ECONOMIC AFFAIRS: Can banks create money out of thin air?*

The global financial crisis in 2007/08, which came close to destroying the world economy, had its beginnings in a banking crisis. The reasons why need not bother us here. But a consequence of it has been to cast the spotlight on banking and money mismanagement associated with the GFC. Economists who adhere to neo-classical free-market orthodoxy insist that modelling the real economy need take no account of banks. Modern money, they say, was nothing more than a convenient move away from pure bar…

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