (of base money, lending, deposits or whatever).   Demand for credit matters quite a lot, and the interest rate is a key rationing device.     When overall demand is weak at any given interest rate –  as has been the case for the last decade –  interest rates tend to fall, and official interest rates are typically cut.  Banks can’t just generate new demand out of thin air.

Gould concludes

But the capacity they [banks] have is hugely important. I concluded by asking whether it was wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.

Reasonable people can differ on the extent to which banks should be regulated, and even on who should do the regulation (one should always cautious about the risk of capture, of bureaucrats/ministers by those they are supposed to be regulating).

But in his two articles put together, Gould has done nothing (at all) to substantiate his claim that banks are the prime (or even just a key) source of the housing affordability problems.    Simply describing the way in which credit and deposits are created, across the banking system as a whole, contributes little.

I would grant one point.  If banks could not create credit – in the process (simultaneously) allowing young generations to borrow from older ones – house price cycles would look rather different.  Perhaps house prices would be a little lower.  But the biggest change would probably be not in the level of house prices, but in who owned the houses.   Even more young people would be unable to purchase their own home, and more of those homes would be owned by those not constrained by access to credit (be it the evil “investors”, cashed-up foreigners, or institutional vehicles such as pension funds).  Systemic credit risks might be lower, but at what cost to individual families etc?  The fundamental factors that create (artificial) scarcity  –  land use restrictions running hard into rapidly rising population-fuelled demand –  wouldn’t have changed at all.

And for believers in the idea that the banking system is the source of the problem, it is often worth pointing them to the United States.    It has the same sort of banking system we do –  the banking system simulataneously creates loans and deposits –  and yet vast swathes of the country, including big cities often with quite rapid population growth, have had no problems with unaffordable house prices (as a resource on this, try this excellent interview with leading US housing academic Joseph Gyourko, which almost deserves its own post).  The private banking system isn’t the problem.  Land use and housing supply restrictions are.    The banking system certainly enables some people who would otherwise be squeezed out completely to purchase (in fact that is what it always did for first home buyers –  whether the “bank” was a private one, or the State Advances Corporation).  If house prices ever do fall back a long way, some borrowers might well regret having borrowed.   But in all sorts of areas of life, hindsight is like that. For now, they’ve made the best decisions they could for themselves, with the information they have,

Monetary reform ideas have a long tradition –  sometimes advocated by some pretty prominent economists (eg Laurence Kotlikoff, who came through New Zealand a few years ago).  Usually, there is (a lot) less there than the advocates make out.  Sometimes – as with Social Credit –  the analysis is simply misconceived, or even straight-out nutty.  I suspect Gould is in the former camp.  We could, if we wanted to, have a quite different system of monetary management.  I think we’d mostly be worse off if we did.  And since our system is the same system adopted now across virtually the entire world, the burden of proof should surely be on the advocates of change to demonstrate that the outcomes of their alternative visions would be demonstrably superior.  Gould hasn’t done that.  And it is no use simply going ‘but the 2008/09 crisis was so awful, anything has to be better’ without a great deal more supporting analysis, of the causes and consequences of those crisis episodes, than is on offer here.


31 thoughts on “Brash vs Gould vs Brash

  1. Thank you Michael, an interesting exchange I hadn’t been aware of.
    I have read a lot of Steve Keen and Michael Hudson on the consequences of limitless credit expansion and can sympathise with Gould’s concerns so am interested in your perspective.
    It seems to me that our system, as “designed” has become habituated, dependent, on credit/debt growth in the high single digits; anything less and we fall into recession. Interest rates are lowered and/or governments will borrow to ensure that the rate of the growth of debt continues. We appear to need to expand debt at a considerably greater rate than the prevailing interest rate.
    The inevitable result is that total credit/debt is now several multiples of annual gdp in most countries and rising by double digit percentages of GDP in many cases; well in excess of the rate of nominal growth of the underlying economy that supports that debt.
    There is clearly a problem with this model.
    My question to you, as the wisest person I could possibly ask is: how long can this continue, when does the whole thing blow up/collapse and where do we stand as a net debtor country when it does?


    • There is something wrong with our bookworm economists. We have let them run the country for far too long. Best we start looking at a Chartered Accountant as a Reserve Bank Governor.

