Monday, 31 January 2011
According to the BBC, a significant proportion of banks have shut down in the more seriously affected parts of Egypt due to the current political unrest. As a result, so claims the BBC, people have started exchanging IOUs.
Something similar happened during the Irish bank strike in 1978: people exchanged cheques.
It’s amazing how quickly a form of “peoples’ money” arises as soon as the supply of official money becomes inadequate. There is a PhD thesis there for someone.
Sunday, 30 January 2011
Obama the imbecile produced four useless ideas, which I listed here, to raise employment in the US. Amongst these was the idea that corporations, which are currently flush with cash, should invest more so as to create jobs.
It now seems that the equally imbecilic British finance minister, George Osborne, thinks the above “corporations” idea is a good one, because he has ordered British corporations to do likewise.
That’s according to the lead story in the Sunday Times Business section (30th Jan 2011), “Osborne orders bosses to splash out for recovery”.
If only we had Laurel and Hardy in charge, assisted by Bart Simpson, we’d be much better off.
Saturday, 29 January 2011
UK Financial Investments (UKFI) is the UK Government body responsible for looking after the Government’s current large bank shareholdings. The latter came about as a result of rescuing the banks during the credit crunch.
According to a Guardian article*, UKFI told the Treasury select committee that if the Too Big To Fails (TBTF) were split up, the value of the shareholdings would decline. Well, talk about a statement of the obvious.
Being a TBTF has clear advantages, for example it involves the well known TBTF implicit subsidy. That is no doubt good for the share price.
But half the point of government is to consider what is RIGHT, not what is profitable. If government just wants to make a profit on its bank shares and is not concerned about what is right, why doesn’t it let banks engage in extortion, protection racketeering, murder, you name it?
The above point about share values is just one of the guns which the banking industry worldwide holds to governments’ heads. The message is, “If you don’t let us return to the pre-crunch status quo, you’ll lose on your shareholdings, which means you’ll have to beg taxpayers for more money, which will make you unpopular.”
* “State would lose in bank split” by Jill Treanor, 28th Jan 2011.
Wednesday, 26 January 2011
I don’t agree with Krugman.
If a zero interest rate loan is not a subsidy, why cannot everyone have some of this zero interest rate “non subsidy”? That is, why give banks preferential access to the “non subsidy”? And if it isn’t a subsidy, why do commercial banks want it?
Because the central bank is not geared to sort out the viable borrowers from the non viable ones, whereas commercial banks are? Well commercial banks are clearly not too good at distinguishing the viable from the non-viable. It was the very fact that they made a hash of trying to make this distinction that largely explained the credit crunch.
Not only that, but if a commercial bank spots a viable lending opportunity, it doesn’t need central bank money in order to make a loan. The commercial bank can create the money itself out of thin air.
Newly created central bank money is the property of the people, not of any specific corporation or group of corporations. And above all, this money is not the property of a group of corporations which has ten lobbyists for every member of Congress: crawling around inside the White House and all over Capitol Hill (and the equivalent institutions in other countries).
To repeat the quote I set out from Thomas Edison here a few days ago:
“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good... If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?” (Hat tip to Beowulf for that quote which comes from the NY Times, Dec. 6, 1921).
Or to put all that another way, if new money is to be created in a recession, it should be fed directly into households pockets. Firms and corporations should then compete on equal terms for any additional orders coming their way from households. And the ones that cannot compete, car manufacturers, banks, massage parlours, you name it, should go to the wall.
Tuesday, 25 January 2011
Sunday, 23 January 2011
Everyone in Britain now knows that horrendous costs are being imposed on Irish households to pay for the fraud, criminality, etc by Irish politicians and bankers.
However, it seems that the same thing has been going on in China for years and on a hundred times the scale. For several years, Chinese households have had their standard of living supressed by around 20% or so to pay for the non performing loans in the Chinese bank system that existed ten years ago. See this article by Michael Pettis. (Hat tip to Naked Capitalism for the information)
As for the current lot of non performing loans, seems the Chinese authorities have not started to think about what to do.
