The myth of the money multiplier

Very interesting piece! Thanks Steve (The myth of the money multiplier, October 22).

Here is a classic example supporting what you are saying. Steve. My bank CBA (The myth of the money multiplier, October 22).
I have written a lot about CBA; they are both innovative and stupid. But fail to coordinate their efforts. For net benefit.
I needed a car in real estate consultancy and 15 years had gone bye.
Wayne Swan offered us $5,000 accelerated depreciation to bolster overseas imported models in year one as Tax Deduction. Last time I did not take up offer. My investment is modest, but sought $10,000 in bridging finance from CBA.
Clients paying accounts are patchy; there is a lack of confidence; people do not want to part with liquidity.
They called my P & Ls, two years ago I had big Bad Debt and so it hammered my modest income (note I work on High Street in the real world). Some things had been going better.
After jumping over hoops for CBA to verify my income and prospective income (i.e. it is looking good), CBA declined my modest request.
Having gone through marriage separation I have funds in trusts to cover the bridging loan by a multiplier of 30+, but the CBA model did not recognise my liquidity. In the end fortunately I had my own funds in bank to pay with a bank cheque.
So yes money is circulating slowly, there is less of it, the multipliers are in reverse, the SME sector (just dealing with Gold Coast clients) have had the White Shoe Brigade gamble with peoples leases. Duh. Double the rent; double the market value of property!
By gambling with peoples leases; creating "value" that is not there. New and prospective "investors" are being forced to take massive haircuts. Banks have lent money on inflated values.
Wayne Swan is getting less tax revenue. We are all making less profit. But my new Korean car is great to drive. And offers good value for money.
Man do we have our priorities wrong. I wish we would get our act together. To crown it all; CBA gave me a new credit card. And $15,000 credit. But I never go higher than $3,000.

Steve. The good thing is that we now don't have to go to university get get your lectures for free. Problem is, no amount of caffeine could hold my attention through that (The myth of the money multiplier, October 22).
So where does all this theory lead? We know what not to invest in – you've shouted it from a mountain top. We know what's wrong – you've dismantled every classical economic theory invented. You stand almost unchallenged as a world leading economist. So may I ask a simple question? "What's the answer?"

@Ken Mortensen
42 (The myth of the money multiplier, October 23.)

It's always interesting to see people's reaction to your papers (The myth of the money multiplier, October 22). As usual you are correct, but it appears now that you have shown money is legally created by the Banks/Central Banks through the setting up of an accounts receivable entry, the question is always the same.
How do you propose to change the system to make it more stable and predictable so more people can make more obscene amounts of money, instead of how can it be changed to be socially beneficial for everyone.

Nearly 50 years ago in Europe, Cheques were sorted in banks on magnetic strip reading equipments, the cheques were simultaneously stored on a tape to be read at the clearing house (The myth of the money multiplier, October 22).
Things looked simple, one was credited by one bank and debited by the other, similarly Central Banks would use the same mechanism across countries and money would be backed by Gold Reserves with one currency largely used for most exchanges.
After Bretton Woods and advances in technology the convertibility to gold was abandoned and some countries became more equal than others, the ECU a European saving device was proposed to equalise things but was not implemented, instead the Euro was implemented to counter balance the US Dollar.
Because we have many assets, money created by reserve banks at the stroke of a pen did not matter much and in a way we are all please with it....
Given the multiplier effect money could also be backed up by trees instead of Gold...or Chocolate...miam miam

@ Clive Mace. I'm starting to believe.

Steve, I think I already understood what you are saying from other things I have read (The myth of the money multiplier, October 19). But I have a couple of comments in the Australian context.
If you look at the balance sheets of the four big Australian banks, you see that they all have reserves of zero, or close to it. Their deposits are all less than their lendings. In the case of Westpac, the deposits are around two thirds of the lendings. To make up the difference, they have borrowed money (I don't know where from) so that their deposits plus borrowings are about equal to the lendings. The question is, where has all the endogenous money created by the lendings gone? It looks as though, in your terminology, the "seller bank" is somewhere else, but where? If some of the endogenous money has been spent on imports, perhaps a significant amount has gone to foreign "seller banks".
I understood that Australian had a reserve requirement, but it is zero as opposed to the 10% in the US. I can't quote any authority here so perhaps I am wrong.

Borrowings must equal lendings. ( The myth of the money multiplier, October 22)
Deposits cover when they stuff up.
If someone borrows more than they can possibly ever repay such as US or Greece and they have nothing tangible they have stuffed up.
So they stuff the unit of currency so it is worse much much less and root their citizens particularly those who save work and pay taxes.
Please stop the gobblygook like an economist and come back to earth.
If you use your scone you would buy a few hard assets like a farm then maybe you would come back to earth.

May I respectfully suggest you debits and credits....they are very easy to understand...it would make the presenation very much more straightforward (avoids the bit about + when something decreased) (The myth of the money multiplier, October 22).