The Pernicious Myth of “Patient Savers and Lenders”

Banks are obviously different from households. But I think explaining two key differences goes far towards explaining why “endogenous money” theory — often pooh poohed as either confused or obvious — is important to economic thinking.

The first is a dweeby accounting difference. The other, which arises from that, is very, very real.

1. When the banks lend to households, the banks expand their collective balance  sheet. New assets (loans due) and new liabilities (deposits payable).

When households “lend” (deposit their currency in a bank, buy bonds), they do not expand their balance sheets. They just shift the composition of their asset portfolios (currency traded for deposits, deposits traded for bonds).

(Of course if households were lending directly to other households, that would expand household balance sheets. But they don’t, hardly at all.)

Unlike banks, households only expand their balance sheets by borrowing. New liabilities (loans payable) and new assets: houses residable, cars drivable, food eatable, education usable, health livable. The stuff of life.

This points to the other key difference:

2. Households consume their assets. They have to, in order to live. The very necessary business of living constantly pushes their balance sheets towards imbalance — topped up, for most households, only through labor.

Not so banks. They don’t consume their assets. They don’t have to, in fact can’t. Financial assets (claims against real assets) can’t be consumed.

Banks’ assets are never diminished through consumption, or through use, decay, illness, obsolescence, or death. Excepting borrowers’ payoffs or default, banks’ assets are eternal and immortal (as are the banks, for all intents and purposes).

Which exposes the whole notion of “patient lenders” and “impatient borrowers” as the wholesale claptrap that it is. When the banks expand their balance sheets by lending, they are not displaying “patience.” They are not “saving” in any sense of the word, and they are certainly not “patiently foregoing current consumption.” When a household displays “impatience,” it is the inevitable and inexorable impatience of life, passing.

Bankers face very little or no personal risk from expanding their balance sheets; it’s just how they make money. Households, quite otherwise.

Do with this reality what you will, but don’t tell me that the “patient savers and lenders” construct describes any real world that any of us lives in, or the incentives of the lenders in that world.

Cross-posted at Asymptosis.

 

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