Author(s): Daniel Daianu
Date published: Aug 2019
SUERF Policy Note, Issue No 89
by Daniel Daianu, National Bank of Romania
JEL-codes: B26, E4, E5, E6, F3, F4, G2.
Keywords: Money, credit, central banks, commercial QE, financial stability, crypto-currencies, over-financialization, narrow banking, shadow banking, monetary policy.
Over-financialization and the fragility of economic systems in the industrialized world is widely debated among academics and where public policies are formulated, which, obviously, involves central banks. High finance, as named by President Franklin Delano Roosevelt (who called for regulatory measures after the Great Depression, after which the Glass-Steagall Act was enacted), has become more disruptive over the past decades. This is reflected in the dynamics of financial cycles, in the volume of public and private debt, in the frequency of “Minsky moments”. The Great Recession has reignited the debate on “who creates money” What has surprised not a few is that a deep crisis hit so badly advanced economies – which rely, presumably, on solid institutions and knowledgeable regulatory authorities. No wonder then that some voices have gone beyond the need for tight financial regulation and supervision efforts and have come up with proposals aimed at a fundamental rethinking of the banking/financial system. Fintech and cryptocurrencies have also amplified the debate on who creates money and the role of central banks. Unconventional policies have altered the complexion of monetary policy and balance-sheet operations have turned into a basic component of their toolbox. The thoughts below dwell on money creation and the relationship between central banks and commercial banks, the money vs. credit debate, crypto-currencies, banking reform proposals. The main argument is that central banks still run the money creation process, but that their life has become much more complicated in the aftermath of the Great Recession.
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