Sunday, 22 September 2019
Frances Coppola claimed recently on Twitter that Warren Mosler (founder of Modern Monetary Theory) is too monetarist. I beg to differ: i.e. I think the extent to which MMT accepts monetarism is about right. Reasons are as follows.
MMTers certainly tend to claim that given inadequate demand, the private sector’s attempts to save money must be higher than usual, thus the solution is to create more money (base money in particular) and spend it into the private sector. And clearly that claim is not a million miles from the monetarist claim that GDP varies with the size of the stock of money (base money in particular), and the even more extreme version of monetarism, namely that the best way of controlling demand is simply to control the size of the stock of money.
First, there is nothing basically wrong with monetarism (on the dictionary definition of the word, i.e. the idea that GDP tends to vary with the size of the stock of money, base money in particular). To illustrate, when people win a lottery, or come by some other windfall, their weekly spending rises. Ergo if the central bank were to print tons of new money and distribute wads of it to everyone, total spending, i.e. aggregate demand would rise, and assuming the economy had spare capacity, GDP would rise. Alternatively, if there was no spare capacity, the only effect would be to raise inflation.
However, clearly monetarism can be taken too far: e.g. the idea that demand can be accurately controlled simply by adjusting the money supply is over-simple. But MMTers do not advocate the latter over-simple idea.
What they do argue (speaking as a self-appointed spokesman for MMT, ho ho) is that come a recession, the best solution is for the state (i.e. government and central bank) to create money and spend it, and/or cut taxes. Keynes advocated much the same. And that will have two effects.
First there is what might be called a fiscal effect: e.g. if the extra spending comes in the form of extra spending on education, then an immediate effect will be more jobs for teachers.
A second and more delayed effect is that the stock of money (base money in particular) rises, which will itself also raise demand.
Thus it can be said that not even extreme monetarists are extreme monetarists – in the sense that there is an inevitable fiscal element involved in feeding more money into the private sector.
Who controls the printing press.
Of course there is an obvious problem with creating money and spending it, namely that if POLITICIANS are in control of the money printing press, they may well be tempted to engineer pre-election booms.
But the solution to that little problem was set out by Positive Money several years ago: have some sort of independent committee of economists, perhaps based at the central bank, decide the SIZE OF the deficit, while politicians retain control of strictly political matters, like what proportion of GDP goes to public spending, and how that is split between education, health, infrastructure, etc. Ben Bernanke incidentally gave an approving nod to that sort of system.
Another point in favour of the MMT stance here is that while MMTers do not claim adjusting the stock of money should the SOLE method of adjusting demand, their claim that inadequate demand proves there’s an inadequate stock of money is nevertheless true by definition – at least in the following sense.
If the private sector is spending an inadequate amount, that ipso facto means they are trying to save too much, or trying to save an amount that results in Keynes’s “paradox of thrift” unemployment. Put another way, if people are saving too much, those people must in their own estimation, have an inadequate stock of liquid savings (in the form of base money – or government debt, which as MMTers have often pointed out, is pretty much the same thing as base money). Ergo the claim by MMT, Keynes and others namely that given unemployment, there must be an inadequate stock of savings is true by definition. And that is an argument in favour of at least a partial acceptance of monetarism.
Conclusion: the extent to which MMT accepts monetarism is about right.
Wednesday, 18 September 2019
This New Statesman article by Grace Blakeley isn't too clever. (Article title: "The next recession won't be like...") She argues that we’re doomed because given that interest rates are near or at zero, central banks won’t be able to cut interest rates come the next recession, plus she claims the automatic stabilisers won’t do the trick. And that’s it basically. Only slight problem is that she’s left out DISCRETIONARY fiscal stimulus. That is, the latter stabilisers are what might be called “non discretionary” i.e. they happen automatically. But in contrast, any government (particularly the government of a country which issues its own currency) is free to implement as much fiscal stimulus as it likes over and above the latter automatic fiscal stimulus. Indeed, that’s exactly what most governments did in the last recession.
But I’m not being desperately clever in making the latter point: I’m simply repeating what Keynes said almost a hundred years ago. You’d think Blakeley, who got a degree at Oxford in politics, philosophy and economics would have heard of Keynes and understood his basic message.
