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Bank credit creation

Extra: The dynamics of boom and bust

This is extra content. If you want to know more about the mechanisms behind financial crises we will provide an overview of four optional lectures on money, debt and crisis.

Last year we released a small video lecture series called Debt: the good, the bad and the ugly. Here, Dirk Bezemer explains the origins of money as debt. How banks work and how self-reinforcing mechanisms in asset markets keep producing financial crises.

Episode 1: Debt, a great invention covers how debt and money systems developed over the years into the financial system we have today. All modern money is debt created by banks and this system has and can potentially bring us great wealth.

Episode 2: How bubbles grow covers how debt and money can be created by banks for both productive and non-productive purposes. With non-productive purposes mainly being asset markets. Here, excessive debt causes the prices of these assets to go up. The market does not correct this. This can lead to bubbles and a large debt burden which are a drag on the economy.

Episode 3: Why crises occur covers how a debt fuelled asset bubble is always doomed to burst. This leads to a self enforcing process of debt reduction that spirals into the real economy. This is why we call our crisis today a debt crisis or a credit crunch.

Episode 4: The post-bubble economy covers possible solutions. Is it possible to create an economic system that does not produce bubbles and crises? And is it possible to solve our current debt crisis? We need to restructure unsustainable debt, redirect bank lending to productive purposes and get productive bank lending going again. And finally, economics should pay close attention to debt, one of its most important variables.

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This article is from the free online course:

Decision Making in a Complex and Uncertain World

University of Groningen

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