Thursday, 26 May 2016
Opponents of the TBTF subsidy have missed an elephant in the room: i.e. there’s another large subsidy that private banks enjoy, as follows.
Private banks print and lend out money, as the opening sentence of this Bank of England article explains. But printing and lending out money is inflationary, if the economy is already at capacity (i.e. full employment). So how do governments control that inflation? Well they impose some sort of deflationary measure, like increased taxes, so as to counteract the inflation. But that amounts to a subsidy for private money printers, paid for by taxpayers: in much the same way as the profits made by backstreet counterfeiters are paid for by taxpayer / citizens.
A hypothetical economy.
Let’s illustrate that process by considering a barter economy which converts to a money economy.
A barter economy considering that switch can use publicly created money or privately created money. Now privately created money is inherently expensive: private banks have to check up on the credit worthiness of anyone they supply money to. But that expense is not needed where the state simply prints money and spends it into the economy in whatever amounts are needed to bring full employment. So publicly created money is clearly the best choice.
And having done that, no doubt interest rates would settle down to some sort of genuine or optimum free market rate.
But having set up a publicly created money system, private banks in our hypothetical economy would be gagging to get in on the money printing process, just as they do in the real world. Should that be allowed? Well our hypothetical economy COULD ALLOW THAT. And the reason why that would be profitable for private banks is that they can undercut the going rate of interest. Reason is that unlike a normal saver who abstains from consumption and saves and then lends out money, private banks do not need to save: they just print and lend! Nice work if you can get it!
Huber and Robertson.
Joseph Huber and James Robertson described the latter process in their work “Creating New Money”. As they put it, “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves. So their profit on this part of their business is not, say, 9% credit-interest less 4% debit-interest = 5% normal profit; it is 9% credit-interest less 0% debit-interest = 9% profit = 5% normal profit plus 4% additional special profit. This additional special profit is hidden from bank customers and the public, partly because most people do not know how the system works, and partly because bank balance sheets do not show that some of their loan funding comes from money the banks have created for the purpose and some from already existing money which they have had to borrow at interest.”
Now assuming our hypothetical economy is at capacity, government would have to counteract the inflationary effect of that private money printing, e.g. by raising taxes (i.e. robbing various households and firms) so as to enable private money printing. In short, the private sector in general, or parts of it, would be subsidising private money printing.
Put that the other way round, if we stopped private banks printing money (which is what is involved in full reserve banking), the effect of that would be deflationary, which would mean government would have to compensate with some sort of stimulus, like printing more public money (i.e base money) and spending it into the economy. I.e. if in the real world private banks are barred from printing money, then sundry households and firms who were robbed in order to make private money printing get their money back.
You might be tempted to answer that by saying that the latter amounts to helicoptering and helicoptering is not the only possible form of stimulus. Actually traditional fiscal and monetary stimulus comes to much the same as helicoptering. That is, traditional fiscal stimulus consists of “government borrows and spends”. While monetary stimulus consists of “central bank prints money and buys back the bonds that government has issued to the private sector”. That all nets out to “the state prints money and spends it into the economy”.
Banks pay interest to depositors.
You might also be tempted to claim that private banks do in fact pay interest to depositors in respect of the money they print and lend out because the money they print is inevitably deposited at some bank, where the depositor earns some interest. Or at the very least, the cost of running instant access accounts is cross subsidised by interest that a bank earns when it lends out the money in those accounts.
The answer to that is that private banks do indeed pay interest to depositors (if only in the form of charging less than they might otherwise charge for instant access accounts). But that’s simply an example of a well-known phenomenon, namely that when a new line of business opens up, firms which INITIALLY enter the business make substantial profits, while over time, competitive forces cut those profits to something nearer a standard return on capital. I.e. Huber and Robertson’s above example is an over-simplified illustration.
But the question remains: should private banks even be making a standard return on capital out of “printing money and lending it out”? I suggest not, because that business is subsidised for reasons set out above.
Wednesday, 25 May 2016
This is an interesting article. That’s “interesting” in the Sir Humphrey Appleby sense of the word, i.e. something like “this may be a novel idea, prime minister, but I’m not overly impressed, to put it politely”. The article is by Claudio Borrio of the Bank of International Settlements and two co-authors (one also from the BIS).
The basic argument is that helicoptering involves the central bank in printing and spending base money into the private sector, which of course causes the reserves of commercial banks to rise. And since central banks control interest rates by keeping commercial banks short of reserves, the ability to control interest rates is then lost, which apparently is a near disaster.