      Every bank around the world is highly regulated. Debt creation must ultimately balance with deposits. Banks that allow debt to outstrip deposits end up having to have a sit down with a bank regulator or like Lehman Brothers go out of business and liquidated.. You either have deposits available or you ensure that you are sufficient;y recapitalised to support your loans. Balance Sheets must balance. It is a zero sum game.

      It is nonsense to say that Don Brash is correct in a single bank situation but he is wrong in a all bank situation. What utter nonsense. Single banks add up to all banks. What applies to one bank applies to all banks. Banks in China may operate a little differently as they are all government owned banks and therefore their loan structure may overrun to the extent allowed by the Chinese Government who can back their state owned banks with the immense capital that the government has. Even Chinese banks operates ultimately a Balance Sheet ie it is a zero sum game.


    • It is ridiculous the amount of nonsense that bookworm economists dream up to justify their jobs. It is true that ultimately debt creation leads to deposits but it is also equally true all deposits ultimately lead to debt creation. Anyone who have studied algebra will know this is a mathematical fact.


      • The individual banks must have deposits or borrowings (their liabilities) equal to or greater than their loan book (assets) plus a buffer (reserves). The banking failures (BNZ, Lehmans etc.) usually occur when the value of the collateral (your house) backing their assets (your loan) declines below the value of the loan (your debt). The loan book might look to be in glowing good health one month and a total wreck the next. We have moved from a gold money to house money.
        That is why a collapse in asset values (e.g. house price crash) is a destroyer of banks and, if its a big one, entire banking systems and why speculative debt funded bubbles are highly dangerous and why we require a reserve bank to backstop the system.
        We seem to require a continuous expansion in debt, (new money, a bet on the future?) or the economy and asset prices enter a downward spiral of debt deflation and depression. It all seems to work – until it doesn’t; the long term sustainability of this arrangement is the reason for my question at the start of this discussion.


      • George, of course credit and deposit growth continues. We are also making more and more products around the world. Businesses all around the world continue to make a margin on their products that lead to disposable income, which then leads to more savings in the banks and corresponding more credit growth. You are wrongly trying to overlap a dynamic model onto a static model. But there is no static model as population continues to grow and the demand for products and services continue to growth at more or less the same rate. Higher productivity means that you can create more with less people but then you are faced with a problem. Less people equates to less demand and that’s when all the problems start. It’s called economic decline, stagnation, death.


    • David

      I’m not in the camp that sees some sort of inevitable “blow-up” or collapse. In New Zealand’s case, for example, government debt is at pretty modest levels (and is pretty representative of the real fiscal position – which isn’t the case in say the US – where there are lots of very generous not-funded defined benefit public sector pension commitments). And our net external debt (the “net international investment position”) is now less negative than the average for the last 25 years or so (albeit still relatively large comparatively speaking).

      In terms of private credit measures, overall credit/GDP hasn’t changed materially over the last decade. It rose sharply in the 00s, but we then came through the 2008/09 recession without severe loan losses or a severe domestic financial crisis. After the recessionh credit/GDP fell back somewhat and then has risen again in the last few years, but not to levels that are materially higher than what we saw a decade ago.

      In terms of flows, the RB’s measure of total business credit (“business” + agriculture) increased by around 5.5 per cent in the last year, almost exactly the same rate of increase as the growth in nominal GDP. Contrast that with, say, 2005 when the annual growth rates were fluctuating in the 15-19% range (and nominal GDP might have been rising by 6-7% pa.

      Where there is something of an issue is around housing. Even house finance growth rates now are only around half of what they were in 2005, but they are consistent with a continuing increase in housing debt/household income. That probably can’t go on forever, but we don’t know how long it can go on. My own sense is that, awful as the rigged housing market is, it isn’t mostly a banking sector issue. On the one hand, Reserve Bank stress tests suggest the banks would be pretty resilient even if house prices were to fall back quite a long way. And on the other hand, really large falls in house prices probably depend mostly on the prospect of freeing up land use regulations (or maybe a big sustained net migration outflow). Mostly the rise in housing credit looks like what you’d expect if the banks were simply accommodating the pressures on house prices that arise from the interaction of population pressure and land use restrictions – rather than being something directly fed or fuelled by the banks. As I noted in the post, without banks’ willingness to lend, scarce houses would be owned to an even greater extent by people/institutions who were not credit-constrained.