It could perhaps be argued that Blakeley is implicitly ruling out Keynsian fiscal stimulus in that she very briefly refers to the allegedly excessive levels of “total global debt”, which in her own mind presumably includes national debts, though she is not clear on that. That’s where she says, “The global economy is facing a debt overhang (around $246trn) many times larger than that which preceded the financial crisis. Total global debt is three times the size of global GDP…” Well there are two answers to that.
First, as Keynes explained, there is no need to incur any extra national debt at all in order to fund fiscal stimulus: as he said, a country which issues its own currency can simply create new money and spend it, and/or cut taxes.
Second, the tired old argument that we can’t do too much fiscal stimulus because of the increased national debt that involves was PRECISELY the argument used by George Osborne, David Cameron and other Tories to limit stimulus (i.e. impose austerity - in the “inadequate demand” sense of the word) in the last recession.
Though in fairness to the Tories, many if not most economics commentators employed the same crass argument, as Simon Wren-Lewis has pointed out over and over.
So if Grace Blakeley IS EMPLOYING the latter argument, then Blakeley, the left wing firebrand is agreeing with Tory pro-austerity arguments.
Now that’s a giggle.
Monday, 9 September 2019
First, he claims the coexistence of low unemployment and low inflation disproves the conventional idea that the two are inversely related. (Article title: Central Banking's Bankrupt Narrative.)
No it doesn’t and for the simple reason that advocates of the latter relationship never said it stays constant thru time: i.e. the inflation / unemployment relationship can deteriorate OR IMPROVE – indeed, it would be surprising if it did stay absolutely constant thru time. Doh!
Second, he claims that if an interest rate hike were accompanied by his own bizarre idea that governments should hand out money to those who invest in the stock market, the net effect might not be the normal “higher interest rates damp demand” relationship. Well you don’t say!!
Apart from the dubious morality of handing taxpayers’ money to the rich, if an interest rate hike is accompanied by fiscal stimulus of any sort, it’s pretty stark staring obvious that the NET EFFECT can be stimulatory!!
Monday, 2 September 2019
To cut interest rates, they first have to be artificially raised, which involves the poor subsidising the rich – mad or what?
Why exactly do governments borrow? Well it’s not for the same reason as most private sector entities (households or firms) borrow, i.e. to make investments. While there are many who argued that government should borrow only to invest, that idea has not actually been put into practice.
The sad reality is that governments the world over borrow for a much more devious reason. The reason is that politicians are always tempted to ingratiate themselves with voters by increasing public spending and to ingratiate themselves even more by abstaining from raising taxes. That results in a need to borrow to cover the difference between money flowing into government coffers and the amount flowing out.
Simon Wren-Lewis (former economics prof at Oxford) calls that the “deficit bias”. And David Hume, writing three hundred years ago pointed to the same phenomenon. As Hume put it, “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”
To summarise, the process that gives rise to government debt is for the most part as follows. First, politicians collect an inadequate amount of tax, i.e. they spend, or at least find themselves planning to spend more than will come in from tax each year. That in turn means the private sector (households and employers) are in possession of too much money (base money to be exact), and that would be inflationary if something were not done about it. So governments offer attractive rates of interest to those with cash to spare with a view to inducing those concerned to lock up their cash for a period of time, rather than spend the cash and thus cause excess inflation. And that whole process results in an entirely artificial rise in interest rates.
Worse still, it is not even clear that if public borrowing was limited to funding investments, that that would justify such borrowing. The reasons are obvious to every taxi driver: that is, if a taxi driver wants a new taxi and happens to have enough cash to buy one, the taxi driver won’t borrow money to buy the taxi!! Why pay interest to anyone when you don’t need to? In short, what justifies borrowing is a shortage of cash, not the fact of making an investment.
And as for large corporations, their investments are nowhere near all funded via borrowing: some of the funds come from shareholders and some from retained earnings.
But governments are never short of cash in that there is no limit to how much cash they can grab off taxpayers plus governments along with their central banks can simply print a certain amount of cash most years.
The latter point about the debatable reasoning behind “borrow to invest” simply reinforces the point that governments’ motives for borrowing are thoroughly murky, and probably unjustified.
To summarise so far, any rate of interest paid by governments on their debt is an entirely or largely artificial contrivance, and the same goes for interest paid by central banks on money deposited with them (i.e. interest on “reserves”).
But if a government does borrow, how is the interest funded? Well it’s funded out of general taxation, while the interest is paid (as already pointed out) to those excess amounts of cash. So in short, any rate of interest above zero involves robbing the poor to subsidize the rich!
Mad or what?