As the abstract puts it, helicoptering “…would require giving up on interest rate policy forever.” Or – and making the same point - “The central bank can of course implement a permanent injection of non-interest bearing reserves and accept a zero interest rate forever....”
The alternative, so the article claims, is for the central bank to impose “a non-interest bearing compulsory reserve requirement equivalent to the amount of the monetary expansion (so that excess reserves remain unchanged – scheme 1), but then this is equivalent to tax-financing – someone in the private sector must bear the cost.”
Well certainly helicoptering drives interest rates to zero (unless banks’ reserve requirements are raised). But a permanent zero rate, while it is unconventional is not a bad idea. Milton Friedman and Warren Mosler advocated the idea. And here is another work which advocates abandoning interest rate adjustments.
As for the “alternative” mentioned just above, i.e. higher reserve requirements, that is not the same as “tax financing” UNTILL the state decides to impose extra reserve requirements on commercial banks. Meanwhile, helicoptering is stimulatory. Let’s run thru this.
Under tax financed public spending, the state grabs $X off the private sector and spends it back into the private sector, and perhaps also into sundry government spending departments: education, law enforcement, etc. As a result, what might be called “spenders” end up with no extra cash. Thus there may be a slight stimulatory effect (e.g. because the rich, who tend to pay more tax, do not cut their monthly spending when taxes rise as much as the poor). But the stimulatory effect, if it exists, is limited.
The alternative, namely helicoptering, involves the state simply printing $X and spending it. In that case, spenders end up with $X more: a totally different kettle of fish. If you’re a spender (e.g. a household, firm or state school) and you find you have loads of cash to spare, you’re more likely to spend than if you DON’T HAVE cash to spare!
So there is no question but that helicoptering is stimulatory.
Having done that, the state (i.e. government and central bank) may decide to rein in some of the stimulus, and it can do that by raising bank’s reserve requirements. But that doesn’t mean that helicoptering has not been effective in the mean time. Also, raising reserve requirements is perhaps equivalent to tax in the very broad sense that both raising reserve requirements and tax are deflationary. But what of it? Some stimulus is applied (via helicoptering) and then a year or two down the line, government reins in that stimulus. That would be nowhere near the first time that’s happened.
I.e. helicoptering is a form of stimulus, which like all forms of stimulus, can be, subsequently reined in.
No one argues that there is something wrong with an interest rate cut because it is subsequently reversed.
The BIS authors are right in a sense: helicoptering is not without problems. But then interest rate adjustments have problems as well. Personally I'm on the side of the above "Mosler" lot: i.e. I favor abandoning interest rate adjustments, expect in emergencies and relying on helicoptering.
Monday, 23 May 2016
Lefties, or a least a significant portion of the political left, do treasure their pet hate figures: that’s people they love to hate. And Milton Friedman certainly comes into that category. Plus dangling the word “monetarism” in front of a leftie is even more dangerous than dangling a red rag in front of a bull.
So what exactly was wrong with monetarism? Well don’t bother asking a leftie. Lefties will tell you that monetarism is responsible for half the problems of the world, including AIDS and numerous other diseases, global warming, airliner crashes and much else besides.
This all reminds me of a passage from William Hazlitt: “Defoe says that there were a hundred thousand country fellows in his time ready to fight to the death against popery, without knowing whether popery was a man or a horse.”
In fact Friedman’s monetarism had various elements. One element was simply the idea that the quantity of money (base money in particular) influences demand and hence inflation. And that idea is a bit hard to deny: I mean when someone’s stock of money rises, e.g. when they win a lottery, their weekly spending rises (surprise surprise). And at the macroeconomic level, when the Robert Mugabe’s of this world print far too much money, hyper-inflation ensues (something that is doubtless intuitively obvious to the average ten year old).
The latter idea, namely that the stock of base money is of relevance is shared (shock horror) by numerous economists and groups of economists, e.g. advocates of Modern Monetary Theory.
A second element of Friedman’s monetarism was the idea that governments are so incompetent that they might as well have no discretion at all when it comes to stimulus. Instead, said Friedman, we should just have a fixed and small annual increase in the money supply.
Well there’s a wealth evidence from the recent crisis that governments are indeed incompetent. George Osborne, the UK’s finance minister, came to power with the promise to cut the national debt. In practice he DOUBLED it!! How’s that for a cock up?