      Generally I think people have been too willing to blame banks. I illustrated the endogenous nature of what I think has gone on in a post last year (and particularly in a chart near the end of that post).

      None of this is to say that there are not potential risks around debt in some sectors and some parts of the world. Public debt looks very worrying in a range of big countries (including CHina, where much debt is effectively public) and, for example, in the US a great deal of corporate debt has been taken on at low interest rates, and when lots of debt is taken on under some conditions, and those conditions change, then it would be surprising if there were not some stresses. That said, my hunch – no more – is that those stresses might be more 2001 like than 2008 like. The public debt situation worries me more, and leaves me very thankful to govts of both stripes in NZ for having avoided those particular problems. (We have other, more structural, challenges of long-term economic underperformance).


      • Thank you Michael, much appreciated and somewhat reassuring.
        I had noticed the very subdued levels of NZ private credit growth in the first five years following the GFC although total credit growth was still significant thanks to government stepping into the breach.
        We have probably all seen the classic graph of US total credit market debt to GDP; the ratio of 130% in the 1950’s almost tripled to 380% just prior to the GFC. The ratio then declined for the first time in over five decades thanks to massive defaults in the private sector but is once again rising strongly.
        I think what Steve Keen et al. and others have highlighted is the dynamics of credit growth and its effect on economic growth. Ignoring current account effects for now; with total debt rising by say 10% of a total debt of say 300% of GDP (not the actual figures but not unusual for NZ and others) we are creating such a massive cash injection into the economy that even a slowing down must have huge crippling effects. Please excuse my ignorance but I still can’t see how that level of debt growth is even remotely sustainable.


  2. Yes, like David, I’d agree – there is a serious problem with this model the world over. I found this statement of yours interesting:

    “When overall demand is weak at any given interest rate – as has been the case for the last decade – interest rates tend to fall, and official interest rates are typically cut.”

    I assume you mean overall demand for credit/debt has been weak? But isn’t that the opposite of what we have seen (i.e., demand for credit is high);

    In other words, I don’t get it – the world seems awash with debt that is unlikely to be able to repaid in future – yet interest rates have fallen and continue to fall.

    So how can you claim that demand is weak?

    Or are you talking about demand for something other than credit/debt?


    • I mean’t overall demand for goods and services – altho try to imagine what demand for credit might look like if, all else equal, the OCR were at 2007/08 levels now.

      I’d be more hesitant about concluding that demand for credit is high now. Most of it looks like the purely endogenous response to higher house prices, and in this episode total credit growth has been quite modest when set against the experience in 2001 to 08.

      (I’ll respond to David on Monday)


      • The OCR at 2007/2008 was a poorly engineered RBNZ respond to local inflation without looking at the global climate nor paid any consideration to the survival of NZ productive industries. It was a extremely blunt instrument and crudely handled like a bludgeon. The OCR at 9% pushed commercial lending rates to 12% and above sending the economy into a death spiral. We lost most of our productive industries, decimated an entire building sector, which in turn dominoes into the destruction of 61 finance companies with the loss of $6 billion in investor funds. Our interest rates was amongst the highest amongst our global trading partners. The NZD was pushed through the roof and made our local exporters uncompetitive.

        This was a self engineered destruction. No other nation has done what we have done, purposely and with intent destroy our local industries.


      • The 2001 -08 credit boom was a scary beast (16 or 17% annual household debt growth at the peak) with an appalling 8 or 9% current account deficit so I guess the RB had to try and reign it in somehow.
        We are running at 8 or 9% annual H.H. debt growth now which while double the nominal GDP growth is well below the prior price boom. Perhaps the influx of foreign money is more of a factor in juicing the market rather than double digit credit growth this time, never mind what John Key said.


      • George, that is not correct. Between 2001 to 2008, floating interest rates hovered between 6.5% to 9.6%. It was an inverse yield curve which meant that longer term rates was much cheaper.

        You are referring to the 1990’s period when interest rates went up high to those levels.

        It sounds scary whe interest rates hit 18% but for me and a lot of people that had jobs and businesses it was business as usual. The CPI index was also running at the same rate which meant that wages and prices was increasing to compensate. This is a nice boogeyman tale we tell the kids. But we neglect to also tell them that land prices was also included in the CPI index at the time. The reason wages have not kept pace with land prices is because Central banks around the world stripped out land prices due to distortion in the CPI index resulted in distortions in price setting and wage setting around the world.

