Banking: Intermediation or Money Creation
Roundtable #1 Prompt

Contributors: Morgan Ricks, Marc Lavoie, Robert Hockett, Saule Omarova, Michael Kumhof, Zoltan Jakab, Paul Tucker, Charles Kahn, Daniel Tarullo, Stephen Marglin, Howell Jackson and Christine Desan

Prompt for Discussion

Commercial banks are, indisputably, at the center of credit allocation in virtually all modern economies. Astonishingly, however, it remains controversial exactly how banks expand the money supply.

According to one view, banks operate as intermediaries who move money from savers to borrowers. The basic idea is that banks extend the monetary base by lending out of accumulated funds in a reiterative way. In round 1: a bank takes a deposit, sets aside a reserve, lends on the money; round 2 – the money lands in another bank, that bank sets aside a reserve, lends on the money; round 3 – the process repeats. Money’s operation is effectively multiplied in the economy because banks transmit funds constantly from (passive) savers to (active) borrowers, thus distributing money across those hands. The system works because savers, who are content to leave their funds alone, are unlikely to demand more than the (respective) reserve amounts back from any round. Banks balance their flow of funds over time as borrowers repay their loans.

Banking: Intermediation or Money Creation
R. Hockett & S. Omarova, What Do Banks Intermediate?

February 5, 2020

Robert Hockett, Cornell Law School
Saule Omarova, Cornell Law School

Apparently there still are people who believe that the principal role of commercial banks is to ‘intermediate’ between depositors and borrowers – lending the funds of the former to the latter at a premium, conveying a portion of that premium to the former, and pocketing the remainder.

Current Scholarship
Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure

Author: Saule T. Omarova
This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms’ internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market-on a macro- rather than micro- level-would profoundly, and far more effectively, alter individuals’ and firms’ normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound – and to do so on a systemic level.

Saule T. Omarova. “Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure” (2018) p. 797 – 839
Available at: http://works.bepress.com/saule_omarova/23/