Thursday, 11 February 2016

Are university students brain dead?

I helped organise a seminar last Saturday on bank and monetary reform. We asked those attending to fill in a questionnaire which asked, among other things, the occupation of those present.

The seminar was in a university building and we advertised the event extensively in university buildings and the surrounding neighborhood. Of the 43 who responded to the questionnaire, there wasn’t one single student. In contrast, 14 of the 43 said they were retired.

That chimes with a point made to me by a full time employee of Positive Money recently, namely that there’s a significant bias among PM supporters towards the older and male section of the population.  (PM campaigns for bank and monetary reform)

You’d think that given we’ve had a serious recession for the last seven years sparked off by a defective bank system, that students (if they seriously want to make the world a better place) would take some interest in bank and monetary reform. Maybe they find screaming insults at Donald Trump and David Cameron less intellectually taxing and more emotionally satisfying.

For more evidence that students are brain dead, see here, here and here.


Wednesday, 10 February 2016

Never mind negative interest rates: all interest rate adjustments are fundamentally flawed.

There are fundamental flaws in the whole notion that demand should be regulated by adjusting interest rates. They are not mentioned often enough and they are as follows.

First, the basic purpose of economic activity is to produce what people want: both privately and publicly produced goods and services (roads, education, etc). As to what proportion of GDP should be allocated to those two types of spending, that’s a purely political question: it’s one of the main issues that differentiates the political left from the political right. But certainly it’s true that the basic purpose of economic activity is to produce what people want.

That being the case, if there is inadequate demand, the solution is (gasps of amazement) to up the production of the goods and services that people want, and that can be done first by giving people more of the stuff that enables them to purchase goods and services and that stuff is called “money”. For example money can be channeled into household pockets via tax cuts. Second and as regards publicly produced goods, output of those goods can be increased by having government print or borrow money and spend that money on those goods.

Interest rates.

An alternative method of adjusting demand is to adjust interest rates. But all that does (allegedly) is to adjust investment spending. Or to be more exact, it adjusts investment spending primarily by firms and households which are dependent on borrowed money when it comes to investing: i.e. some firms and households have plenty of cash and do not need to borrow in order to invest. (Incidentally, “investment goods” includes stuff like fridges, cars etc).

Now if households and government are given the freedom to buy more, they’re guaranteed to want a wide variety of different goods and services, thus it does not make sense to adjust just one type of spending, namely investment spending by entities that are short of cash.

Of course when investment spending changes there is a trickle down effect: e.g. increased spending on roads increases the incomes of contractors and their employees. Nevertheless, trying to adjust only investment spending (and at that, only for entities that are short of cash) when the object of the exercise is to adjust almost all types of spending is nonsense. We might as well increase aggregate demand by boosting sales of just cars, computers and ice-creams. That too would have a trickle-down effect.

That’s one basic flaw in interest rate adjustments.

Skilled labor.

A second basic flaw is that it’s not easy to suddenly expand just one relatively narrow sector of the economy, whether it’s the investment goods sector, agriculture or any other sector. Each sector needs specific types of skilled labor. Those types of skilled labor may not be available even if unemployment is higher than normal. That is, all else equal, it’s much better to expand all sectors rather than just one.

The evidence.

In addition to the above theoretical weaknesses in interest rate adjustment, THE EVIDENCE is that interest rate adjustments are not all that effective. See here and here.

As Jamie Galbraith put it, “Business firms borrow when they can make money, not because interest rates are low”.

Having criticised interest rate adjustments, there are SOME possible arguments for the alternative to interest rate adjustments, namely fiscal policy. But the arguments are not brilliant. Let’s run thru them.


A possible excuse for concentrating on interest rate adjustments is that the reaction of the real economy to such adjustments might be QUICKER than in the case of tax cuts or extra public spending. However, reaction times or “lags” actually seem to be similar.

Central bank independence.

Another excuse for interest rate adjustments is that if central banks have their very own method of adjusting demand – quite independent of anything that politicians do – that effectively keeps politicians away from the printing press, because central banks can overrule anything the politicians do.