        Land prices are not included in the CPI index now. That is why wages have not kept up with rising land prices and ulitimately house prices.


      • Of course credit growth and deposit growth continues. It is because population continues to grow. Less people die and more being born equates to increasing demand for goods and services. The margin on that production of goods and services leads to savings which leads to more credit growth.


      • Also don’t forget China was able to lift 600 million people out of poverty over the last 30 years into a growing middle class that consume products and services.


      • None of which explains if it’s sustainable for the debt/credit to grow 2, 3 or four times faster than the economy.
        It’s like trying to have a discussion with the missing link – the missing link between ignorance and arrogance.


      • Thanks Michael – the reason I got it wrong was because of the preceding sentence:

        “Demand for credit matters quite a lot, and the interest rate is a key rationing device. When overall demand is weak at any given interest rate – as has been the case for the last decade – interest rates tend to fall, and official interest rates are typically cut.”

        As a non-economist, I get confused. I just can’t see a monetary policy framework that is applied consistently. Reading, for example, this piece by Grant Spencer in 2010 brings up all sorts of inconsistencies;


        “Immediately prior to the crisis, monetary policy in New Zealand had been relatively restrictive with the Reserve Bank increasing the Official Cash Rate (OCR) between 2004 and 2007 in response to elevated inflation pressures associated with a booming housing market.”

        Yet now we have inflationary pressure on the housing market at least equal to that pre-GFC, yet interest rate/OCR is not being used based on the same situation as pre-GFC;

        I assume that is perhaps because the banks priced risk inappropriately, meaning many loans might go bad if they used the OCR tool now in the same way they applied it pre-GFC?


      • George, tourism and international students is a $20 billion foreign currency direct injection in the economy.. Since 2001, that industry has grown at a rate of 12% to 15% a year becoming now our largest industry in NZ. The discretionary spend in the local communities is 100%. This is quite different from the agricultural industry whose available discretionary spend in the local communities is only 30%. Tourists and international students require massive investment in infrastructure in accomodation, in learning centres with multi billions invested in the University campuses and private institutions,

        It is rather sad that you do not fully appreciate the impact of a growing sector that feeds back to increased savings from available disposable income and increased levels of credit to fund the infrastructure spend.

        Also the expansion of the dairy sector has moved farm debt to $60 billion. Credit expansion is a necessary part of a growing economy. Debt to fund business expansion is actually cheaper than equity funded expansion. Equity funding equates to loss of autonomy, loss of control by the original owner, loss of future profits to equity partners and loss of future value add. Any potential buyback of equity on making more profits is at a subsequent higher and higher value.

        Debt principle value is static. It does not increase in value as profits increase. Debt can easily be repaid. Asset values increase as profits increase which means that debt shrinks relative to the increasing asset held. Autonomy and control resides with the original owner throughout the debt period. What is there not to like about debt?


  3. Speak to Harmony about peer to peer lending. They have more investors than borrowers. Ie, deposits exceed debt creation.


    • Here’s how I understand it GGS:
      Harmoney and others like that (finance companies) are outside the banking system and can’t directly create loans before deposits.
      When you create money by taking out a loan from a bank (or using your credit card) the “money” is always within the banking system. The deposit is created simultaneously with the loan – when it is spent it immediately appears as a deposit in the vendors bank account and becomes a liability to the banking system to balance the asset of the loan. In that way credit/debt can grow dependent almost completely on our propensity to borrow. Actual cash is different but not such a big factor these days.


    • No, the only difference is that harmony is trying to match deposits with lending. This was how banking first started. Peer to peer lending works on a small scale. But when you are dealing with hundreds of thousands of customers it becomes an administartive nightmare. The only way the model can work on a large scale is to create a warehouse of deposits ie you aggregate. From that you then on-lend. That’s how a bank works. It creates two independent contracts. The deposit contract and the debt creation contract.

      This is the same way any business is run. There is a purchase contract and there is a sale contract both of which runs independent of each other.


      • ….indeed: ‘flow’ determines ‘stock’ so the story goes; but perhaps in a monetary economy, stock determines flow – until it doesn’t.