Governments failed to regulate banks properly ten years ago, which cause the crisis. They then spent far longer recovering from the crisis than we spent fighting World War II. How do you rate that for a cock up?
Simon Wren-Lewis (Oxford professor of economics) has written numerous articles detailing government’s incompetence during the crisis, e.g. here.
All in all, Milton Friedman’s claim that governments are incompetent isn't far out. Hence his claim that due to that incompetence, governments should have no discretion when it comes to stimulus is not 100% wrong either.
Conclusion: his ideas on monetarism were doubtless not 100% right, but they certainly weren’t 100% wrong either.
Saturday, 21 May 2016
As an advocate of full reserve banking, I’m always interested in criticisms of the idea. So far I haven’t come across any I can’t deal with, and Sawyer’s criticisms come into that category, that is, they are easily disposed of.
The first two sentences of the abstract read as follows.
“The idea of full reserve banking (under various names) has been adopted by parts of the green and ecological movements (e.g. Green Party of England and Wales). The paper argues that full reserve banking (FRB) would represent a ‘green monetarism’”.
Well there’s a bit of a problem there, which is that full reserve banking has been advocated for a good two centuries and normally with no mention of matters green. For example David Hume, writing over 200 years ago advocated the idea, as did Abraham Lincoln, as did Milton Friedman in the 1960s. None of those individuals were much concerned with matters green or ecological.
That is, full reserve banking and the idea that we should be more environmentally responsible are two quite separate ideas, though obviously, as is the case with any pair ideas, those two ideas CAN BE merged. But Sawyer doesn't actually deal with the COMBINATION of full reserve and green policies: that is, he deals just with full reserve. Thus references to matters green and ecological are irrelevant.
Next, the first sentence of the main text starts, “There have been a number of similar proposals under headings of full reserve banking, positive money, sovereign money and 100 per cent reserve banking…”.
Now hang on: I’ve never heard of a “proposal” called “positive money”. In contrast, there’s an ORGANISATION called Positive Money (with capital letters), which advocates full reserve banking or similar.
You might argue that the above “green” and “capital letter” criticisms are minor criticisms. Perhaps they are: but that number of mistakes that early in a paper does not give me confidence that the rest of the paper will be worth reading.
Anyway, to continue, the rest of the first page describes full reserve banking, in an accurate manner. So no complaints there. As Sawyer says, the existing system is an endogenous money system: we let private banks issue money as they see fit. In contrast, full reserve is an EXOGENOUS system: only the state creates or prints money.
However, things go wrong again at the top of p.2 where Sawyer says, “Under this exogenous money situation, a mismatch between the amount of money which the central bank creates and the amount of money which the public is willing to hold. This leads to a situation of either ‘excess money’ (more money issued than people willing to hold) or ‘deficient money’ (less than people wish to hold for transactions purposes), though the usual emphasis has been on the ‘excess money’ case.”
The above first sentence doesn’t have a verb. But never mind: I make the odd typo myself. More important, are the IDEAS there.
Sawyer is of course quite right to say that there may be a mismatch between the amount of money a central bank (CB) issues and the amount the amount the “public is willing to hold”, and that if the CB issues too much, excess inflation might ensue. But then exactly the same problem applies to every alternative method of implementing stimulus: whether it’s interest rate adjustments, QE, or budget deficits, it’s common for CBs and governments to get it wrong!
What Sawyer should have explained, and in detail, is exactly why regulating demand via the above “print and spend” policy is more difficult that via interest rate adjustments, QE, etc etc. However, he doesn’t explain.
Instead of explaining that point, Sawyer then (half way down p.2) claims that full reserve “shares many similarities with the ill-fated proposals of Friedman and others for the achievement of a specified growth rate of the stock of money..”.
Now the big problem with that claim is that full reserve no more “shares similarities” with Friedman’s monetarism than do EXISTING policies. You may have noticed that over the last five years or so, CBs have organised a massive and totally unprecedented increase the the stock of base money, and they’ve done it via QE.
Moreover, the full reserve system advocated by Positive Money, the New Economics Foundation and Prof Richard Werner (which Sawyer cites) does not rely just on the money supply effect. That is, given inadequate demand, the work linked to just above argues that the state should print money and spend it (and/or cut taxes). In other words there is a clear fiscal element there as well.
