Wednesday, March 2, 2011

Don't Take It From Me

Warren Mosler unearths a good quote from Vitor Constancio, a Vice President at the European Central Bank:

“The level of bank reserves hardly figures in banks lending decisions; the supply of credit outstanding is determined by banks’ perceptions of risk/reward trade-offs and demand for credit”.

This is an extraordinarily important point that economists and journalists get wrong ALL THE TIME. Remember it the next time you read someone saying that we need to inject money into the banking system so that banks will make more loans to the public. It doesn't work that way. Banks ALWAYS loan when they have profitable lending opportunities at prevailing interest rates, and NEVER otherwise.

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