One answer to that is that the evidence seems to be that there is no relationship between the degree of central bank independence and inflation. Put another way, and surprising as this might seem, when politicians DO HAVE access to the printing press, they don’t normally act in an irresponsible manner, though Robert Mugabe is an obvious exception. (See chart here.)

Indeed, since the 2007/8 crisis it’s the Fed that has done most of the printing (in the form of QE), while politicians have been far too timid: they’ve been in a state of near nervous breakdown over the size of the national debt. That is, it’s the Fed that has in a sense been “irresponsible” and politicians who have been responsible.

A second answer to the above claim that central banks must have their own method of adjusting demand is that assuming it is desirable to keep politicians away from the printing press, there are ways of doing that other than giving the central bank its own method of adjusting demand. To illustrate, it would be perfectly possible to have some independent committee of economists (possibly even based at the central bank) decide how much stimulus was suitable in the next six months or so, while purely political questions, like what proportion of extra spending goes to the public and private sectors are left with politicians. That is, the latter committee could decide that $Xbn of extra spending is suitable in the next six months, while politicians decided how to allocate that extra spending. Indeed, a system just like that is advocated in this work (p.10-12).

Should interest rate adjustments be banned?

Given the above litany of problems with interest rate adjustments it’s tempting to suggest we abolish them altogether. Indeed, the work mentioned just above advocates just that. Personally I wouldn’t go quite that far.

Fiscal policy does have a potential problem, which is that a large scale reversal of fiscal stimulus can be politically difficult.  That is, it’s easy enough to slash taxes while leaving government spending untouched (i.e. in effect print money and hand it out to everyone). But a sudden and drastic reversal of that, should it prove necessary, may be politically difficult. Households’ take home pay would be slashed which might lead to riots.

Thus I suggest interest rate hikes should always be there as a backup tool to be used in emergencies. But apart from that “emergency” point, the case for interest rate adjustments is very weak.

Tuesday, 9 February 2016

The effect of negative interest on reserves depends on whether banks can discriminate between new borrowers and existing ones.

Unless I’ve dropped a clanger, which is more than possible. Anyway, what I mean is this.

The initial effect of negative rates is simply to impose costs on commercial banks. E.g. commercial bank X which has $1bn in reserves and which previously paid / received no interest on those reserves, and which then has to pay 1%, would face a bill of 1% times $1bn, i.e. $10million pa.

Commercial bank X now has a bigger incentive to lend more because for every $100 loaned, about $90 ends up being deposited with OTHER banks. That means that bank X owes the latter banks $90 in reserves, which of course bank X is happy to dispose of.

However, in order to persuade its customers to borrow more, bank X has to reduce the interest charged. Assuming bank X can discriminate between new borrowers and existing ones, the latter “additional loans” strategy will work for bank X. Of course other banks will be attempting the same ploy. Nevertheless, the net result ought to be additional loans for the economy as a whole, far as I can see. Reserves become a sort of hot potato which every bank tries to pass on to other banks.

However, banks’ EXISTING customer / borrowers are not going to be too pleased when they find out that NEW borrowers who are identical in every respect to themselves are being offered loans at a lower rate. But if the small print in loan agreements bars existing borrowers from re-newing their loans, there’s not much they can do about it. So in that case, negative interest rates on reserves WILL increase lending.

On the other hand if, or to the extent that existing borrowers can re-new their loans at the new lower rate, then negative interest on reserves won’t work. Reason is that (to repeat) the initial effect is to impose a cost on banks, and assuming banks were earning a standard return on capital prior to the negative rates, and assuming they have to continue to earn that standard return, they banks just have to pass on the cost of negative interest on reserves to customers. I.e. interest charged to borrowers will RISE. Ergo total amount loaned will FALL.

Or have I missed something?

Monday, 8 February 2016

Former senior Barclays Bank executive pontificates on full reserve banking.

The individual concerned is Geoffrey Gardiner, former director of the Financial Services Division of Barclays Bank, and the article is here.