Indeed, the beauty of that system is that it doesn’t matter whether the stimulatory effect comes primarily from the latter fiscal element or the monetary effect. I’m prepared to bet my house there’d be some sort of effect. As to whether the effect comes via the monetary or fiscal channel, I couldn’t care less. Why should that matter?
The next three or four pages of Sawyer’s paper are then devoted to attacking monetarism. Well as far as I’m concerned that’s a waste of ink and paper. To repeat, full reserve (at least as advocated by the latter three authors) does not absolutely depend on the idea that the quantity of money is of crucial importance. Though frankly it would be a bit strange if the quantity of base money had NO EFFECT. Robert Mugabe demonstrated very convincingly that if a country prints ludicrously excessive amounts of money, hyperinflation is the result: a point which I imagine is obvious to the average ten year old, even ten year olds who have never picked up a book on economics.
Then on p.10-11 Sawyer explains, correctly, that under full reserve (at least as set out by the above three authors), the deficit is not known in advance. That’s because the CB doesn’t know in advance how much stimulus the economy will need in six months or a years time. And apparently that’s undesirable because it's “Not a recipe for the good management of public expenditure”.
Well the problem with that argument is that NO government or CB knows what’s going to happen in six months time or a year’s time or two year’s time. Thus it doesn’t matter much exactly what system you have for implementing stimulus: one thing’s for sure, and that’s that governments and CBs are often forced to make unforseen changes in spending, interest rates and so on.
You might as well criticise interest rate adjustments because they aren’t a “recipe” for easy forward planning for those thinking of borrowing with a view to making investments, e.g. those contemplating buying a house with the assistance of a mortgage.
Well that’s it. I’m not minded to read any more of this work by Sawyer. He hasn’t thought full reserve through in any detail.
But that is not to suggest I think all his output is poor quality. I liked this work of his which criticised “employer of last resort” or “job guarantee” as it is sometimes called.
Friday, 20 May 2016
If you lend direct to corporations A,B,C… there’s no government run insurance for you. But if you lend to a bank, i.e. make a deposit at a bank, and the bank lends to A,B,C… then you’re automatically insured.
That makes no sense because there is no inherent merit in lending to A,B,C… via some third party like a bank as compared to lending direct. That’s not to say there is anything WRONG with “indirect lending”, whether done via a bank, a mutual fund or whatever. The point is that, to repeat, there is no special merit in indirect lending.
Ergo if government should EITHER abandon deposit insurance, OR offer insurance for all those with bonds in non-bank corporations. After all, the main argument for deposit insurance seems to be that that form of insurance increases bank deposits which in turn increases bank loans and thus allegedly boosts economic growth. And that argument applies in exactly the same way to bonds in a non-bank corporation or firm.
Moreover, the big attraction of being insured by GOVERNMENT rather than by some private sector insurer is that governments can grab almost limitless amounts of money off taxpayers to bail out the depositors of failed banks. That right to grab taxpayers’ money is not a free market phenomenon.
Thus the answer to the question “Should government insure ALL lenders” is “probably not”.
Moreover, politicians have a long record of being complete suckers when confronted by bankers: that is, bankers only have to produce sob stories about economic growth being hit if the deposit insurance premium is too high, and politicians fall for it every time. Or as Paul Volker put it, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.”
And just to illustrate the size of the above “sucker” problem, UK banks and their depositors enjoyed the luxury of deposit insurance between WWII and a few years ago all at no charge at all: i.e. the insurance was provided by UK taxpayers for free!
As to what people would do if lending entities DIDN’T accept deposits, that’s easy: totally safe deposits could be made at entities where relevant monies are kept in a totally safe fashion, like the various state run savings banks (e.g. National Savings and Investments in the UK). And as to how LENDING entities would be funded, they’d be funded just by equity.
And that split of the bank industry into two halves, lending and deposit taking has been advocated for decades, e.g. by Irving Fisher in the 1930s and Milton Friedman in the 1960s.
Tuesday, 17 May 2016
Blanchard and other IMF folk have been predicting Armageddon for Japan and its rising debt to GDP ratio for a long time. But Armageddon never comes. Some details of Blanchard’s latest and ridiculous ideas on Japan’s debt are in this article by Ambrose Evans-Pritchard. (Incidentally not even Evans-Pritchard seems to get the sheer scale of Blanchard’s ignorance)
This passage sums up Blanchard’s ideas, and according to Evans-Pritchard they are Blanchard’s own words.