This simply reinforces the point made by advocates of Modern Monetary Theory (and Milton Friedman) namely that the best rate of interest is zero: i.e. that governments should not borrow, except perhaps in emergencies.
As for exactly WHERE advocates of MMT make the latter point, Warren Mosler, founder of MMT, made the point in the two works listed at the end below.
The above argument to the effect that any rate of interest above zero is unjustified (except in emergencies) leads to the inevitable and and somewhat disturbing conclusion that interest rate adjustments are not a justifiable way of regulating aggregate demand: that is, demand should be regulated simply by adjusting the amount of new money created and spent by governments and their central banks.
1. Huffington article by Warren Mosler entitled “Proposals for the Banking System”, 2nd last paragraph.
2. Paper entitled “The Natural Rate of Interest is Zero” (co-authored by Matthew Forstater.)
Wednesday, 24 July 2019
If you’re looking for incompetence in high places, nothing quite beats the “fiscal space” idea, much favoured by the IMF, OECD and similar organisations. Google “IMF” and “fiscal space” and you’ll find twenty or thirty IMF articles on the subject and an equal number by the OECD, UN, WHO, World Bank, etc.
I actually had a go at demolishing the fiscal space idea several years ago in a short article here. (Title of article: “Fiscal space is hogwash.”) But the IMF continues to spew out articles about fiscal space. So it’s time for another article on this subject. This present article is a bit longer and more detailed. (Incidentally, for another article which mocks the fiscal space idea, see this article by Bill Mitchell entitled “The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.”)
Fiscal space is the idea that in order to implement stimulus, governments have to borrow and spend, and that allegedly raises the rate of interest government has to pay on its debt, which in turn places a limit on the amount of stimulus. Thus fiscal space, so the story goes, is the amount of stimulus that can be implemented before serious problems kick in in the form of increased interest rates etc.
This IMF work for example defines fiscal space thus: “Fiscal space is a multi-dimensional concept reflecting whether a government can raise spending or lower taxes without endangering market access and debt sustainability.”
There’s no need to borrow!
One big flaw in the whole fiscal space idea is that governments and their central banks do not need to borrow in order to impart stimulus! As Keynes pointed out in the early 1930s, governments and their central banks can simply print money and spend it in order to impart stimulus. Indeed, that’s exactly what several large countries have done over the last five years or so via QE! (At least that certainly applies to countries which issue their own currencies, or to groups of countries which issue a common currency, like the Eurozone. Individual countries within in the Eurozone which do not have their own currency are entirely different, of course.)
Let's expand a bit on exactly what QE is. In reaction to the recent recession, governments have borrowed and spent more than usual (say $X) while central banks have printed around $X of money and bought back that debt. That nets out to the same as “government and its central bank print and spend $X”. Indeed, governments do not even need central banks in order to print and spend: the UK Treasury printed or “created” money at the start of World War I.
Of course advocates of the fiscal space idea might answer that by claiming that the sight of a government (with or without the help of its central bank) going for “print and spend” might induce government’s creditors to doubt the responsibility of such a government and thus demand extra interest on its debt. (Though I know of no instances of the IMF or other advocates of fiscal space being bright enough to actually make the latter objection.)
Anyway, one answer to that is that as long as the amount printed is enough to cut unemployment to the minimum feasible level without causing excess inflation, money printing is a perfectly responsible course of action. Indeed, the latter form of responsibility is exactly what the larger developed countries have displayed in recent years: that is, they have printed larger than normal amounts of money so as to implement QE, and lo and behold, the amount printed has been enough to take unemployment down to record lows without exacerbating inflation. But those governments have not printed completely ludicrous “Robert Mugabe” amounts of money and given us hyperinflation.
You really have to wonder whether the IMF has ever heard of QE or whether it is aware of the relevance of QE to this debate. Indeed the above mentioned IMF work from which the IMF definition of fiscal space was quoted is around thirty thousand words in length (longer than many books), but QE is not mentioned so much as once!
Can IMF ignorance be excused?
In defence of the IMF, it could perhaps be argued that prior to QE, the IMF did not have the experience of QE to confirm that money printing when done responsibly is no problem. Unfortunately that excuse won’t wash.
First, as pointed out above, Keynes explained in the 1930s that money printing was a perfectly viable way out of recessions. Second, since QE, IMF enthusiasm for fiscal space and the number of articles they turn out per year on the subject has continued unabated. In short the IMF and similar international organisations which enthuse about fiscal space do not seem to have learned much from QE.
