This page has a shortlink: bit.do/azb4m -- linked on YouTube Video for Lecture.
Final Exam Questions:
1. Explain how private banks create money when they make loans. Explain why the theory of financial intermediation -- which says that banks take money belonging to depositors and give it to the borrowers -- is wrong, and why the real process involves creation of money. Explain what happens when customers demand money from the bank which the bank does not have.
2. Explain why banks have incentive to maximize lending -- they want to find people to lend money to. Explain some of the ways that the banks create borrowing so that they can create money to lend.
3. Explain the politics of why the process of money-creation is mis-represented, so the public generally does not know or understand the process.
On Wednesday 14th Nov, we will have an inverted classroom. The class should read the following two articles and watch the video lecture
1. Zarlenga & Poteat: THe Nature of Money in the Modern Economy: Implications and Consequences, JKAU Journal on Islamic Economics
2. The Battle for the Control of Money: JKAU Journal on Islamic Economics
3. 95m Video Lecture on Battle for Control of Money -- Adv Micro Lec 24 + Link to Readings.
Come to clases prepared with THREE written QUESTIONS. One question each on each of the three items above. These questions will be used for classroom discussion. Questions should be submitted to me at start of the class.
For reference: Main page on Modern Money provides links to many writings, lectures, and other relevant materials.
Based on question asked in class, it may be useful to clarify the process of creation of money as credit by banks as follows:
Normal Thinking is that When I deposit money, bank opens an account in my name and PUTS MY MONEY INSIDE the account. THIS IS NOT TRUE and a false picture of the situation.
It is better to think as follows. Bank has a product which is called a CHECKING ACCOUNT (CA for short). It sells this product for money. When I deposit 1000 PKR, bank takes this price and puts it into its OWN kitty and SELLS me a CA with 1000 Rs. The CA is DISCONNECTED from the money I paid for it (deposited).
The Bank owns assets like CASH earned by selling CAs and by selling Loans. Rules say that if bank owns liquid assets worth 1000, it can sell 5000 worth of CAs. Thus with 1000 PKR in its pockets, it can create 4000 PKR of money.
The Checking Account is a SPECIAL PRODUCT, it entitles the writer of a check to get CASH for his check. HOWEVER, even though this entitlement exists, and this is what makes the CA valuable, it is not equivalent to cash, it is equivalent to a PROMISE by the BANK to produce cash To fulfill the promise, bank need not HAVE cash - it can borrow cash as needed, when presented with a check.
Discussion, Q&A Session on Battle for Control of Money - Inverted Classroom -- readings/lecture listed above. Recording of Urdu discussion