Banks caused the property boom (article)

An interesting article, by Alub Breward appears here:

http://www.smh.com.au/articles/2004/07/15/1089694482083.html?oneclick=true

or

http://www.smh.com.au/news/opinion/webdiary/index.html

It argues that bank lending practices, not tax policy or interest rates, have been the key drivers behind the property boom.

Regards, Peter

But the retail banks can't print money. That's the RBA's job and they do it well. It's the growth in M3 that matters.

The yanks are the same, printing money to prevent recession but finding business (who may use the money productively) don't want it so they must lend it into the housing market.

How can biz borrow for development? Forever stymied by environmentalists, NIMBYs, original owners and every other self interest group who can think of a reason to complain.

So now you know: It's Greenpeace and Friends Of The Earth causing the housing bubble.

Thommo (a little tongue in cheek)

Banks don't PRINT money, but by lending it at interest they sure as heck increase the supply

And with the very low cash reserves imposed on banks these days, they can have quite a magnifying effect on the money in circulation.

Cheers,

Aceyducey

Some simple money multipliers....

Aceyducey said:

Banks don't PRINT money, but by lending it at interest they sure as heck increase the supply

And with the very low cash reserves imposed on banks these days, they can have quite a magnifying effect on the money in circulation.

Click to expand...

If it is assumed that all income is either consumed or saved then, the value of a simple multiplier can be represented by the formula:


K = 1 / 1 - MPC or 1 / MPS

Where:

MPC = Marginal Propensity to Consume

MPS = Marginal Propensity to Save

MPC + MPS = 1


Say that:

MPC = 0.90

MPS = 0.10

Therefore K = (1 / 1 - 0.90) or (1 / 0.10)

So in both cases, K = 10.

Initial increase = $500 million > in this simple word (the world inhabited by economists has to be simple, they are simple people) the initial increase of $500m will result in a change to national income of $5 billion.


A more complex multiplier includes consideration for taxes and imports (leakages from the circular flow of income).




An alternative money multiplier can be represented as:

total change in bank deposits = (1 / reserve ratio) x initial change

So if banks have a reserve ratio of 20%, then a $500 million initial change in bank deposits will (in this simple model) result in a total change of $2.5 billion in bank deposits.



MB

Come on MB - Ive been trying for years to get that damn formula out of my head... hehe good memories.

Confession time.... I cheated

Yes I did learn those at uni.... and yes they were promptly all-but-erased-from-memory the milli-second after my exam for whatever subject it was ended.

My theory, however, is this.

Once you have learned something it is ok to forget it, so long as you know where to find it again.

And I knew where to find them again.

Mark

Pitt St said:

If it is assumed that all income is either consumed or saved then, the value of a simple multiplier can be represented by the formula:


K = 1 / 1 - MPC or 1 / MPS

Where:

MPC = Marginal Propensity to Consume

MPS = Marginal Propensity to Save

MPC + MPS = 1


Say that:

MPC = 0.90

MPS = 0.10

Therefore K = (1 / 1 - 0.90) or (1 / 0.10)

So in both cases, K = 10.

Initial increase = $500 million > in this simple word (the world inhabited by economists has to be simple, they are simple people) the initial increase of $500m will result in a change to national income of $5 billion.


A more complex multiplier includes consideration for taxes and imports (leakages from the circular flow of income).




An alternative money multiplier can be represented as:

total change in bank deposits = (1 / reserve ratio) x initial change

So if banks have a reserve ratio of 20%, then a $500 million initial change in bank deposits will (in this simple model) result in a total change of $2.5 billion in bank deposits.



MB

Click to expand...

Ahhh yes, credit creation policy.........*reminises about year 12 economics class*