Saturday, 6 March 2010

Bank reform means fewer jobs? Bunk!

This is a poor article by Rolfe Winkler of Reuters. It claims that bank regulation means less credit created by commercial banks which in turn means fewer jobs.

Of course OTHER THINGS BEING EQUAL less credit from commercial banks means fewer jobs. But other things don’t have to be equal; that is, to compensate for the reduced amount of money created by private banks, a central bank can easily create more “central bank money”, i.e. monetary base.

And if this additional monetary base is channelled into the pockets of Main Street rather than Wall Street, then genuine jobs would be created rather than the casino type jobs which is about all that Wall Street creates.

The points in the above two paragraphs are well set out by James Galbraith. As he points out, “Bankers don't like budget deficits because they compete with bank loans as a source of growth.”

The above process of replacing commercial bank created credit with central bank created credit can be taken to an extreme where the ONLY money is central bank created money. This is sometimes known as “hundred percent reserve banking”. Milton Freidman favoured this system. (See p. 247 here.)

The big advantage of it is thus. Commercial banks behave in a pro-cyclical manner. That is, they create more money just when it’s not needed: during a boom. And they destroy money just when they shouldn’t: in a recession. Hundred percent reserve banking would certainly not on its own mean an end to boom and bust, but it would help.


Thanks to Winterspeak for drawing attention to Rolfe Winkler’s article. And thanks to JKH for drawing attention to Galbraith’s article.

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