Friday, 19 September 2014

Spot the flaw in this argument relating to bank capital.

The illustrations below come from a Bloomberg article by Peter McCoy. I like the illustrations, but the argument behind them is actually flawed, though the flaw is not serious. Or rather, rectifying the flaw actually SUPPORTS McCoy’s argument rather than detracts from it.

The flaw is thus.
If banks are made to hold more capital, the TOTAL AMOUNT that individuals, households etc need to invest in capital in ALL INDUSTRIES for the country as a whole must rise (all else equal). That means the RETURN that households will demand for holding or investing in capital will rise. Thus banks will have to charge more for loans.
However, contrary to the claims of bankster / criminals, that will not reduce GDP: in fact it will INCREASE it. Reason is that when banks have a low capital ratio they are more likely to fail, thus they are implicitly relying on taxpayer funded subsidies or guarantees. And subsidies distort markets and reduce GDP. Thus a rise in capital requirements, while it will reduce loans and debts, will actually increase GDP.

Bank capital ratios in the 1800s when taxpayer funded bail outs for banks were unheard of were often around 50%: way above current levels. That 50% is some indication of what the genuine free market ratio would be.

But of course Wall Street bankster / criminals don’t want genuine capitalism or free markets. Their praise for capitalism is one HUGE LOAD OF HYPOCRISY. What they really want is socialism for the rich, while the poor are exposed to capitalism red in tooth and claw.
H/t to Anad Atmati.

Wednesday, 17 September 2014

The removal of bank subsidies equals full reserve banking.

1. There is no justification for subsidising money lending (i.e. banks) any more than there is a reason to subsidise car production or any other commercial activity.
2. If all forms of taxpayer funded backing and subsidies for banks are removed, then all of those funding banks (shareholders, depositors, bondholders, etc) necessarily become shareholders, or shareholders of a sort. That is, they all stand to lose money if a bank goes seriously wrong.
3. That means that commercial banks are no longer a totally safe haven for money. But there is a perfectly legitimate demand for a totally safe method of storing money. Indeed such a method already exists in that anyone can store central bank issued notes (e.g. $100 bills) in a safe deposit box or under their mattress.
4. Ergo when all state backing for commercial banks is removed, the state should at the same time set up a totally safe method of storing money: effectively let every household and firm have an account at the central bank. That is clearly more efficient that safe deposit boxes, and safer than mattresses.
And that all amounts to full reserve banking.

Monday, 15 September 2014

Article by Paul De Grauwe.

MMTers will be pleased to see that Paul De Grauwe (who has taken to plagiarizing MMT) has just penned a less than inspiring article claiming to have the solution to the Eurozone’s problem.
He makes the mistake of assuming that the ONLY problem in the EZ is EZ wide lack of demand. The problem with that is that if demand for the EZ as a whole is increased, that means excess inflation in Germany. And the Germans just won’t accept that.
In fact another major problem if not THE CENTRAL PROBLEM, in the EZ is competitiveness disparities as between the EZ core and periphery.
Quite possibly the Germans SHOULD accept some excess inflation (as others have pointed out) so as to help the periphery adjust, but it’s debatable as to whether an extra 2% or so of inflation in Germany would solve the problem.
Next , De Grauwe says that if extra demand CAN BE organised, it should come via extra public investment. Problem there is that Spain is littered with brand new underused (or not used at all) airports. Germany’s infrastructure is far better than the UK’s. It’s thus very questionable as to whether extra demand should come via extra investment.
Using public investment to escape recession is daft: it can take YEARS to get those sort of investments going, by which time they may just stoke the next boom (as I’ve pointed out a hundred times on this blog to little avail).

Saturday, 13 September 2014

Rebecca Strauss on the debt.

Ms Struass has just written an article for the Council on Foreign Relations which Tom Hickey describes as “moronism”. Tom is right. However, the site where Tom expressed his opinion is a Modern Monetary Theory site and is read mainly by MMTers who will immediately grasp why Ms Strauss’s article is flawed.
So for the benefit of those not acquainted with MMT let’s run thru the EXACT REASONS why the Strauss article, and indeed hundreds of similar articles are flawed.
Strauss type articles start by claiming that the debt is too high and/or it WILL BE too high given current levels of tax, government spending, etc. Exactly what constitutes “too high” and why, is never spelled out with any precision in Strauss type articles. But never mind: let’s assume that the debt is, or will be “too high”.
That means, according to Straussies, that what are normally called “painful choices” have to be made: e.g. government spending on roads, welfare or whatever allegedly has to be cut. Indeed, Ms Strauss uses the phrase “painful choices”. But there’s a problem there, as follows.
If government spending is cut, that will raise unemployment. Now what’s the point of that? I.e. what’s the point of having the economy run at less than capacity or the full employment level? Absolutely none!
So Straussies are in a fix: they think they have the choice of continuing with a too high or escalating debt, or alternatively causing unnecessary unemployment and unnecessarily reducing GDP.
Got to be something wrong there. So what’s the solution?
Well it’s easy: do something which has been implemented BIG TIME over the last few years, namely QE. That is print money and buy back some of the debt (or cease rolling it over).
As I’ve pointed out about a thousand times on this blog, that  will have a stimulatory or inflationary effect. But the latter effect can be countered by raising taxes. And assuming the deflationary effect of the latter tax hike exactly equals the former stimulatory effect, aggregate demand stays the same, as does public spending, but the debt comes down!
And not only does the debt decline, but the interest paid on it also declines: reason is that if you tell your creditors you’re not interested in borrowing any more, they’ll offer you loans at a rate of interest below the previously rate.
Magic! Problem solved! And there is no need for those “painful choices” referred to by Straussies.

