Tuesday, 19 September 2017
Martin Wolf is the chief economics commentator at the Financial Times. Ed Balls is a former UK politician who worked under Martin Wolf at the FT for a few years. Fran Boait is director of Positive Money.
The latter three gave speeches in the order in order given above, i.e. Martin Wolf went first. Wolf’s speech was much the most technically competent, as might be expected. I didn’t disagree with anything he said.
I’ve set out a summary of their speeches below. I’m not guaranteeing my summary is accurate or fair. Listen to the debate if you want a total accuracy and fairness.
Times given are APPROXIMATE: certainly not accurate to the nearest second or even the nearest 30 seconds.
7.30 Martin Wolf started with the interesting point that money can be defined (to paraphrase him) as the stuff you hold which is supposed to be totally safe and which you can use in times of trouble. Yet it is precisely privately issued money which has a habit of disappearing into thin air in times of trouble.
The crisis was not just a shadow banking crisis: virtually all banks were involved.
UK banks’ capital ratio HAS BEEN improved, but not by nearly enough. In fact ratios have simply been returned to where they were around 1970.
17.00 Quote: “a bank is about as unsound a financial structure as you can imagine” (produced laughter)
Ring fencing will help, but it’s not the basic solution.
Risk weighting doesn’t work: banks claimed their assets were totally risk free just before the 2007 crisis.
20.0 Banks have a big incentive so subvert the regulations, and essentially they will succeed in demolishing all the new regulations passed since the crisis.
Wolf likes Mervy King’s “pre-positioned collateral” idea.
21.00 Wolf likes Positive Money’s “Sovereign Money” proposal.
Quote: “Money consists of the liabilities of unsound financial institutions”.
25.0 Wolf’s ends by saying that the existing bank system is a huge nonsense. That reminds me of Mervyn King’s famous quip: “Of all the many ways of organising banking the worst is the one we have today”
Wolf says there will be another bank crisis. It’s not a question of if: it’s a question of when.
Ed Balls starts at 25.0.
In his first ten minutes he explains how he, and the then governor of the Bank of England and others in early 2007 had a “war game” to mimick a bank crisis. The war game was accurate for the UK in that it envisaged a crisis sparked off by a building society / bank in the North of England in trouble – that was good foresight given the Norther Rock fiasco that happened a few months later. But the war game did not forsee the extent to which the real crisis was international.
35.0 Claims Friedman’s monetarism was an example of Chicago School thinking. Strange claim. Balls gets Keynsianism, Chicago School, monetarism and other stuff very muddled.
Balls claims there are three question marks to be put over full reserve banking. The first is whether we can pin down what is used as money?
Well my answer to that is we do not need to “pin down” in order to reap the benefits of full reserve. Indeed, after the introduction of full reserve, people will certainly continue to use a variety of forms of money other than that nation’s official currency. Plus many advocates of full reserve don’t even object to some of those alternative forms of money (e.g. local currencies like the Lewis pound in the UK or Ithaca dollars in the US).
The important point is that full reserve makes available to everyone a form of money which is totally safe. If people want to take risks and stock up on strange forms of money like Bitcoins or Krugerands, that’s their business.
38.0. Balls says (rightly) that under a sovereign money / full reserve system there is some sort of committee of economists that decides how much money to create per month (a point which Positive Money would not disagree with) but that the job of that committee is incredibly hard. Reason is that the committee has to foresee crises. That’s his second point.
Well the simple answer to that is that crises would not occur at all because it’s impossible for banks to go bust under full reserve!!!!! Of course that’s not to say economies would be 100% stable under full reserve, but advocates of full reserve never claimed they would be 100% stable. But the solution to a downturn under full reserve is much the same as under the existing system: stimulus. The main difference is that the FORM OF stimulus advocated by Positive Money amounts to a merge of monetary and fiscal policy: that is, given a need for stimulus, the state simply creates money and spends it (and/or cuts taxes).