  4. I recall a New Zealand before the Banks got their claws into the Insurance companies and the Building Societies

    The bulk of mortgages were supplied by Life Insurance companies and Building societies and State Advances corporation. Life Insurance Comanies and Building Societies more or less only lent out what they recieved in

    Remembering those days led me to go have a read up on the History of the Saving and Loans disasters of the 1980’s in the USA

    (a) Pretty instructive, and
    (b) No menton of the above in this article, and
    (c) Somehow NZ survived without the banks doing the business, in those days

    Liked by 1 person

    • The US S&L debacle was primarily caused by fixed-rate deposit insurance inducing a large amount of moral hazard (combined with a collapse in the oil price), so not directly relevant here.

      And yes, NZ did ‘survive’ back in the day, but that’s about the best you could say. If you wanted a mortgage, you got in line, and waited (unless, of course, you happened to know the bank manager or had access to some kind of subsidised scheme via your employment). As for getting a loan to start or grow your business, good luck!

      The kind of system you envisage may or may not have restrained house prices (it would have reduced demand, but also supply), but to the extent it was successful the pressure would simply have gone on rents instead. And all of us would certainly have been a lot poorer.


  5. Getgreatstuff – Your comment – “The only way the model can work on a large scale is to create a warehouse of deposits ie you aggregate. From that you then on-lend. That’s how a bank works.” – demonstrates you need to do more research to understand how banking really works.

    Banks do not lend their deposits. Check these references for confirmation:-

    The Bank of England Quarterly Bulletin 2014 Q1 – “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks”.

    International Monetary Fund – “The Truth About Banks” – “New funds are produced only with new bank loans….. through book entries made by keystrokes on the banker’s keyboard at the time of disbursement. This means that the funds do not exist before the loan and that they are in the form of electronic entries – historically, paper ledger entries – rather than real resources.

    Adair Turner, former vice chairman of Merrill Lynch Europe, who took over Britain’s Financial Services Authority on Sept. 20, 2008 – “this “myth” is that people deposit money and banks take that money and lend it out to make productive investments of that capital into businesses.
    It’s fictitious in two elements. One of which is to suggest that banks merely take pre-existing money and lend it on. It does not capture the reality that banks are able—unless they are constrained by capital and liquidity and reserve asset requirements—to create new credit money and purchasing power.

    I have plenty more if you need them.


    • Nothing wrong with these articles but they are an economists warped view of the world. It is a zero sum game. The entire business world revolves around the balance sheet. Net always sum up to zero.

      The equation is actually very simple. A = L + E

      Debt creation is limited to the deposits and the availability of capital. A deposit creating contract is separate from a savings deposit contract. Banks work as a warehouse, always monitoring their capital adequacy versus available deposits. Debt creation is limited by the funds and savings available to lend. All these articles say the same thing just from a warped economists language perspective.


  6. There is a very simple test to see whether prices are too high in Auckland and debt driven as Gould contends.

    1. The cost to draw a single line for a subdivision, ie from 1 site subdivided to 2 sites is around $150k per extra site.
    2. to build a house will cost $2000 per sqm. Say a 200sqm house will cost $400,000

    Therefore the base build cost without the land cost is already $550,000

    Add land cost of $400,000 and the value jumps to $950,000

    Add a developers margin of say 10% and the price goes up to $1,045,000

    Unfortunately, this is very much in line with Auckland’s average house prices. House prices are therefore fundamentally correct.


  7. Perhaps you didn’t really read this quote:- The Bank of England Quarterly Bulletin 2014 Q1 – “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks”.

    Banks don’t take in deposits and then lend them out. They create deposits by lending out money created effectively out of thin air. Are your really going to say the Bank of England is wrong or the IMF?


    • You are reading their statements out of context. Banks do create debt as they do write up on contracts with borrowers. This contract is independent of deposit contracts with savers.

      You can’t read the IMF statements or the Bank of England as these are economists and economists have a warped view of reality. That is why we should seriously look at having a Chartered Accountant as our next RB governor.

      But banks do write up a separate contract with depositors so you have a jolly good argument that banks create deposits as well.

      It is a circular argument. Either way you argue you are correct. There is no right or wrong answer.

      All rational and legitimate banks have a balance sheet. The net sum is always zero.


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