BANKS may be frail and dangerous things, but most economists see them as essential to growth. According to the centuries-old circular-flow model, which tries to explain how money moves between firms and households, it is their job to recycle private savings into business loans. That helps firms invest and grow. Places where spare cash is routinely stuffed under mattresses, in contrast, will tend to grow less fast.In practice, not all savings make their way into investment. For instance, as John Maynard Keynes pointed out in the 1930s, it is possible to have “savings gluts”—periods when households are more willing to save than firms are to borrow and invest. Ben Bernanke, a former chairman of the Federal Reserve, has shown that scarred banks curtail their lending to companies after financial crises even if they have sufficient funds, inhibiting economic growth.* But it is not enough for banks to be handing out cash: just as important, a growing body of research suggests, is where the money goes.According to a new paper by Oscar Jorda, Moritz Schularick and Alan Taylor, the traditional view that banks primarily lend to businesses is out of...
from The Economist: Finance and economics http://ift.tt/1A1QctA
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