His third point is that full reserve is much better introduced world-wide than being introduced by just one country. True. But then there are numerous organisations around the world pushing for full reserve.
Balls is a bit clueless. He claims that the above mentioned money creation committee has to take all sorts of decisions, like what constitutes worthwhile investments!!! Total nonsense.
Balls claims that avoiding bank crisis is not the most important issue we face.
Well I dare say it isn’t, but that’s not an argument for not tackling the issue. Sprained ankles or flue may not be the most important issues facing the National Health Service, but if we can find a way of halving the time taken to cure sprained ankles or flue, why not go for it? False logic there by Balls.
Fran Boait starts around 42.0.
She says she won’t talk much about stripping private banks of their powers to create money. And launches forth about inequalities, climate change, and other issues. She attacks “neoliberalism”.
Well neoliberalism is a favourite gripe of lefties. Be nice if they defined it!!!! Also it should be remembered that neoliberalism, at least in the UK, was a reaction to what preceded it, namely the Labour government throwing taxpayers’ money at clapped out loss making industries so as to “save jobs”. At least that was the excuse. “So as to buy votes” might be nearer the mark.
Many reacted to that episode with something like, “S*d taxpayer funded subsidies: let’s just have the free market rip.” Can’t say I totally disagreed with the latter “let market forces rip” philosophy.
47.0 She disagrees with Carney’s claim that the UK needs a much bigger financial sector.
She claims lots of people think markets are perfect!! Well about 95% of economists realize (apparently unbeknown to Fran Boait) that markets are highly IMPERFECT. She claims “markets are people” – meaningless phrase, but the phrase will go down well with lefties.
51.0 Complains that QE and interest rate cuts (almost the same thing) makes the rich richer by increasing asset prices. Problem with that is that as Positive Money itself has said, INTEREST RATE INCREASES can also be argued to increase inequalities in that debtors have to pay more interest to the rich (i.e. creditors).
She wants the Treasury committee inquiry into monetary policy to be re-opened.
52.0 She ends by saying she wants to “democratize” the Bank of England and the financial system. What does that mean? Democratize is one of those words like “neoliberal”, “radical” or “progressive”: fashionable at the moment, but their exact meaning is not clear.
Monday, 18 September 2017
Tuesday, 12 September 2017
Friday, 8 September 2017
If bank deposits are not insured, as was the case in several countries prior to WWII, then so called deposits are not actually deposits: that’s “deposit” in the sense of “a totally secure holding of $X”. Those so called deposits are more akin to shares or bonds, i.e. so called depositors are not guaranteed to get their money back.
So that system, it can be argued, amounts to full reserve banking: a system where bank loans are funded by equity, not deposits.
Alternatively, if deposits are insured by taxpayer backed deposit insurance, that amounts to a subsidy of banks and depositors. Reason is that taxpayer backed insurance is artificially cheap or “good value for money” because everyone knows the state has limitless powers to grab money off taxpayers to rescue depositors should there be a series of large bank failures.
That’s similar to the “too big to fail” phenomenon: that is, if everyone knows taxpayers will come to the rescue of a large bank when it gets into trouble, that knowledge in itself means the relevant bank can borrow at an artificially low rate of interest, even if the bank never actually gets into trouble and taxpayers never actually need come to the rescue of said bank.
But subsidies for banks or indeed any other type of corporation are not justified, unless it can be shown there are overwhelming social considerations involved.
Ergo taxpayer backed deposit insurance for fractional reserve banks is not justified. Accounts at banks should be split into two basic types: first, accounts where deposited money is not loaned on. Those accounts are totally safe because they are INHERENTLY totally safe and do not need any significant amount of insurance.
The second type of account is where deposited money IS LOANED ON, but it’s made abundantly clear to depositors that they may not get all their money back.
And apart from the latter arrangement making sense logically, an additional bonus is that it’s plain impossible for banks to fail: for example if it turns out that the loans made by a bank are worth only half of their book value, the bank does not go bust. All that happens is that depositors will get only around half their money back if they want to cash in their deposits immediately. Alternatively they can hold on in the hopes that things improve.
