When Non-Banking Experts Become Overnight Banking Experts

by: Cullen Roche

In my previous post I mentioned how important I thought the banking debate between Paul Krugman and myself was. I also mentioned how most economists downplay banking debates because it puts a wrinkle in their model of the world. If banks create money endogenously then suddenly things like monetary policy might not be quite as effective as one might think. So, right on cue, Scott Sumner has declared Paul Krugman the winner of the debate and has once again confirmed that banks aren’t special. That’s all well and good except for the fact that Scott Sumner is the first person to admit that he has “little” banking expertise. He says so on his own blog:

“It’s true I know little about banking”

I hate to write a rather personal post about Scott Sumner because this banking debate has nothing to do with him, but his mentality is a fair generalization of mainstream economists. They don’t understand banking, but they’re happy to declare who does and doesn’t understand banking when it confirms whatever biased view of the world they hold. How can someone hold the position that banks aren’t special when they don’t understand banks? Maybe I am crazy, but that defies logic to me.

A big part of the banking debate going on here is to try to push the ball forward and get more economists to understand banking so they can consider whether banks actually do matter. If you don’t understand banking then how can you possibly declare that banks aren’t special? I am sorry, but I have trouble taking someone seriously when they declare they don’t understand something and then declare to the world that that thing that they don’t understand just doesn’t matter.

Don’t get me wrong, there are LOTS of things I don’t understand (tall women, short women, round women, slender women, etc), but before I marginalize something I usually try my best to understand it. In the case of economists, many of them simply seem to have a blindspot on banking because it messes up their world view so it’s easier to just declare their irrelevance than to actually study them and find out whether they matter or not. That’s not progress. It’s a regressive, destructive and closed-minded attitude that does little to help anyone aside from the biased thinkers pushing that sort of mentality. I’m willing to admit that banks aren’t special. But not before I actually understand banking….