I could of course try to deal with Gardiner’s article in the comments after the article. But the relevant site is a University of Missouri - Kansas City site, which tends not to publish comments which are too critical. Universities nowadays, far from being havens of free speech and debate, are if anything, centres of bigotry: e.g. see here, here and here.

I’ve re-produced Gardiner’s article, which is quite short (700 words) and interspersed that with my own comments in green italics. Here goes. (Incidentally, there’s nothing wrong with the first third or so of the article).

Jurists have demonstrated that every right must have a corresponding duty, or it is worthless.

The same is true of financial assets: for every creditor there has to be a debtor.

Money is assignable debt. The debt should be negotiable, that is it can be transferred to another owner without reference to the knowledge of the debtor.

There are primary debt and secondary debt. An example of primary debt is when a borrower draws down a bank loan by making a payment to someone. That someone pays the money received into a bank account, thus creating the credit which finances the loan. New money has been created.

The new money can then circulate in either of two ways. It can be spent, which means the payee becomes the new holder, and the payee too can spend it. Thus new money can be spent over and over again until it gets used to repay a debt, when it ceases to exist.

Or the new money can also be lent on, creating secondary debt.

Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.

It is possible to make sure that the only money created by primary debt is state debt.

To achieve it every one has to be a customer of the central bank and all his or her payments and receipts will be recorded there. The accounts are to be called ‘transaction accounts’. The central bank will not make loans to the public but only to the state. The state’s payments will become deposits in the transaction accounts of the members of the public who receive payments from the state.

As Positive Money (PM) literature explains, there is no need for “everyone” to be a “customer of the central bank”, although that’s certainly one option, an option which PM coincidentally has just recently started to advocate. It’s also an option advocated by William Hummel.

The other option is for existing commercial banks to act as AGENTS for the central bank: i.e. commercial banks offer customers totally safe accounts where money is only lodged at the central bank and/or invested in short term government debt (an option advocated by Milton Friedman). Money market mutual funds will soon be offering that sort of account in the US, incidentally.

Customers will be allowed to make transfers from their transaction accounts to commercial banks which will use them to make loans to people or businesses up to the limit of its deposits and no further. The bank will make a loan by transferring money from its own transaction account to the transaction account of the borrower. In its own books it will credit ‘transaction account’ with the amount of the loan and debit the account of the borrower, following normal bookkeeping principles of ‘debit value in’ and  ‘credit value out’. In the books of the central bank these transactions will of course be reversed.

Note. A transaction account at the central bank may never be overdrawn as that would be allowing the customer to create money.

The system of transaction accounts at the central bank will be used to keep track of the population. Every person will be allocated an account at birth and vital details will be recorded and updated. The records will include a record of the person’s genome. The bank will issue identity documents. The transaction account number will be the person’s identity and passport number, and also the number of his or her tax account. Transaction account statements will be sent automatically to the tax office, which will have the duty to debit it with all assessed taxes. Every immigrant or visitor to the country will get an account and give similar identity details.

Gosh: so the central bank will have records about everyone! Shock horror. I have news for Geoffrey Gardiner: the tax authorities, the police and other organs of the state already have VOLUMINOUS amounts of information about everyone. So nothing much changes there.

In any case, and to repeat, there is no need for everyone to have an account at the central bank in order for PM’s system (i.e. full reserve banking) to work.


Use of coins and banknotes will be discouraged and eventually banned so that every transaction a citizen makes will be visible to the security services.

The decline of physical cash is taking place anyway, in case Gardiner the so called “banker” hasn’t noticed. Moreover, numerous economists, apart from full reserve advocates and PM supporters are currently discussing the desirability of banning physical cash.

And not only that, but there is no need whatever to ban physical cash in order for full reserve banking to work. In fact ALL PHYSICAL CASH nowadays is central bank issued. To that extent advocates of full reserve banking have no big problem with physical cash.


Credit cards will be forbidden.

Total and complete nonsense. Under full reserve, (Milton Friedman’s version, Lawrence Kotlikoff’s version of PM’s version) the bank industry is split in two. On half accepts deposits which are designed to be as safe as is possible in this world: the relevant money is simply lodged at the central bank or put into government debt. The other half lends in a more risky fashion (to mortgagors, businesses, etc) but that is funded by equity or equity like liabilities, like bog standard corporate bonds. There is nothing to stop the second half making loans via credit cards.

