Just finished The Big Short. Yes, Lewis does a great job describing why the CDSs and synthetic CDOs were created, but like Yves Smith, he misses the process that actually creates the initial money used to purchase those instruments. Add to that list the authors of This Time is Different.
Some of that CDS money came, of course, from the investment characters that shorted the market in Short (Burry, Lippmann, Eisman, Cornwall, etc.), meaning it was pre-existing money.
Smith was also an investment banker. In EConned, she writes:
Banks hold deposits and pay interest on them. Depositors have the right to demand their funds at any time, but through experience, banks know that only a small percent of the funds they hold in trust will be withdrawn on any given day, and even that might be matched or exceeded by a new inflows. Thus banks, to earn additional profit, lend out a portion of their deposits, typically $9 for every $10, at a higher interest rate than they pay to their depositors.
This is incorrect. The money she claims is a portion of the deposits is actually newly created money. Without this money creation, there would be no increase in the amount of money in circulation, and therefore no money to pay out in depositor interest and shareholder return.
As an investment banker she, like Lewis, probably had no reason to understand money creation through lending, and thus accepted the commonly held mis-perception she describes above. In fact, many working inside commercial lending banks probably have no need to understand the fractional reserve lending system. Only a few at the top need to know. Sadly, therefore, Lewis's book does not disprove my theory.
I'll put Devils on the list as well. Thanks.
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Date: 28/8/11 17:55 (UTC)Some of that CDS money came, of course, from the investment characters that shorted the market in Short (Burry, Lippmann, Eisman, Cornwall, etc.), meaning it was pre-existing money.
Smith was also an investment banker. In EConned, she writes:
This is incorrect. The money she claims is a portion of the deposits is actually newly created money. Without this money creation, there would be no increase in the amount of money in circulation, and therefore no money to pay out in depositor interest and shareholder return.
As an investment banker she, like Lewis, probably had no reason to understand money creation through lending, and thus accepted the commonly held mis-perception she describes above. In fact, many working inside commercial lending banks probably have no need to understand the fractional reserve lending system. Only a few at the top need to know. Sadly, therefore, Lewis's book does not disprove my theory.
I'll put Devils on the list as well. Thanks.