And as for the idea that funding loans via equity will be much more expensive than funding them via deposits, that’s rather contradicted by the fact that at the time of writing the return on equity in general is (bizarrely) less than the return on bonds, and bonds are of course nothing more than long term deposits.
But even if funding via equity does turn out to be more expensive, the important point is that that system is subsidy free. Ergo it approximates a genuine free market better than funding via deposits. Ergo GDP ought to be higher under that subsidy free system.
Wednesday, 6 September 2017
First, the Fed carries on doing QE: i.e. printing money and buying up government debt (Treasuries).
That will probably raise inflation too much, so the Fed announces that taxes need to be raised or public spending cut so as to deal with that inflation. That would be music to the ears of right wingers (Republicans) seeing as they’re always keen to cut the deficit.
If that process goes on for long enough, there’d be little or no debt left: it will be turned into base money paying a zero rate of interest.
Debt ceiling numpties (Republicans) would then be hit in the face with the realization that the debt had been replaced with base money: i.e. that debt and money are virtually the same thing. That would be a big improvement in Republican’s grasp of economics.
A further benefit would be that the US would no longer be paying interest to China, Japan and other foreign countries.
What’s not to like?
As for how to regulate demand, just continue with the above idea: i.e. the Fed suggests to numpties (I mean “Congress”) that the deficit needs raising or reducing a bit – and possibly, given a serious outbreak of irrational exuberance, that a surplus is in order.
The only slight drawback with that idea is that the reduction in interest yielding investments in the US would induce some investor / savers to take their money elsewhere in the world, and that would cause the dollar to decline relative to other currencies, which in turn would reduce US living standards for a while. But that’s a purely temporary effect.
I really deserve a nobel prize for that idea, but I’m far too modest to nominate myself.
Monday, 4 September 2017
Large numbers of well meaning numpties in recent years have advocated the idea that we should print money and spend it on the sort of stuff popular with left of centre environmentally concerned folk. I.e. the green new dealers advocate that the money be spent on windfarms, solar energy, insulating homes and so on.
Richard Murphy seems to advocate the idea: title of his article is "Time for a Green New Deal."
The flaw in the idea is that it confuses two entirely separate issues. That is, (and first), we don’t need to print money in order to devote a larger proportion of GDP to green stuff: we’re free to do that ANYWAY. In case you’re not clear on how to do it, this is how: raise taxes and spend more on green stuff! There: that wasn’t difficult was it?
An alternative is to spend less on existing forms of public spending (health, education, law enforcement, etc) and spend more on green stuff. That wasn’t a big intellectual challenge was it?
Second, printing money is a form of STIMULUS, and that’s necessary when the economy is operating at less than capacity, i.e. when unemployment could be lowered without exacerbating inflation too much.
But that has precisely and exactly nothing to do with the decision as to whether to spend more on green stuff!
Hope that’s cleared that up. Probably not.
Sunday, 3 September 2017
Summary. A debate has taken place in the Cambridge Journal of Economics over the last year or so between on the one hand Giuseppe Fontana and Malcolm Sawyer (F&S) and on the other hand, sundry Positive Money authors. This present article of mine is a response to the latest F&S paper in that journal.
To summarise, a few of F&S’s criticisms of the Positive Money authors are valid, but basically F&S’s paper is a litany of nonsense. Among other things, F&S attribute ideas to PM without saying whereabouts in the PM paper those ideas appear. Moreover, far as I can see, some of those ideas don’t actually appear in the PM paper at all.
Details on this series of papers.
F&S published a paper in the above journal in 2016 entitled “Full reserve banking: more ‘cranks’ than ‘brave heretics’”. I actually reviewed that paper here just over a year ago.
Messers Dyson, Hodgson & Van Lerven of Positive Money responded to that with a paper in the same journal entitled “A response to critiques of “full reserve banking”. I’ll refer to that as “the PM paper” or “the PM authors” or similar.