A second flaw in the fiscal space idea, which is actually very close to the above one, is that as soon as interest on government debt rises significantly above zero, stimulus can then be imparted by cutting interest rates: and that’s done by among other things, having the central bank print money and buy back government debt.
Indeed there’s little difference between QE and cutting interest rates: that is, QE consists of printing money and buying back debt when interest rates are at or near zero, whereas conventional interest rate cutting consists mainly of printing money and buying back government debt when interest rates are significantly above zero.
In fact Simon Wren-Lewis (former Oxford economics prof) specifically advocates using interest rate cuts when rates are above zero, and fiscal stimulus when rates are at or near zero.
To summarize so far, fiscal space looks like one big irrelevance.
Does “borrow and spend” have particular merits?
It could perhaps be argued that fiscal space would be relevant if “borrow and spend” was a much better way of imparting stimulus than interest rate cuts or QE. Unfortunately though, there’s a monster flaw at the heart of “borrow and spend” as follows.
Clearly the effect of extra public spending (or tax cuts) is to stimulate demand. But the effect of borrowing, considered in isolation, is the opposite. That is, if government or central bank borrow $Y and just sit on the money, that CUTS demand. Now if you’re aiming to raise demand, it’s a bit of a nonsense to do something that has the opposite of the desired effect! That’s like throwing dirt over your car before washing it!
To summarize, Keynes was right to say in the 1930s that the way out of a recession is for government to borrow or print money and spend it (and/ or cut taxes), but the print option clearly makes more sense than the borrow option.
As the German economist Claude Hillinger put it in 2010, “An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.”
Is “unprinting” money difficult?
Another possible argument against “print and spend”, and hence an argument in favour of fiscal space, is that if stimulus is imparted by “borrow and spend”, then when stimulus needs to be reversed, government bonds can be sold to mop up any excess supply of money in private hands.
Well the answer to that is that stimulus can always be reversed simply by raising taxes and/or cutting public spending. But if that’s politically difficult, government or central bank can simply wade into the market and offer to borrow at above the going rate of interest.
Central banks in some countries may not be allowed by law to do that at the moment, but there’s no good reason to stop them: i.e. the law can be changed.
The moral (to be cynical) is that if you can produce an important technical sounding phrase, like “fiscal space”, “secular stagnation” or “austerity”, your fortune is made: everyone likes to sound technical and important, so all and sundry will repeat your important sounding phrase for years to come. The fact that the important sounding phrase is in some cases no more than emperor’s clothes won’t worry anyone.
Wednesday, 10 July 2019
I’m setting up a stall at the Durham Miners’ Gala on Saturday 13th July and handing out the article below on an A4 sheet – minus the last section of the article which argues that money created by commercial banks is counterfeit money. The hard copy version refers readers to this internet version. That “counterfeit” point is included in this internet version, i.e. in the paragraphs below.
Image of the leaflet:
The large majority of money in circulation is created by or “printed” by private banks, like Lloyds and Barclays, not our central bank (the Bank of England). Same goes in most other countries.
A small proportion is created by the BoE (e.g. £10 notes, coins etc), but most of the money supply, in particular those numbers you see on your bank statement (if you’re in credit) originate with private banks. So how do private banks do it? They do it as follows.
When anyone applies for a loan from a private bank, the bank does not need to get the money from anywhere: it can simply open an account for the borrower and credit thousands to the account. That money comes from thin air! At least a proportion of it does.
And if you don’t believe that, see the opening sentences of an article published by the BoE entitled “Money Creation in the Modern Economy” by Michael McLeay and co-authors.
Several organisations around the World are campaigning against private money creation, e.g. Positive Money in the UK and “Vollgeld Initiative” in Switzerland. Plus several Nobel economists have argued against private money, e.g. James Tobin and Maurice Allais.
The arguments against private money, i.e. the arguments for nationalising the money creation process (which is not the same as nationalising banks) do not have much to do with the traditional left of centre call for nationalising much of the economy: that is, the arguments are technical rather than political, which is why a number of Tory politicians are sympathetic to abolishing private money (not that 95% of politicians know much about this subject). Indeed, the fact that the arguments are technical is a plus, in that if it was just the left wing of the Labour Party advocating a ban on private money, most Tories would automatically oppose the idea.
The arguments against private money.
