The dangerous magic of banks

Dusseldorf How does a bank work? This question is extremely relevant against the background of the current crisis. Interestingly, economists do not agree on this, although banks as we know them today have existed since the late Middle Ages.

The dispute boiled over with the recent Nobel Prize in Economics for Ben Bernanke, Douglas Diamond and Philip Dybvig. Economist Peter Bofinger accused the Nobel Committee of rewarding people who misunderstood how banks work.

It is wrong that banks collect money from customers and lend it to other customers. It is true that banks can create loans and money at the same time at any time by posting the loan on the assets side of the balance sheet, i.e. assets, and the corresponding loan amount in the customer’s account on the liabilities side, i.e. liabilities. A bank creates money out of nothing.