F&S have recently responded to that PM paper with a paper entitled “A rejoinder to “A response to critiques of ‘full reserve banking’”.
This present article of mine examines the latter F&S paper.
F&S start by saying that while the PM authors claim their proposals are different from full reserve banking, in fact PM proposals and full reserve are to all intents and purposes the same. I agree with F&S there.
F&S then claim on their p.2 that contrary to the claims of the PM authors, “No agents involved in the loans supply process, including commercial banks, have a seigniorage privilege.”
Well the first problem there is that the word “seigniorage” does not appear in the PM paper. Second, F&S do not say where the “seigniorage claim” is in the PM paper.
The first sentence of the Oxford Dictionary of Economics (2009) definition of seigniorage is “The profits made by a ruler from issuing money”. Obviously “rulers” are irrelevant here, in that we are considering the possibility that a “non-ruler” i.e. a commercial bank can make seigniorage profits.
Clearly a private / commercial bank cannot do exactly what a back-street counterfeiter or legitimate state / “ruler” can do, namely print money and buy whatever the printer wants with the freshly issued money. In the case of back-street counterfeiters, that’s bog standard consumer goods: booze, food, holidays, etc. And in the case of governments (aka “rulers”) it’s the various items that states or governments normally buy: roads, military equipment, hospitals, schools, etc. However, what commercial banks can do is to create and lend out their liabilities, which are treated as money.
Plus money lenders who can simply print the money they lend out, are clearly in a different and better position to a money lender who has to come by money in the way the large majority of households and employers do, namely earn it or borrow it.
Of course, private banks do not charge what might be called a “normal” rate of interest on the money they have to borrow BEFORE lending it out, and a lower rate on the money they themselves print or create (at no cost to themselves). What they do, as explained by Joseph Huber in his work “Creating New Money” is to use the cost savings derived from money printing to charge less interest than they otherwise would, and hence expand the overall size of their business and the overall size of their profits. As Huber 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.”
So to summarise, it is true that private banks to not earn seigniorage profits on a narrow definition of the word “seigniorage”, but it’s pretty obvious they earn an unjustifiable profit which amounts to “seigniorage profit” on a broader definition.
Next, and still on their p.2, F&S criticise a claim allegedly made by the PM authors namely that the money supply can be used to control inflation. F&S say the PM authors claim “Inflation can be controlled by the rate of increase of the money supply, as in the standard though now discredited monetarist theory.”
Well the answer to that is that the PM authors and PM literature in general certainly do not go along with the Milton Friedman idea that we should have the same annual increase in the money supply (if that’s what F&S mean by “the standard though now discredited monetarist theory”). Indeed PM literature in general is perfectly clear that there will always be unforeseen fluctuations in economic activity, and that those fluctuations will need to be counteracted by varying the amount of stimulus.
Moreover, PM literature in general makes the very obvious point that where the state creates and spends money, there is a fiscal as well as a monetary effect. That is, to illustrate, if the state creates $X and spends it on roads and education say, the fact of that extra means more jobs for contractors and teachers, plus there is the purely monetary effect (i.e. the increase in the money supply) which comes a bit later and which also has a stimulatory effect.
In fact F&S themselves actually quote a passage by the PM authors which makes just that point. The quote is on p.5, where F&S quote the PM authors as saying “Consequently, in a sovereign money system, monetary policy would work by financing a fiscal stimulus…”.
It’s a trifle incompetent to accuse someone of saying X when you yourself specifically quote them as contradicting X!!!
But if F&S are claiming that there is no monetary effect at all, then in effect they’re saying that when people come by a windfall, e.g. win a lottery or come by a tax rebate, their weekly spending does not rise at all. Well first that is obvious nonsense on common sense grounds. Second, it is clear from the empirical evidence that (amazing as it might seem) when households come by windfalls, their weekly spending rises!
Demand for loans.
Next (item No.3, p.2) F&S attribute a truly extraordinary idea to the PM authors namely that “The demand for loans is of little or no consequence for the determination of the quantity of money in the economy.”