Some aspects of the arguments against private money are a bit complicated, but if you’re up for it, read on.
First, private banks are so unreliable that they have to be backed by government (i.e. taxpayers). Governments do that via deposit insurance and multi billion pound bail outs for banks in trouble. In short so called “private money” is in a sense not actually private money at all in that it has to be backed by governments.
Put another way, governments create money in two quite separate ways: first, their central banks create money (and for example spend that money buying up government debt as under QE), and second, as just mentioned, governments create money in that they stand behind private banks which lend money.
But what’s the point in having two different ways of doing the same thing? That’s duplication of effort! There’s an onus on supporters of the existing bank system to justify that duplication of effort, something they have not done.
Second, private banks increase the amount of money they create and lend out exactly when we do not want them to: i.e. during a boom. Then come the crash, they again do exactly what is not in the country’s interests: they cut their lending.
Central banks in contrast, do the opposite: they create money and for example implement QE during recessions, and cut down on their money creation during booms.
Private money exacerbates debts.
Third, private money results in a lower than optimum level of interest which in turn results in a higher than optimum level of borrowing and debt. Reason for that can be illustrated by the following simple hypothetical scenario.
Take a hypothetical economy adopting money for the first time. Assume everyone agrees on what the basic form of money shall be: maybe gold coins or maybe paper money like £10 notes and coins made of relatively worthless metal.
The more the amount of money issued, the more people will tend to spend, and as the stock of money rises, some point will come at which the amount of spending is enough to bring full employment.
Also in that scenario, people and firms will lend to each other, sometimes direct person to person and sometimes via banks. Now there is no obvious reason why in that scenario, the resulting rate of interest would not be some sort of genuine free market rate.
But suppose private banks are then allowed to create and lend out their own home made money. As Prof Joseph Huber explains in his work “Creating New Money” (p.31), creating that money costs banks nothing, thus they are able to lend at below the genuine free market rate! The result is excessive borrowing and debt!
Private money is counterfeit money.
A fourth argument against private bank money is that such money is basically counterfeit money. Certainly the Nobel economist Maurice Allais argued that private money is counterfeit money. (See opening sentences of Ronnie Phillip’s article “Credit Markets and Narrow Banking”.) And David Hume, the Scottish economist / philosopher writing 300 years ago said the same.
So were they right? Well I’ll argue in the paragraphs below that private money is at the very least very near to being counterfeit. Here goes.
The Concise Oxford Dictionary defines “counterfeit” as “made in exact imitation of something valuable with the intention to deceive or defraud”.
As to “made in exact imitation”, when you get a loan for £X from a bank, the bank lets you believe that what it has supplied you with are pounds in just the same sense as genuine Bank of England issued pounds. Actually the bank supplies you with nothing of the sort: it supplies you with a promise by the bank to pay £X to whoever.
Put another way, BoE pounds are a liability (at least in a sense) of the BoE, while private bank created pounds are a liability of a private bank. Not the same thing! So there is definitely “imitation” going on there.
As to the word “deceive” in the above dictionary definition, the latter failure to make clear the difference between BoE pounds and private bank pounds is clearly a form of deception.
As to “defraud”, it is necessary to distinguish between private banks as genuine private banks and private banks as part of government. (As mentioned above, so called “private” banks are backed by government, and are thus arguably part of the government machine – indeed, Martin Wolf, chief economics commentator at the Financial Times once referred to bankers as “just highly paid civil servants”)
Where a private bank is acts as a genuine private institution, it is into fraud in a totally blatant way – a situation that obtained before the days of deposit insurance. Reason is that such a bank promises depositors they’ll get one pound back for every pound deposited. But at the same time, the bank lends out money in a less than totally safe manner, with the result that (as everyone knows) banks go bust from time to time (when those loans go wrong).
Thus the promise by such banks to depositors that depositors’ money is safe is plain simple fraud!!
In contrast, where private banks are backed by government via deposit insurance, bailouts etc, the question arises as to why banks enjoy the luxury of taxpayer funded protection, but institutions which perform a very similar function to banks do not, (those institutions being unit trusts, mutual funds, private pension schemes and so on).
To illustrate, there are unit trusts (“mutual funds” in American parlance) which accept deposits and lend to a variety of relatively large borrowers: i.e. those unit trusts buy bonds issued by corporations, cities, local authorities, etc. But those unit trusts are denied the sort of support that banks get! Indeed, those unit trusts are specifically prohibited from promising depositors they’ll get all their money back!
