Banks As Social Accountants: Credit and Crisis Through an Accounting Lens

Bezemer, Dirk J (2009): Banks As Social Accountants: Credit and Crisis Through an Accounting Lens.

Abstract

This paper probes the role of banks and credit in our socio-economic system using the metaphor of banks as social accountants (Stiglitz and Weiss 1988). It highlights the credit nature of money, and thus the fact that money is an accounting construct. This motivates the viewing of financial booms and crises through an accounting lens. By accounting necessity, credit creation in deposit-taking institutions implies debt creation. The analysis is that self-amortizing credit to the real sector grows apace with the size of the economy while credit to financial asset markets creates a net debt overhead on the real economy, as illustrated by dissection of long-term credit flows in the US economy. The long boom in credit to the financial sector so led to the growth of debt since the 1980s and onto the credit crisis. Turning to the behavioral aspects of credit and debt growth, the paper also discusses the role of banks and regulators in facilitating the boom. It identifies three ways in which debt growth was de-emphasized in monitoring and policy making.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit; economic history; banks; accounting; crisis; regulation
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Arestis, P and M Sawyer (2008) A Critical Reconsideration of the Foundations of Monetary Policy in the New Consensus Macroeconomics Framework. Cambridge Journal of Economics 32(5): 761-79

Arnold, P and P Sikka (2008) Globalization And The State-Profession Relationship: The Case The Bank Of Credit And Commerce International. Accounting, Organizations & Society 26(6) : 475-499

Barth, J, D Brumbaugh Jr., and J Wilcox (2000) The Repeal of Glass-Steagall and the Advent of Broad Banking. Journal of Economic Perspectives 14(2): 191-204

Beck, T & R Levine & N Loayza (2000). Finance and the Sources of Growth. Journal of Financial Economics 58(1-2), pp 261-300

Benk, S, M Gillman & M Kejak, (2005) Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects, Review of Economic Dynamics 8(3), pp 668-687

Board (2009) Guide to the Flow of Funds Accounts. Washington DC: Board of Governors of the Federal Reserve System

Borio, C and A Lowe (2004) Should Credit Come back from the Wilderness? BIS Working Paper 157. Basel: Bank for International Settlements

Caporale, G. and P. Howells (2001) Money, Credit and Spending: Drawing Causal Inferences Scottish Journal of Economics, Vol. 48, No. 5, pp. 547-57.

FRBC (1992) Modern Money Mechanics. Chicago: the Federal Reserve Bank of Chicago.

FRBD (2009) Federal Reserve Bank of Dallas website education section, at http://www.dallasfed.org/educate/everyday/ev9.html. Accessed February 25, 2009 Dallas: the Federal Reserve Bank of Dallas.

Gardiner (2004) The Primacy of Trade Debts in the Development of Money. In: Wray (2004) (ed.) Credit and Sate Theories of Money: the Contributions of Michael Innes Cheltenham UK: Edward Elgar

Gardiner, G (2006) The Evolution of Creditary Structures and Controls. Houndmills, Basingstoke, Hampshire UK: Palgrave McMillan

Geanakoplos, J (2009) End The Obsession With Interest. Nature 457(19): 963

Gertler, M (1988) Financial Structure and Aggregate Economic Activity: An Overview. Journal of Banking, Money Credit and Banking.

Greenspan, A (2008) Testimony for the Committee of Government Oversight and Reform, October 23 2008.

Hendrickson, J (2001) The Long and Bumpy Road to Glass-Steagall Reform. American Journal of Economics and Sociology 60(4): 849:879

Hilferding, R (1910) Finance Capital: A Study of the Latest Phase of Capitalist Development

Hudson, M and M van de Mieroop (2002) Debt and Economic Renewal in the Ancient Near East. International Scholars Conference on Ancient Near Eastern Economies. Baltimore: CDL Press

Hudson, M (2004) The Archeology of Money: Debt Versus Barter Theories of Money’s Origin. In: Wray (2004) (ed.) Credit and Sate Theories of Money: the Contributions of Michael Innes Cheltenham UK: Edward Elgar

J Mills (1867), On Credit Cycles and the Origin of Commercial Panics Transactions of the Manchester Statistical Society, Dec 1867

Keynes (1930) A Treatise on Money. Reprinted in Keynes, Collected Writings, vol. 6. Cambridge: Cambridge University Press

Knapp, F ([1924] 1973) The State Theory of Money. Clifton NY: Agustus M Kelley.

Kocherlakota, N (2000) Creating Business Cycles Through Credit Constraints. Federal Reserve Bank of Minneapolis Quarterly Review 24:3

Kuttner (2007) Repeal of Glass Steagall Has Caused the Subprime Crisis. Washington: Testimony before the Committee on Financial Services, October 2, 2007

Kyotaki, M and J Moore, (1997) Credit Cycles. Journal of Political Economy 105, 211-248

Leahy, M., S. Schich, G. Wehinger, F. Pelgrin and T. Thorgeirsson (2001), Contributions of Financial Systems to Growth in OECD countries, OECD Economic Department Working Papers No. 280.

Lequiller, F. (2004) Recommendations on the treatment of taxes on holding gains in the SNA Note presented by François Lequiller. At http://unstats.un.org/unsd/nationalaccount/AEG/papers/m1(p)taxes.pdf

Levine (2005), R. Finance and Growth: Theory and Growth, in P. Aghion and S. Durlauf eds. Handbook of Economic Growth, Elsevier, 2005.

