The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh, Peter Stella 02 July 2012
The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.
One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’.
monetary policy, Central Banks, money multiplier, Pledged collateral, re-pledging, private money creation