There is just one fly in the latter ointment, which stems from the fact that a proportion of any country’s debt is held by entities in other countries. And if a country cuts the amount it borrows, then some of the relevant funds will seek yield elsewhere in the world. That will tend to depress the value of the relevant country’s currency on forex markets, which means a standard of living hit for the relevant country. But currencies gyrate in value on forex markets all the time. Indeed, the pound sterling was devalued by 25% in 2008, and no one I know turned a hair, though doubt less there were exporters and importers who were inconvenienced and people taking foreign holidays who were not too thrilled.

Thursday, 11 September 2014

Article by Juan C.Pryor about Anat Admati.

Below is an amateur translation of parts of an article by Pryor (who lives in Colombia, South America). Article title: “Anat Admati: los riesgos del populismo financier”.
The parts translated below are (first) the first third of the article. I don’t see anything of huge significance there, but others might. Second, there is a passage from the final third which seems to contain a possibly interesting idea.
I put a couple of comments of my own in green.
First third:
I’m worried by the way discussions on banking are going in the US because when they talk there, the rest of the world listens. Columbia (in South America) is no exception. I recently read an article in which they discussed Bankers’ New Clothes by Anat Admati and Marin Hellwig. In writing these comments I am conscious that I have not read the actual book; but I am sufficiently informed on the basis of academic articles  from the first mentioned and public statements and I believe it’s necessary to comment any time I find her manipulating opinion with assertions based on here long established hatred of speculative capital.
The maximum that Ms Admati proposes is to modify the scheme of supervision indicating that it is not too important to know what the banks are investing their resources in; rather, what is crucial is how they finance themselves. In her view the explanation of financial crises is that the collapse of banks has its effect in the pockets of investors/savers and therefore the government should deal with these situations.
On the basis of this she proposes that it is up to banks to operate more like other businesses. The difficulty is that the activity of banks is to borrow money in order to lend it more efficiently (i.e. in fixing rates of credit etc). The activity of other businesses is providing a service or adding value to goods by means of industrial processes. That is, trying to make banks resemble other businesses is to misunderstand the nature of their activity. However the interests of developing the discussion let us continue. What Ms Admati hopes for is for the banks to capitalize themselves because the fact of being levered up makes them sensitive to crisis situations.
The truth is that crises are not going to be avoided by businesses borrowing or not borrowing money. What happens is that a business which is levered up has less margin for manoeuver in the face of a drying up of payments or decreases of its income, but if a customer will not buy there is nothing the resources of capital can do to solve the situation.
Now as to the discussion of capitalising that Admati proposes, she herself acknowledges that her plan of diminishing the ratio D/E (debt to equity/) to 2.33 has no scientific or financial support, merely her perception that the present levering up is very high and that banks should approximate more to the real sector.
The above criticism about there being no “scientific” basis for the 2.33 ratio is a poor criticism. One can equally well criticise the capital ratios that existed prior to the crisis for being “unscientific”: a criticism that was amply born out by the crisis. As to there being any sort of obvious “science” behind a 10% or 20% or 50% ratio, there just isn't any, as I’ll explain in the forthcoming improved version of the MPRA paper featured at the top of the column to your left. But there are several complicated arguments in favour of MUCH HIGHER capital ratios than exist at the moment, and some good arguments for a 100% ratio, i.e. full reserve banking.
In fact, she goes further and proposes abandoning the model of capital adjusted for levels of risk in favour of a model of the nominal value of assets which would have a perverse effect (which is criticised by the author in the current model) and the banks would be tempted to invest their resources whether borrowed or not, in assets much more risky seeing as neither their financial state or their levels of levering up would be affected. Admati’s plan is counter-productive and if implemented as a policy would gravely prejudice the interests of investors because there would be no criterion of security or solvency of investments for the financial institutions to meet, and their activity of raising money would be limited exclusively to competing in markets of capital for public resources. They would pass from gaining resources through bank accounts to other types of negotiable instruments segmented from capital or hybrids.

Passage from final third.
In this connection there has been a plan in Colombia relating to the societies of electronic payment shortly to be set up, which “banks” which may lend their own monies but not those of their customers, in the sense of short-term administered monies of customers which they will require at any moment.
Looks like they’re trying to limit maturity transformation.
The fact is that when we speak of the total or major part of the economy, the use of these monies becomes insufficient because of the performance (???) of these deposits in concentrated in the monthly or fortnightly payment days and reduces gradually up to the next payments, so that there are at least 5 or 8 days of not 15 when the money is available to be used for profitable activities such as covering temporary cash flow deficits and thus yield returns. Certainly this will not happen if it is believed that these companies will use the deposit systems of traditional banks who calculate neither the risk of withdrawals by those clients nor to foretell their cash on this basis of the average balances that these “bancos de giro” register in the traditional banks.