One more for the Banking School. This is a thought-experiment to help us clarify our thinking about banks.
If banks bought houses, instead of lending people the money for people to buy houses, what would be different? Not much.
But we students of money and banking would avoid some common mistakes, like confusing the demand for money with the demand for loans. And we would see that financial intermediation has no necessary connection with money.
Suppose there were some prohibition (motivated by religion or politics or whatever) against banks charging interest on loans. But no prohibition on banks charging rent on houses they own. So banks stop making loans and start buying houses instead.
The asset side of banks' balance sheets would be diffferent: banks would own lumpy and illiquid houses instead of lumpy and illiquid mortgages on houses. Banks might need higher capital ratios, because houses are normally riskier than mortgages on houses. But the liability side of banks' balance sheets could be exactly the same as now. Some of the things on the liability side, like chequable demand deposits, could still be used as money, just as they are now.
People would pay rent to the bank, instead of paying interest to the bank. So banks would earn rental income from their assets instead of interest income. The revenue side of their income statements would look a little different, but banks would still make their living from the spread between the low yield on their liquid liabilities and the high yield on their illiquid assets.
So not much would change.
But it would be a lot simpler to teach money and banking.
Instead of: 1. me promising to repay a loan from the bank; 2. the bank crediting my chequing account for the amount of the loan; 3. the bank debiting my chequing account when I buy the house; 4. and the bank crediting the house seller's chequing account, -- we can skip all but the last step. The bank buys the house by crediting the house seller's chequing account. Period. What happens to the money after the house seller gets it is exactly the same in both cases. And that's the important part. That money keeps on circulating around the economy. Until the bank sells a house, which destroys the money it had previously created.
It is very easy for students of money and banking to get confused between the demand and supply of money and the demand and supply of loans of money. It would be very hard for students to get confused between the demand and supply of money and the demand and supply of houses. But the two would nevertheless be related: the demand for houses by banks would be exactly the same as the supply of money by banks. (You can define them both as stocks, or both as flows, whichever you find more convenient.)
But an excess supply of money by the non-bank public wouldn't necessarily mean an excess demand for houses by the non-bank public. There are lots of other things you could buy if you wanted to hold less money.
If people wanted to hold more money, a good monetary policy would try to ensure that this resulted in banks wanting to hold more houses. Otherwise we would get recession and deflation, as people tried to hoard money.
And if people didn't want to hold more money, a good monetary policy would try to ensure that banks didn't want to hold more houses. Otherwise we would get boom and inflation, as people tried to spend away the excess money.
If banks both bought and sold houses, and announced a price (or price/rental ratio, or rental yield) at which they were willing to buy or sell unlimited quantities of houses, we know that the housing market would always clear. The stock of houses demanded by the non-bank public at the price set by banks would always equal the stock of houses they actually owned. If the non-bank public had an excess demand for houses, they would immediately buy them from the bank. If the non-bank public had an excess supply of houses they would immediately sell them to the bank. But that wouldn't mean the stock of money demanded by the non-bank public would always equal the stock of money they actually owned. The market for houses is not the same as the market for money. The market for houses is just one of the many markets for money.But if banks bought houses, instead of lending people the money to buy houses, then banks, strictly speaking, wouldn't be banks. They would act almost exactly like banks, but we wouldn't be allowed to call them "banks". Because banks, by definition, are financial intermediaries whose liabilities are used as money. And a financial intermediary both borrows and lends, and the "banks" in my thought-experiment don't lend. They buy houses instead. They create money not by making loans, but by buying houses.
But if the "banks" in my thought-experiment act like banks, but don't meet the strict definition of being banks, maybe we should change the definition? Does a bank that is left holding the houses when all its mortages default, but is still a going concern because it has adequate capital, suddenly stop being a bank, by definition? That isn't a very useful definition.
Maybe we should change the definition to: a "bank" is anything that creates money. What it spends that money on is immaterial. It could buy houses, buy financial assets backed by houses, or it could just give it away to charity, or by dropping money out of a helicopter.
What should our slogan be? "Loans create deposits!"? Maybe. "Buying houses creates deposits!"? Maybe. "Creating deposits creates deposits!". Better. "Creating money creates money!". Yep, that's it.
The one truly important and puzzling thing about banks is that people are willing to use their liabilities as a medium of exchange. But that's equally important and puzzling about any thing that creates money, whether it's a financial intermediary or not.