The costs imposed by the world’s banking systems on households are utterly horrendous.
Saturday, 22 January 2011
George Washington has produced evidence that it’s the big banks that have failed to lend over the last year or so, while smaller banks have continued to lend.
Let’s be clear about that. The banks which are in receipt of billions of taxpayers’ money and various covert subsidies like the implicit “too big to fail” subsidy have, to put it impolitely, sat on their ar*ses, while the banks which are NOT in receipt of these totally unwarranted privileges have continued to lend.
Walter Bagehot will be turning in his grave. He said, “any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank”. Quite right.
And there are plenty of small banks and small quasi banks out there ready to set up and/or do more business.
Siemens, the Germany company, was planning to set up a bank about six months ago.
Plus there was an article in the Sunday Times Money Section by James Charles (unfortunately not online as far as I can see) entitled “Become a bank and pick up 12% a year”. This was on the subject of small private lenders expanding their activities because of the caution of big banks.
And finally, Bank of America has just announced a $1.2 bn loss !!! They cannot even make a profit despite the billions of overt and covert subsidies they get.
Friday, 21 January 2011
Prof David Beckworth claims the Fed should attempt nominal GDP targeting (NGDP targeting). I’m sympathetic, but I don’t like the tool he advocates for actually effecting this policy. He advocates a monetary base (MB) increase to boost demand: any old MB increase it seems.
We have recently had an astronomic and unprecedented MB increase (thanks to QE) and the effect has been unspectacular, apart from boosting asset prices. And the latter in itself is totally useless.
In contrast, channelling extra MB into the pockets of households rather than into the pockets of banksters DOES have an effect: all the evidence is that a significant proportion of wage increases or windfalls enjoyed by households is actually SPENT, which is what we want, if we want stimulus. For the evidence, see here, here, here and here.
And apart from that strict economic point, there is a moral or philosophical point which backs the latter economic point. It’s a point made by Thomas Edison, which briefly is that new money should be the property of the people. The full quote is thus.
“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good... If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?” (Hat tip to Beowulf for that quote – it comes from NY Times, Dec. 6, 1921)
The above policy (having extra monetary base go straight to households) involves getting Congress to mesh fiscal policy with the Fed’s monetary policy, which is easily done in principle. And that “meshing” does not require a merging of the two bodies. That is the Fed can still be responsible for the economy’s overall deflationary / stimulatory stance, while Congress can decide on exactly where money is spent and how much money comes from which form of taxation. And same goes for any other central bank and parliament.
And finally this will all ring loud bells in the brains of Modern Monetary Theory (MMT) advocates. MMT favours having the government / central bank machine go for straightforward extra net spending in a recession. With no extra borrowing to cover the extra spending, and with the extra money very definitely not going into the pockets of banksters.
MMT just steamrollers everything in front of it!
Thursday, 20 January 2011
With inflation and interest rates probably on the rise in the UK over the next year, we can expect the usual long queue of yawn provoking commentators telling us that this makes life more difficult for borrowers. The reality is that when interest rates and inflation rise by the same amount, the cash flow position for borrowers would not be affected one iota if they got to grips with inflation accounting. I’ll explain.
A loan involves two elements: first paying interest, and second, gradually repaying the capital sum. Let’s assume, 1, a £100k loan, 2, that interest is 5%, 3, repayment of capital is 5% a year, and, 4, that inflation is zero.
Total payments in the first year will be 10% of the sum borrowed.
Now let’s assume inflation of 15% with the REAL rate of interest the same, i.e. 5%, which makes the APPARENT rate of interest 20%. In this scenario, how would a borrower and lender with their heads screwed on (i.e. acquainted with inflation accounting) go about arranging matters so that the outcome IN REAL TERMS was the same as in the zero inflation scenario?
At the end of the first year, the outstanding loan needs to be £95k in real terms (i.e. in terms of prices as they were 12 months earlier). But wait a moment: £95k adjusted for 12 month’s worth of inflation is £95k x 120% = £114k. In other words the borrower needs to borrow an extra £19k just to make sure the value of the capital sum borrowed declines at a nice steady rate IN REAL TERMS.