To complete the total control of the credit supply, trade credit will be forbidden as will be bills of exchange and peer to peer lending.

Complete and total garbage: none of the various versions of full reserve advocate forbidding one firm to supply goods to another and not ask for payment for a month or two.

Unfortunately secondary lending probably cannot be stopped entirely and no doubt, as in all recorded history, the public will devise methods of creating credit instruments and therefore money.

Note that it will not be possible to finance all government expenditure for ever from creation of state money as the quantity of money in circulation would be so great that the currency would become worthless as has happened so often in the past. Therefore some taxation will be inevitable.

Of course the banking system will be far less flexible and in particular the inability to overdraw will annoy many citizens.

More drivel: there is no “inability to overdraw”. As the advocates of full reserve – Friedman, Kotlikoff, PM etc - make perfectly clear, borrowing IS PERMITTED under full reserve. But only from entities that are funded via equity or equity type liabilities.

Tuesday, 2 February 2016

Historical quotes on banking.

The following historical quotes about banking are being handed out to all those coming to the meeting on banking in Newcastle-upon-Tyne (UK) on 6th Feb 2016.

"The bank hath benefit of interest on all moneys which it creates out of nothing." -
William Paterson, founder of the Bank of England in 1694, then a privately owned bank.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford, founder of Ford Motors.

"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits." Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain.

"The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests." - The Rothschild brothers of London writing to associates in New York, 1863.

"I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people." Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924.

"The banks do create money. They have been doing it for a long time, but they didn't realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it." H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." - Napoleon Bonaparte, Emperor of France.

"I believe that banking institutions are more dangerous to our liberties than standing armies." - Thomas Jefferson, US President 1801-9.

"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).

"The government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity." Abraham Lincoln, US President 1861-5. He created government issue money during the American Civil War and was assassinated.

"The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilisation." Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination.

"That this House considers that the continued issue of all the means of exchange - be they coin, bank-notes or credit, largely passed on by cheques - by private firms as an interest-bearing debt against the public should cease forthwith; that the Sovereign power and duty of issuing money in all forms should be returned to the Crown, then to be put into circulation free of all debt and interest obligations..." Captain Henry Kerby MP, in an Early Day Motion tabled in 1964.

"... our whole monetary system is dishonest, as it is debt-based... We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned." - The Earl of Caithness, in a speech to the House of Lords, 1997.

Saturday, 30 January 2016

Hoenig falls for the popular myth that bank capital is expensive.

Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig says that requiring banks to fund themselves via more capital or capital/equity like instruments like bonds that can be bailed in will raise bank funding costs and hence force banks to make more risky loans to cover those costs.

Anat Admati, economics prof at Stanford, would be able to explain to Hoenig why capital is no more expensive than debt. But I’ll run thru the argument very briefly for the umteenth time. It’s very simple.

If a given bank is funded ENTIRELY by capital, the risks run by capital holders are EXACTLY THE SAME as if the bank is funded entirely or almost entirely by debt. E.g. if the chance of the bank’s assets declining to X% of book value are 1/Y in any given year when the bank is funded entirely by capital, then the chances of the same thing happening when the bank is funded by debt will be exactly the same. Ergo the charge made by debt holders and capital holders for funding the bank will be the same.

Friday, 29 January 2016

Oxford economics prof not allowed to pay cash for new car.

I’m still scratching my head over this.

Simon Wren-Lewis (Oxford economics prof) says he has enough cash to buy a new car. But when he tried to buy one, the car dealer said new cars could only be acquired via an interest free loan.

I suspect this is plain old trickery. I.e. I suspect if you look at the small print in the “interest free loan” agreement, you’ll find something like the rate of interest suddenly jumps to 10% after two years, but is not charged to car buyers immediately. That is, after three or four years, the car dealer can send car buyers a stonking great bill for interest and if there are any complaints, he just says that was all in the small print.