Well, first, F&S do not say where the PM authors make that claim, and I can’t see where they do make that claim. Moreover, the PM authors say on their page 2: “a bank cannot make a loan unless it can find a willing borrower”.
Well that’s clear enough isn't it? The PM authors are saying the amount of bank loans made is determine much like the way the number of apples sold is determined: an interplay between supply and demand.
Bank loans create debts.
Next (item No.4, p.2) F&S say the following claim by the PM authors is false: “The new supply of bank loans produces an equivalent increase in the amount of outstanding debt in the economy.”
Well frankly that’s bizarre. So when I borrow £Y from a bank I’m not £Y in debt to the bank??? This is good news. Perhaps F&S can tell us where these amazing banks are where one can borrow money, yet not become indebted!!
By way of justifying the above, F&S say (same page) “The reflux principle operates in modern economies such that much or all of newly created money is extinguished by the reimbursement of previously accumulated debt.”
Well quite. In other words if someone borrows £A from a bank, £A of money and £A of debt is created. And when the debt is repaid to the bank, the money vanishes, and that’s very conventional thinking. I.e. there’s nothing controversial there.
PM’s work “Sovereign Money”, is perfectly clear on the latter point. It says for example on page 9, “As bank balance sheets contracted, broad money was destroyed.”
And on page 15 they say “First, following the crisis households lowered their consumption spending in order to focus on repaying debt. Deleveraging requires loan repayments to be made at a faster rate than new loans are taken out. Because loan repayments are the reverse process of money creation, money is being destroyed at a faster rate than new money is being created, lowering spending, nominal demand and income.”
Next, (top of page 3), F&S criticise the PM authors for getting environmental and equality matters mixed up with the decision as to whether we have full or fractional reserve banking. I agree with F&S there.
The truth is that even under the existing (i.e. fractional reserve) system, we can be as green as we like, plus we can have any level of equality we like. Thus green and equality matters have little to do with the decision as to whether to adopt full reserve banking.
Next, F&S claim that full reserve would not tame rising house prices. Well there is a very simple and obvious reason why it WOULD, at least to some extent. It’s that full reserve makes lending and borrowing more difficult which is bound to mean a finite rise in interest rates. Indeed, that’s one of the most popular criticisms made of full reserve.
And higher interest rates means it costs more to buy houses. In fact the big rise in house prices in REAL TERMS in the UK over the last twenty years or so is clearly related to some extent to the steady and large decline in interest rates over that period. (To be more accurate, the rise in house prices probably has much to do with increased demand for housing as a result of lower interest rates, COMBINED WITH the suppression of additional supply thanks to local authorities failure to make enough land available: witness the HUNDRED FOLD increase in the price of land once it gets planning permission.)
And as for any idea that a rise in interest rates would be a catastrophe, people with mortgages in the UK in the 1980s were paying almost THREE TIMES the rate of interest they do nowadays. For some strange reason the sky did not fall in, nor were the streets lined with homeless beggars. If anything, the number of beggars has RISEN over the last twenty years, though admittedly I’m not the World’s expert on begging.
And finally, low interest rates are not an unmixed blessing: they encourage asset price bubbles plus they hit savers and pensioners.
So what’s the optimum rate of interest?
Since there are clearly advantages and disadvantages in both high and low interest rates, an obvious question arises, namely what’s the optimum or GDP maximising rate? My answer to that is “the free market” rate. And that’s pretty much PM’s answer in that PM advocates leaving interest rates largely to their own devices.
Next (still on the same page and paragraph) F&S claim full reserve would not bring improved financial stability. Well that is a truly hilarious claim: reason is that under full reserve it is plain impossible for a bank to go bust. Reason is that under FR, loans are funded by equity. Thus if the value of loans made by a bank turn out to be worth only half their face value (which has never happened in the case of a large bank) all that happens is that the value of the shares / equity approximately halves. The bank as such does not go bust.
