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Making Money: Leverage and Private Sector Money Creation

dc.contributor.authorBlair, Margaret M., 1950-
dc.identifier.citation36 Seattle U. L. Rev. 417 (2013)en_US
dc.descriptionlaw review articleen_US
dc.description.abstractIn the wake of the financial crisis of 2008-2009, practitioners and theorists in law, finance, and economics are rethinking our theories about how the financial sector influences the real economy. In particular, they are reexamining the linkages among financial innovation, supply of credit and money, monetary policy, bubbles, financial stability, and economic growth. One of the key issues that is being reconsidered is the dynamics of how banks and other financial institutions drive credit creation and credit allocation, and how these factors, in turn affect the performance of the macroeconomy. In this article, I argue that, by providing an alternative to “money” (as traditionally defined), credit acts like money in stimulating the economy. When financial institutions that provide credit to the real economy borrow too much and become over-leveraged, the effect is like an uncontrolled expansion of the money supply, increasing the risk of dangerous asset bubbles and making financial markets unstable. Excessive leverage in the financial sector can set the stage for sudden and catastrophic contractions when multiple financial institutions all try to deleverage quickly and at the same time. This is because when financial institutions collectively withdraw credit from the market, this depresses aggregate economic growth, I further argue that the tendency of financial institutions to use too much leverage will not be self-correcting because leverage has helped to drive up profits and incomes over time in the financial sector. Thus, because of the substantial negative social externalities of excessive leverage, financial market regulations must be deployed to prevent financial institutions from using too much leverage.en_US
dc.format.extent1 PDF (39 pages)en_US
dc.publisherSeattle University Law Reviewen_US
dc.subject.lcshFinance -- Law and legislation -- United Statesen_US
dc.subject.lcshFinancial leverageen_US
dc.titleMaking Money: Leverage and Private Sector Money Creationen_US

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