Question

Preface:

The commercial banking sector through its role of granting and creating credit in the money creation process has a large influence on the overall macro-economy. Specifically, their directing of credit has a large impact on what type of transactions happen in the economy. The majority of loans that banks grant go towards existing assets--mainly real estate. This means that the majority of banks' credit creation goes towards unproductive transactions or transactions which don't increase GDP (The purchase and sale of existing real estate assets does not add to GDP).

Write at least two paragraphs answering the following questions:

2. Why do you think that banks grant the majority of their loans to finance the purchase of existing assets or unproductive transactions? (Remember banks are profit maximizing firms)

Answer 1

There is a far reaching view that much bank lending is unproductive, i.e. does not raise GDP – or on the off chance that it does, it does as such in an unsustainable route by blowing up resource costs or expanding expansion, as opposed to by expanding generation. Monetary exchanges on optional markets, and the buy of second-hand property, are viewed as useless. This seems appealing. In the event that we could wipe out ineffective lodging fund, banks would loan more to organizations, and that would mean higher GDP in the more drawn out term.

Loaning for optional market buys contributes to GDP, and not simply in unfortunate resource value swelling. All auxiliary market exchanges are possibly GDP upgrading. This is a direct result of their "draw" impact on essential markets. For instance, consider somebody who claims a 5-year-old BMW. He needs to purchase a fresh out of the plastic new auto, yet he needs to pitch his present one with a specific end goal to manage the cost of another one. So he exchanges his auto. On the off chance that there were no auxiliary market for autos he would be not able do this: he would drive his BMW until the point that it went to pieces, instead of purchasing another one like clockwork. Genuine, auto makers may react by cutting the costs of new autos to tempt buys, and they may run a scrappage conspire for autos more seasoned than 5 years: yet could this truly be called "beneficial"?