Also in the same paragraph, F&S make the bizarre claim that investment grinds to a halt entirely under FR. They say “When investments are halted…”. That is such obvious nonsense that I can’t even be bothered dealing with it.
Alternative forms of money.
Next (bottom a p.3) F&S repeat a popular claim made by critics of full reserve, namely that if conventional forms of privately issued money are banned (that’s money issued by high street banks), then alternative forms of private money will arise.
The first answer to that is that opponents of fractional reserve banking have never advocated a TOTAL BAN on privately issued money. For example many advocates of full reserve are happy with local currencies, e.g. the Lewis pound or the Ithaca dollar.
Second, there always have been and probably always will be strange bits of paper which serve as money in the world’s financial centers, e.g. London and New York. For example short term government debt is often accepted in lieu of money in those centers.
Third, whatever bank regulations we have, banks will always make big efforts to circumvent the regulations. In that connection, the fact that the rules of full reserve can be written on the back of an envelope, compared to Dodd-Frank which occupies well over ten thousand pages, is a big plus for full reserve: simple rules are relatively easy to enforce.
Fourth, F&S cite PayPal as an alternative form of money. Well it just isn't: PayPal is simply an alternative way of TRANSFERRING existing sums of money between different peoples’ and firm’s bank accounts. As Wikipedia puts it, “PayPal . . . . supports online money transfers and serves as an electronic alternative to traditional paper methods like checks and money orders.”
The cost of current accounts.
Next, (p.4) F&S trott out the ever popular criticism of full reserve, namely that it would result in those with current accounts (checking accounts in the US) having to pay more for their accounts because account holders would no longer be helped by the interest that comes from lending out some of their money.
The answer to that is that cross subsidisation is generally frowned on in economics and quite right. To be more exact, under the existing or fractional reserve system, the lodging and transfer of money is subsidised by another activity, namely the lending out of money. There is no particular merit there, any more than there are merits in having baked beans subsidised by a tax on rice pudding.
Next, on their page 5, section 4, F&S set out a totally bizarre and nonsensical argument relating to fiscal stimulus.
F&S point out that the government of a country which issues its own currency can simply print money (in physical or electronic form) and spend that into the economy. Indeed, governments (in the sense: “government plus central bank”) already do that: witness the fact that the stock of base money in private hands has steadily risen since WWII and before, with a particularly sharp rise as a result of QE.
F&S then point out that governments clearly do not fund their spending PURELY via new money: they also fund it via tax and borrowing.
So far so good. Those are widely accepted common sense points.
But F&S also accuse the PM authors of being confused over the latter points. Well I’m darned if I can see why. To repeat, the above points are very simple and straightforward. But F&S end with what they clearly think is some sort of punch line or crucial flaw in PM thinking, namely: “A legitimate question then arises: if the government has the power to create money once, in order to promote—in their words—the central bank money monetary circuit, why then could the government not use the same power in the future?”
Well if you can work out the relevance of the latter question, you’re smarter than me. Elucidation will be welcomed in the comment section below.
Anyway, my answer the latter “why could the government not use the same power in the future?” question is: “IT CAN!!!”.
Indeed PM has devoted tens of thousands of words to setting out the exact circumstances in which government SHOULD create and spend new money (and/or cut taxes). Plus PM has devoted thousands of words to explaining how to avoid an excessive and irresponsible use of that source of funds.
F&S’s argument is a bit like explaining that a baby can suck milk from its mother’s breast and then asking, “what’s to stop it sucking more milk?” The answer is . . . wait for it . . . “nothing”….it CAN suck more milk. Babies can suck as much milk as they want, assuming an adequate supply is there.
Put another way, if someone is able to drive a car a hundred miles, what’s to stop them driving another ten miles? My answer is: “probably nothing”!
Hope that’s cleared that one up!
I’ve had enough of this nonsense. I can’t be bothered with the final couple of pages of the F&S paper. I’ve got better things to do than parley with self-styled professors of economics who are a long way from being totally clued up.