[nabla9]

I'm well aware of that paper.

Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking.

Banks don’t create demand out of thin air by providing loans.

While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.

[hn0]

Richard Werner did empirical tests of the theory you describe, and found it to be false:

https://www.sciencedirect.com/science/article/pii/S105752191...

And

https://www.sciencedirect.com/science/article/pii/S105752191...

Economists at the Bank of England re-ran these tests in an attempt to disprove the above theory and found themselves reaffirming it:

https://www.bankofengland.co.uk/working-paper/2015/banks-are...

It has since been reaffirmed by other central banks, including the Bundesbank

https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...

[RobertoG]

>>Banks don’t create demand out of thin air by providing loans.

This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says.

See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan. MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed.

>>While banks can create loans "out of thin air" [..] they are limited by their reserves.

My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details.

Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves.

If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.