To summarise, given a significant rate of inflation, if borrower and lender do their inflation accounting properly, the amount borrowed in nominal terms will initially RISE: counter intuitive.
Alternatively the borrower can make their own arrangements and get a second mortgage or loan with a view to borrowing the above extra £19k.
During the high inflation episode around 1970, lenders and yawn provoking commentators in the UK totally failed to get to grips with this point. If inflation becomes serious again, they will probably fail again. The above point is a mile above their pretty little heads.
Tuesday, 18 January 2011
We should never lose sight of the sheer stupidity of our rulers (and/or those that advise them). I’m referring to Obama’s three great ideas for creating jobs.
The first idea was that since corporations had large cash piles, they should invest them so as to create jobs. Just one problem: there is no point in investing in new plant, factories, office blocks, etc unless the demand is there for the relevant products. I.e. put the demand in place, and employers will automatically invest in capital equipment, and they’ll do it without the sort of moron advice they get from politicians.
The second idea was that the U.S. should export more. Problem here is that every other country is trying to do likewise. Just in case Obama and his advisors haven’t noticed, China is trying every trick in the book to maximise its exports, including currency manipulation.
Rationalising international trade would be a good idea. But the simplistic idea “let’s export more” is plain daft.
And the third idea was that the U.S. can create jobs by exploiting its technological superiority. Obama proposed this idea at the carefully choreographed press conference just before Xmas 2010. Unlike Clinton, Obama seems to have a problem doing live interviews with journalists.
The problem with this “advanced technology” idea is that the Chinese are rapidly catching up with U.S. technology. As the entire world knows (apart from Obama and his advisors), the Chinese are producing stealth fighters.
And not only that, but the bulk of jobs even in advanced economies are pretty mundane: driving trucks, laying bricks, serving in restaurants and so on. Being technologically advanced is nice, but it does not have a huge effect on employment levels. That is, a technologically backward country can perfectly well achieve decent employment levels, if it organises its labour market efficiently.
Faced with this bunch of economic illiterates, the Chinese ought to come out on top in the current negotiations even if they were blindfolded, drunk, and had both hands tied behind their backs.
Afterthought dated 20th Jan 2011. For more imbecility in Washington DC, this time by Alan Greenspan, see here and here.
And for more on the stupidity of Obama’s export idea, see here.
Afterthought (25th Jan 2011). Would you credit it? A few days after setting out the above three imbecile economic policies, Obama comes up with a fourth: “competitiveness”.
As Robert Reich and others point out, the term is meaningless.
3rd Feb. For more on the irrelevance of the "innovation" idea, see here.
Monday, 17 January 2011
While I basically support Modern Monetary Theory (MMT), I don’t agree with the idea put by some MMTers, namely that government’s control of money enables governments to control prices.
One advocate of this idea is Randall Wray (Prof. of Economics at the University of Missouri-Kansas City). See here.
The argument put by advocates of this price control idea is along the following lines.1. In a country where government issues its own currency, the private sector must acquire this money, the state’s money, in order to pay taxes. 2.The private sector can only do this by supplying the state with goods and services. 3. The fact that the state is a monopoly issuer of currency means the state can determine the price of goods or services supplied to the state. 4. This can be of assistance in controlling inflation.
There is of course an obvious and flippant answer to the above argument, namely “try telling that to any bureaucrat responsible for procurement”. They’ll fall off their chairs laughing. But the real flaw in this price control argument is thus.
This price control idea is certainly valid in a non-democratic or dictatorial regime. Indeed, advocates of the idea often illustrate their arguments by reference dictatorial regimes or slave economies.* Unfortunately the implication that this idea translates directly to democracies just doesn’t stand inspection.
Obviously a dictator can determine what constitutes money in their economy, plus the dictator can determine the price at which goods and services are supplied to the dictator.