In short, private banks have over the decades and centuries pulled a huge amount of wool over politicians’ eyes: that is, banks have managed to get themselves into a highly privileged position: they are effectively “defrauding” the country at large.
The conclusion is that private banks are either into counterfeiting pure and simple, or they are into activities which are as near counterfeiting as makes no difference.
Incidentally and finally, if you are tempted to wonder whether private banks unbacked by government would not be risky for depositors, that’s a legitimate concern. The answer is what’s know as “full reserve banking”. That’s a system where banks obey much the same regulations as mutual funds now have to obey in the US: that is, where a depositor wants a specific sum to be totally safe, the relevant bank must invest the money in nothing more risky than bonds issued by a limited number of relatively responsible governments, perhaps just the bonds issued by the government where the bank is located. That way, depositors’ money is safe, but they earn little interest
In contrast, where a bank lends to any borrower who is more risky than a government (e.g. mortgages) those supplying the bank with relevant funds must be prepared to take a hit if the loans go bad. At least that involves consistent or similar treatment for banks and other financial institutions which perform much the same function as banks.
Saturday, 6 July 2019
As Edmund Burke said, “Custom reconciles us to everything”. In plain English, it doesn’t matter how raving bonkers some aspect of our economic, social or political system is: as long as that aspect is customary, a large majority of the population will accept it. Cannibalism is accepted in societies where cannibalism is accepted, if you’ll excuse the tautology.
Anyway, and moving on to banks, money market mutual funds (MMMFs) are banks of a sort: like banks, they accept deposits and make loans. During the recent recession, one of America’s MMMFs failed: the “Reserve Primary Fund”.
Anyone could have predicted that an MMMF would fail at some point and for the following very simple reason. Those funds accept deposits and lend on the money to relatively safe borrowers: i.e. they buy bonds issued by blue chip corporations, cities, etc. But (again, as anyone can tell you) there is no such thing as a totally reliable borrower. That means that at some stage, an organisation lending to those borrowers is absolutely bound to fail.
The reaction of the US authorities was the correct one: they barred MMMFs which lend to anyone more risky than a limited number of sovereign governments from promising depositors that those depositors are guaranteed to get $X back for every $X deposited.
But banks lend to a variety of borrowers who are nowhere near as reliable as blue chip corporations and cities. But banks are allowed to promise borrowers their money is totally safe!!
Raving bonkers, or what?
Of course banks can be made totally safe by having them insured by governments, and indeed that is done via deposit insurance and multi-billion dollar bail outs for banks in trouble.
But by the same token, flouting helth and safety regulations or drinking excess alcohol can be made a relatively safe in that government insurance could be provided for those flouting those regulations or drinking too much alcohol. That is not a good argument for flouting those regulations or drinking too much alcohol.
Another excuse for letting banks promise depositors their money is safe, when it quite obviously isn't (but for deposit insurance etc) is that the effect is stimulatory. I.e. such insurance encourages banks to do more business, lend more etc (i.e. create more debt).
Well one answer to that is the central banks (and governments) can provide any amount of stimulus anytime by creating and spending money into the economy. Moreover, that form of stimulus involves no sort of risk of bank failures, followed by ten year long recessions. Lending by commercial banks certainly serves a purpose, but there is no reason for artificially encouraging it, and hence artificially inflating the total amount of debt.
Second, the above “stimulus” argument applies to MMMFs just as much as it does to banks. That is, promising those who deposit at less than totally safe MMMFs that their money is totally safe would encourage people to deposit at those institutions, which in turn would make it easier for blue chip corporations, cities, etc to borrow! Think of the economic benefits (I don’t think).
But why not take it a stage further and have government organised insurance against loss for those investing on the stock exchange or government organised and taxpayer backed insurance for ships? Think of the economic benefits….:-)
Curiously, most of those who complain about excessive amounts of debt also back the existing bank system which, as explained above, results in an artificially high level of indebtedness.
Cannibalism or the existing bank system seem wholly logical and reasonable once you’re used to them.
In contrast to the existing bank system, there is full reserve banking. Under full reserve, the above mentioned rules that now apply to MMMFs (unless banksters have managed to get the new MMMF rules rolled back) are applied in a wholly consistent manner. That is, no organisation is allowed to accept deposits (i.e. promise those placing money with such organisations that their money is totally safe) if such money is not in fact totally safe.