The Borio-Disyatat paper is especially recommended. It explains best why the savings glut thesis itself is a product of a faulty ‘Loanable Funds’ view of money. Much more appropriate is the credit/financing view of money that Borio and Disyatat take. The best explanation of this credit view is Chapter 3 (’Credit and Capital’) in Joseph Schumpeter’s book ‘Theory of Economic Development’. As Agnès Festré notes, Hayek had a very similar theory of credit but a very different opinion as to its implications:
both Hayek and Schumpeter make use of the mechanism of forced saving in their analyses of the cyclical upswing in order to describe the real effects of credit creation. In Schumpeter’s framework, the relevant redistribution of purchasing power is from traditional producers to innovators with banks playing a crucial complementary role in meeting demand for finance by innovating firms. The dynamic process thus set into motion then leads to a new quasi-equilibrium position characterised by higher productivity and an improved utilisation of resources. For Hayek, however, forced saving is equivalent to a redistribution from consumers to investing producers as credit not backed by voluntary savings is channelled towards investment activities, in the course of which more roundabout methods of production are being implemented. In this setting, expansion does not lead to a new equilibrium position but is equivalent to a deviation from the equilibrium path, that is to an economically harmful distortion of the relative (intertemporal) price system. The eventual return to equilibrium then takes place via an inevitable economic crisis.
Schumpeter viewed this elasticity of credit as the ‘differentia specifica’ of capitalism. Although this view combined with his vision of the banker as a ‘capitalist par excellence’ may have been true in an unstabilised financial system, it is not accurate in the stabilised financial system that his student Hyman Minsky identified as the reality of the modern capitalist economy. Successive rounds of stabilisation mean that the modern banker is more focused on seeking out bets that will be validated by central bank interventions than funding disruptive entrepreneurial activity. Moreover, we live in a world where maturity transformation is no longer required to meet our investment needs. The evolution and malformation of the financial system means that Hayek’s analysis is more relevant now than it probably was during his own lifetime.