At Functional Finance, we believe identifying and taking action to provide an alternative to the primacy of the finance sector and "making banking boring" are key to sustained economic stability defined as full employment and price stability.
Toward that end, we work to identify deficiencies in the current paradigm to improve outcomes. This means recognizing the changing nature of money and the limitations of interest rate manipulations by central banks in effective management of the money supply to regulate economic activity. As events in the aftermath of the financial crisis of 2008 highlight, the current system provides the financial system with unfair influence over policy makers because of their supposed central role in this regard to the detriment of other avenues to counteract the effects. As currently manifest, the primacy of monetary policy in a crisis has proven not only ineffective at facilitating recovery in the economy at large but continues to serve only banks which are made whole for their poor investments while support for full employment and public goods languishes under “austerity measures” taken up by governments due to shortages in tax revenue. This inefficient and ineffective prioritizing of the financial system, as if it were the only source of investment in the economy, limits the role of more direct policy action by elected officials whom the public need to force into action.
Understanding Banking
Our modern economic system, as currently constructed, relies on banks creating a steady flow of credit, or loans, in order to create more spending out of existing income to fuel economic activity. This role was laid out by the Federal Reserve Bank of Chicago in their publication titled Modern Money Mechanics stating that "The actual process of money creation takes place primarily in banks." This stands in contrast to the commonly held belief that banks operate as intermediaries lending deposits received from savings accounts is simply incorrect. Instead banks are central to economic activity because they create money as loans which create deposits fueling demand for goods and services.
This understanding is well known within banking and finance with central banks increasingly coming clean about the role of banks in the creation of money. Most recently of note was a paper in the Banks of England's Quarterly Bulletin containing a paper titled "Money Creation in the Modern Economy".
In it the authors declare:
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money"
President Woodrow Wilson speaking shortly after the creation of the Federal Reserve system was correct when he stated:
"A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation therefore, and all our activities, are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world. No longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
We've been led to believe that only a healthy banking sector will provide the engine for growth and recovery that we need. This simply is not true. This knowledge helps to clarify statements made by other prominent central bankers like Bank of England Chairman Mervyn King:
"At the heart of this crisis was the expansion and contraction of the balance sheet of the banking system."
The change in debt each year plays an integral role in changing the level of demand with increasing debt equaling a rising level of demand and visa versa. Under the banking centered model we're attempting to create more spending out of existing income producing the boom bust economic cycle we've been experiencing since the dot com crash of 2000.
For a more detail on the academic perspective of money & banking see economist Eric Tymoigne textbook available here.
Support Functional Finance to help us educate and raise awareness of how we can move away from a finance centered economic model with continuous boom and bust cycles to a more stable economy.
Toward that end, we work to identify deficiencies in the current paradigm to improve outcomes. This means recognizing the changing nature of money and the limitations of interest rate manipulations by central banks in effective management of the money supply to regulate economic activity. As events in the aftermath of the financial crisis of 2008 highlight, the current system provides the financial system with unfair influence over policy makers because of their supposed central role in this regard to the detriment of other avenues to counteract the effects. As currently manifest, the primacy of monetary policy in a crisis has proven not only ineffective at facilitating recovery in the economy at large but continues to serve only banks which are made whole for their poor investments while support for full employment and public goods languishes under “austerity measures” taken up by governments due to shortages in tax revenue. This inefficient and ineffective prioritizing of the financial system, as if it were the only source of investment in the economy, limits the role of more direct policy action by elected officials whom the public need to force into action.
Understanding Banking
Our modern economic system, as currently constructed, relies on banks creating a steady flow of credit, or loans, in order to create more spending out of existing income to fuel economic activity. This role was laid out by the Federal Reserve Bank of Chicago in their publication titled Modern Money Mechanics stating that "The actual process of money creation takes place primarily in banks." This stands in contrast to the commonly held belief that banks operate as intermediaries lending deposits received from savings accounts is simply incorrect. Instead banks are central to economic activity because they create money as loans which create deposits fueling demand for goods and services.
This understanding is well known within banking and finance with central banks increasingly coming clean about the role of banks in the creation of money. Most recently of note was a paper in the Banks of England's Quarterly Bulletin containing a paper titled "Money Creation in the Modern Economy".
In it the authors declare:
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money"
President Woodrow Wilson speaking shortly after the creation of the Federal Reserve system was correct when he stated:
"A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation therefore, and all our activities, are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world. No longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
We've been led to believe that only a healthy banking sector will provide the engine for growth and recovery that we need. This simply is not true. This knowledge helps to clarify statements made by other prominent central bankers like Bank of England Chairman Mervyn King:
"At the heart of this crisis was the expansion and contraction of the balance sheet of the banking system."
The change in debt each year plays an integral role in changing the level of demand with increasing debt equaling a rising level of demand and visa versa. Under the banking centered model we're attempting to create more spending out of existing income producing the boom bust economic cycle we've been experiencing since the dot com crash of 2000.
For a more detail on the academic perspective of money & banking see economist Eric Tymoigne textbook available here.
Support Functional Finance to help us educate and raise awareness of how we can move away from a finance centered economic model with continuous boom and bust cycles to a more stable economy.