Lown D and C Morgan (2006) The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey Journal of Money, Credit and Banking 38(6): 1575-1597

Malynes, G de (1601) The Canker of Englands Common Wealth. Online at http://socserv.mcmaster.ca/econ/ugcm/3ll3/malynes/canker.pdf

Marx, K. (1906[1887]) Capital (first English-language edition). Chicago: Charles H. Kerr and Co.

Mendicino, A (2007) Credit Market and Macroeconomic Volatility. European Central Bank Workin Paper Series no. 743

Mill JS (1848) Principles of Political Economy with some of their Applications to Social Philosophy. London: Longmans, Green and Co.

Minsky, H (1978) The Financial Instability Hypothesis: A restatement Thames Papers on Political Economy.

Mitchell Innes, A (1913) What is Money? Banking Law Journal, May issue: 377-408

Mitchell Innes, A (1914) The Credit Theory of Money? Banking Law Journal, December issue: 151-168

O’Connor, J (1987) The Meaning of Crisis: A Theoretical Introduction. Oxford: Basil Blackwell

Quinn, S (1997) Goldsmith-Banking: Mutual Acceptance and Interbanker Clearing in Restoration London. Explorations In Economic History 34, 411–432

Roscher (1878) Principles of Political Economy. Translation by JJ Lalor of Die Grundlagen der National Ökonomie. Chicago,

Roubini, N (2006) Why Central Banks Should Burst Bubbles. International Finance 9(1): 87-107

Roubini, N (2008) The Radical Approach. International Economy 22(4): 62-63

Schreier, P and P Stauffer (2004) SNA Revision Process: Provisional Recommendations On The Measurement Of The Production Of (Non-Insurance) Financial Corporations. At http://unstats.un.org/unsd/nationalaccount/AEG/Papers/m1(p)fisim.pdf

Schumpeter J (1954) History of Economic Analysis New York: Oxford University Press

Shiller R (2000) Irrational Exuberance. Princeton NJ: Princeton University Press

Stiglitz J and A Weiss (1981) Credit Rationing in Markets with Imperfect Information. American Economic Review 71(3): 393-410

Sikka, P (2008) Enterprise Culture And Accountancy Firms: New Masters Of The Universe. Accounting, Auditing & Accountability Journal 21(2): 268-295

Sikka, P (2009) Financial Crisis and the Silence of the Auditors Accounting, Organizations and Society 22 (in press) Sismondi, JCL Simonde de (1815) Political Economy. Online at http://socserv.mcmaster.ca/econ/ugcm/3ll3/sismondi/police

List F ([1842] 1885) The National System of Political Economy. Online at http://www.efm.bris.ac.uk/het/list/national.htm

Thornburg, S and R Robert (2008) Money, Politics and the Regulation of Public Accounting Services: Evidence from the Sarbanes-Oxley Act of 2002 Accounting, Organizations and Society 33:229-248.

Thornton, H. [1802] 1939. An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Edited by F. A. Hayek. London: Allen and Unwin

Stockhammer, Engelbert (2004) Financialisation and the Slowdown of Accumulation. Cambridge Journal of Economics, September 2004, v. 28, iss. 5, pp. 719-41

Tomasson, G (2008) Towards the Future. Presentation at the Reykjavik Academy, February 7 2008.

Tooke, T (1844) An Inquiry Into The Currency Principle: The Connection Of The Currency With Prices, And The Expediency Of A Separation Of Issue From Banking. London: Longman, Brown, Green, And Longmans, Paternoster-Row.

Uhlig, H (2004) What moves GNP? Econometric Society 2004 North American Winter Meetings 636

UN (2003) Glossary, Handbook of National Accounting Integrated Environmental and Economic Accounting 2003 at http://unstats.un.org/unsd/envAccounting/Glossary_draft.pdf

UN et al., (2008) System of National Accounts, live online version at http://unstats.un.org/unsd/sna1993/introduction.asp Published jointly by the United Nations, the Commission of the European Communities, the International Monetary Fund, the Organisation for Economic Co-operation and Development, and the World Bank

Van Deventer, D. (2008) Fair-Value Accounting, CDOs and the Credit Crisis of 2007-2008 Bank Accounting & Finance, October-November issue, pp 3-8.

Wadhwani, S (2008) Should Monetary Policy Respond to Asset Price Bubbles? Revisiting the Debate. National Institute Economic Review 206:25-34

Werner, R (1992) Towards a Quantity Theorem of Disaggregated Credit and International Capital Flows. Paper presented at the Royal Economic Society annual conference, York, April 1993

Werner, R (1997). Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan. Kredit und Kapital, 30,2. Berlin: Duncker & Humblot., 276-309

Werner, R (2005). New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance. Basingstoke: Palgrave Macmillan

Wray (1998) Understanding Modern Money. Cheltenham UK: Edward Elgar

Wray (2004) (ed.) Credit and Sate Theories of Money: the Contributions of Michael Innes Cheltenham UK: Edward Elgar

Yeager, L and R Greenfield (1986) Money and Credit Confused: An appraisal of Economic Doctrine and Federal Reserve Procedure. Southern Economic Journal 53:364-273 Young, M (2008) The Role of Fair Value Accounting in the Subprime Mortgage Meltdown. Journal of Accountancy , May issue, pp 34-35