Incidentally, this power to control prices is INDEPENDENT of the fact that the dictator decides to issue a currency. That is, in a small country dictatorship which used say the US dollar, the dictator would still be able to control prices (e.g. by threatening to shoot anyone buying or selling goods at other than stipulated prices). But this is not the scenario we are concerned with here.
The price control argument, to reiterate, is that the private sector MUST supply government with goods and services in order to acquire the state’s money, which (in turn) the private sector needs to pay taxes. But in the real world, as distinct from the “price control” theoretical world, employers have a range of customers other than government to choose from. If government does not offer the market price for goods and serves, the relevant firms just won’t supply government with said goods and services. What happens then?
What happens is that the private sector runs short of state’s money. The effect of that is deflationary. Unemployment rises, and government just has to do something about it: it increases the private sector’s supply of state’s money!
There are different ways government can do this. A currently popular one is quantitative easing. Second, there is the standard MMT solution to unemployment, namely have government increase its net spending. A third possibility is to cut interest rates – and this is effected by government buying its own bonds: which increases the private sector’s stock of state’s money! The whole price control argument collapses!
Moreover, it is arguable that the latter flaw in the price control idea applies even in dictatorships. That is, it is not even in the interests of a dictatorship or semi-dictatorship to have high unemployment levels. The latter involves a lower GDP than would otherwise obtain. Why would any dictator want a lower than achievable GDP?
Saturday, 15 January 2011
On 5th Jan, the British establishment’s favourite newspaper, The Times ran a story out of the blue about Muslim / Pakistani gangs who were allegedly grooming and raping vulnerable white girls.* The story covered the whole of The Times’s front page plus four pages inside.
The main front page story the next day was on the same subject. Plus there were several related stories during the subsequent week.
And the story, according to The Times was a “revelation”. The first word of the headline was “Revealed”. Plus according to the first paragraph The Times was “exposing” something.
But there is just one problem. This story is old hat. In 2001, Nick Griffin, head of the British National Party drew attention to this grooming problem and was put on trial by the establishment for “inciting racial hatred” or similar. Plus a few years later, on television, Channel 4 ran a programme on the same subject.
You might think that the police would investigate these grooming and rape allegations made by Channel 4. But far from it: Channel 4 found itself on the receiving end of a storm of abuse from the establishment for inciting racial hatred etc etc. Channel 4 was not taken to court, but they did have to pull a further planned programmed on the same subject entitled “Edge of the City”.
Fast forward to 2011. The Times draws attention to the problem (and in some style) and the reaction from the establishment is total silence. Now why would this be? Possibly it is that Rupert Murdoch is too powerful to be challenged. Or possibly, the establishment is admitting that it was wrong all along. Probably a bit of both.
When the pompous and the sanctimonious are in the wrong, they can never bring themselves to admit it. What they do is go GRADULALLY change their views, and hope no one notices. Well, sorry, but we’ve noticed.
* Article title: “Revealed: conspiracy of silence on UK sex gangs”. It’s available here.
Afterthough (same day): The above claim that there was “total silence” in response to The Times “revelation” is not quite right. Jack Straw, who was a senior member of Tony Blair’s government at the time of the above mentioned Nick Griffin trial and the Channel 4 fiasco, actually expressed AGREEMENT with the thrust of The Times articles. The hypocrisy is even more delightful than suggested above. You couldn’t make it up!
Afterthough (30th Jan 2011). For more on this, see video clip by Pat Condell.
Friday, 14 January 2011
There is a long and thoughtful article by Krugman on Europe here. He deals with the two main problems: debt and lack of competitiveness amongst PIGS.
Towards the end of the article he sets out four solutions, as follows.
1. “Toughing it out”. That is, continue with protracted deflation in PIG countries. (That addresses just the competitiveness problem.) This actually amounts to devaluing the currency of the relevant country, but it’s a slow painful process the way it is currently being done.
2. “Debt restructuring”. That is, debt restructuring while staying in the EZ. (That addresses just the debt problem.)
3. “Full Argentina”. That is, repudiate debts and withdraw from the Euro in the same way as Argentina withdrew from the Peso - dollar peg. (That addresses both the competitiveness and debt problem.)