“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree…If and when US hedge funds become the marginal Japanese debt, they are going to ask for a substantial spread…”.
And that, according to Blanchard will lead to Japan facing a horrendous bill for interest on it’s debt.
Now let’s think about that. Unfortunately we need to start with some very basic economics, as follows.
Governments run deficits and in consequence face rising debts for TWO REASONS. First, there’s the ever present temptation for politicians to fund government spending via borrowing rather then tax, as David Hume pointed out over 200 years ago. Raising taxes loses votes at election time.
But it’s important to note that in that scenario, demand for loans comes from the DEBTOR or would be debtor. And that’s likely to lead to a relatively high rate of interest. Moreover, the higher the debt, the more doubtful lenders become about the relevant government’s ability or intention to ever repay the debt, in which case they demand an even higher rate of interest.
The second and quite different reason for running a deficit is so as to provide stimulus. That is, if the private sector is spending too little, demand will be too low and unemployment too high. Thus government or “the state” has to spend more than it collects in tax: e.g. the state can simply print money and spend it, or it can “print debt”. Put another way, as Keynes pointed out in the 1930s, in a recession, government can spend more by either printing money and spending it (and/or cutting taxes) or by borrowing money and spending it (and/or cutting taxes).
But note that in that case, demand for the debt comes from the CREDITOR, not the debtor. That is, the explanation for households not spending enough is that they're SAVING too much, or at least they’re saving more than expected. Keynes referred to that phenomenon as the “paradox of thrift”. And in that sort of “demand for debt coming from the creditor” scenario, interest will tend to LOW: exactly what we see in Japan!
In effect, the creditor (i.e. Japanese households) are saying “Please, please, we want you, the government to be in debt to us – that is we want a bigger stock of paper assets in the form of cash or government debt”. Clearly that’s what might be called a “debt seller’s market”.
In that scenario, government can say “OK, here’s some government securities, and we’re paying an utterly miserable rate of interest: about equal to inflation, which makes the interest bill for us (in REAL or inflation adjusted terms) around zero.”
Japanese households might not like that, but it’s the best offer they’ll get. At least they get what they’re basically after, namely a stock of government securities.
The allegedly horrendous Blanchard scenario.
Now what happens if households CEASE demanding a bigger stock of government debt / securities? In other words, what happens when households, instead of SAVING a significant part of their income, decide to SPEND it all instead? Well in that case the BASIC problem, namely inadequate demand disappears. So there’s no need for (or at least a reduced need for) a deficit and an ever expanding debt!
Thus (and contrary to Blanchard’s claims) there’d be no need for the Japanese government to borrow from the “high interest charging US hedge funds”!
So, Blanchard’s argument lies in ruins. It’s basically a load of nonsense.
But what’s worse is that Blanchard has had a senior position at the IMF for years, and “Blanchard type thinking” has pervaded the IMF for years. That is, at the height of the crisis, the IMF (and indeed to OECD) were advocating debt consolidation, i.e. austerity, rather than advocating what was needed, namely stimulus. For more on that see various articles by Bill Mitchell on that subject, e.g. this one.
Saturday, 14 May 2016
As I understand it (and perhaps I don’t) his jubilee consists of having a helicopter drop, with the condition that debtors use their windfall to repay some of their debt. Now there’s a big problem there, namely the sheer size of the average mortgage, which in the UK is £85,000, compared to the likely size of a helicopter drop.
To illustrate (and plucking numbers out of thin air) assume half the country are debtors and half are creditors. Also assume that stimulus to the tune of a helicopter drop worth £2,000 per person is need (though bear in mind that in some years, very little stimulus is needed).
£2,000 is a BIG helicopter drop: £40 per week per person lasting for a year.
That means creditors get £2,000 plus the £2,000 that comes from debtors. Meanwhile debtors get nothing (or to be accurate, they get £2,000 but have to hand it over to creditors, plus debtor’s debt declines by £2,000).
That means £80 a week extra for creditors (to spend or save as they wish) and no extra spending money for debtors. I’d imagine riots would ensue.
Plus £2,000 is less than a fortieth of the £85,000. I.e. it doesn’t scratch the surface of Keen’s allegedly horrendous debt problem.
Incidentally the above points arose out of a discussion involving me and other Positive Money supporters in the North East of England.
P.S. (17th May 2016) .Mike Shedlock criticised Keen’s debt jubilee idea in 2012. Apologies: I didn’t realize Keen started advocating the idea that long ago.