4. “Revived Europeanism”. This involves Europe becoming more of a genuine social and political union – something like the US.
An example of revived Europeanism is the E-Bond idea. But that won’t happen: it involves Germany and other responsible countries subsidising PIGS or at least apparently subsidising PIGS. If in doubt, mention E-bonds or any other form of permanent subsidy for PIGS to German taxpayers: you’ll get a stiff (and understandable) response.
So barring withdrawal from the Euro, there is only one solution to lack of competitiveness: “Toughing it out”. But as pointed out above, this is a slow painful process. So can the process be speeded up?
There are HUGE gains to be had from speeding up the process. Indeed if the process becomes essentially the same as what I’ll call a GENUINE DEVALUATION (that is devaluation in the case of a country that issues its own currency) the whole process is virtually painless. For example the pound sterling was devalued relative to the US dollar in 2008 by around 25%. Scarcely anyone in the UK noticed. There were a few grumbles about the increased cost of holidays in Florida, and that was about it. There were certainly no riots as per Greece.
Well, here is an idea for speeding up the process. First, raise direct taxes like income tax and reduce sales taxes, like VAT. As in the case of a genuine devaluation, this does not make it any more difficult for citizens of the relevant country to purchase products in the relevant country where those products have little or no import content. Also, as in the case of a genuine devaluation, it’s easier for foreigners to buy products made in the devaluing country.
An alternative and/or supplementary measure to cutting VAT would be to cut the employers’ contribution to a payroll tax (National Insurance contributions in the UK).
And that might just about do the job. To illustrate, VAT in the UK is currently 20%. If that were reduced to zero and income tax were raised, that would constitute a 20% devaluation.
An obvious weakness in this idea is that it cannot be used repeatedly, otherwise one ends up with a negative rate of VAT. But if it were implemented and followed by a wage freeze lasting several years (in nominal terms) plus a freeze on social security benefits, etc., then the idea would work.
Moreover, there is in a sense not much use criticising this idea. This is that, as Krugman rightly points out, the only solution to lack of competitiveness is “toughing it out” or some variation thereon. So for those who don’t like the above VAT idea, here is a question: what better alternative is there?
Wednesday, 12 January 2011
Two good articles about off shore tax havens controlled by Britain - see here and here.
Looks like about 6-7% of the US national debt is funded by what are euphemistically called “Carribean Banking Centers”. See here and scroll to bottom.
I got that 6-7% by dividing the 3.2 by 49 – figures at the bottom of this site.
But that 6-7% is very much a shot in the dark. First, is a “Carribean Banking Center” the same as a “tax haven”? Second, what proportion of tax havens worldwide are Carribean? What proportion are British? Also, the above figures apply only to the proportion of US national debt that is “held by the public”: that is, it excludes the portion held by US government institutions. (But then the latter is not “real debt”, is it?)
Anyway, there is nothing like digging dirt, even if the digging is less than entirely accurate.
Tuesday, 11 January 2011
This article by Michael Pakko of the St Louis Fed makes two mistakes. The first is a biggish mistake: a $340bn mistake, or thereabouts. But it’s a common mistake. It is as follows.
He claims two justifications for a deficit, i.e. a rise in the national debt. The first is that “ . . . deficits can be justifiable if they finance long-term expenditures (as with an individual who finances the purchase of a home)”.
The second is borrowing so as to fund Keynsian stimulus.
There is actually a third, which is the need to keep the monetary base expanding. The need for this constant expansion is down to two factors. First it is reasonable to assume the monetary base will expand in line with real economic growth, say 2% a year for the sake of argument.
Second, there is inflation to take into account. Unless the monetary base is constantly topped up, inflation will erode real value of the base (let’s say, again, at 2% a year).
An identical point applies to the national debt. To be more accurate, there is no “need” to keep the national debt at a constant level relative to GDP. But the reality is that while this debt is on the high side at the moment, it is unlikely to vanish altogether in the next ten years.
So let’s make the crude assumption that the national debt stays at a constant level, and equal to the average level over the last decade or so: roughly 50% of GDP.
Let’s also take the U.S. monetary base as $1trillion (about 7% of GDP): that’s where it was roughly 18 months ago before the very large spike caused by bank bailouts, quantitative easing, etc. Let’s say GDP is $15trillion.
Taking the above back of the envelope figures, the deficit required to keep the monetary base and national debt expanding along with real GDP will be:
(2% + 2%) x (50% + 7%) x $15trillion = $340bn (unless I’ve made a mistake!)
The second mistake in the Fed article is the claim, mentioned above, that “ . . . deficits can be justifiable if they finance long-term expenditures (as with an individual who finances the purchase of a home)”.
Not true. Indeed, “individuals who finance a home” and businesses who borrow to invest seem to have got their heads screwed on tighter than governments in this area, and for the following reasons.
The REAL purpose of a loan is to cover expenditure which the borrower cannot possibly meet from their own resources. E.g. if you’ve got at least $30,000 in the bank and want to buy a $30,000 car, there is no obvious reason to borrow the $30,000.
Now governments make investments every year which are of monumental proportions compared to investments made by the average firm or household. But then government INCOME is monumental as well.
In other words governments can perfectly well fund ALL their investments out of income. Indeed, taking the simple example of where a government invests exactly the same amount each year, and funds this out of borrowing which it gradually pays back, this government will end up paying out EXACTLY THE SAME AMOUNT of money each year as if it had funded investments out of income. The only difference is that under the borrowing scenario, interest has to paid.
To summarise, the fact that $X of a deficit is spent on investment does not justify that portion of the deficit, at least not on the basis of Pakko's argument. There may of course be justifications for government borrowing so as to fund investments, but if they exist, they are more abstruse and complicated than the above one.
Monday, 10 January 2011
Having made fools of themselves in the credit crunch, and lost some influence with governments, banks are now trying to re-capture governments. And it looks like banks have got the Telegraph on side, at least in relation to the latest Bank of England Quarterly Credit Conditions Survey – to judge by a totally distorted bit of reporting in The Telegraph.
The Telegraph Business section had a front page report (7th Jan) on the latest edition of the above survey. The article was entitled “Basel III squeezes bank loans”. And the thrust of the article was, as the title implies, that the BoE’s survey had found that Basel III was restricting bank loans.
Problem is that is not what the BoE’s survey says at all.
The reality is that Basel III was scarcely mentioned in the BoE survey. Most the survey was pretty boring: it claims there are no dramatic changes happening as regards credit conditions right now.
The only mention of Basel III was that “A couple of lenders commented that . . .the amount of capital available for lending had been somewhat tighter and more uncertain following the Basel III announcement in September. Though it was difficult to assess the prospective impact of Basel III, lenders commented that capital would constrain net new lending to some extent going forward.”
That’s about 60 words devoted to Basle III in a report consisting of about 3,000 words. And that’s not counting several pages of tables, charts, etc.
Moreover, it seems that only “a couple of lenders commented” on Basel III (though the wording of the BoE survey is not 100% clear here). I have not yet discovered exactly how many lenders took part in this particular survey, but it seems that the intention when this quarterly survey was first set up was to involve between 10 and 30 lenders. (See p.3 of the “Consultation Document” here (scroll to bottom of page).
Now 2 out of 10 or 20 is not what you might call an overwhelming majority!
How much did the banks pay the Telegraph for that article? Sorry, I better put that more politely – how much advertising did banks offer to place on the pages of the Telegraph in exchange for the article?
Or I could put it even more politely: how many weekends for Telegraph journalists on yachts owned by senior bank officials were offered in exchange for the article? There are numerous ways of putting it.
An entirely different explanation is that the Telegraph is for the most part a newspaper for fuddy duddies who cannot imagine anything much apart from the status quo. It is a newspaper devoid of IDEAS. And the status quo just prior to the credit crunch involved banks ruling the roost, so according to Telegraph logic, banks must go back to ruling the roost.
The reality is that the role banks play in an economy is very variable. For example, bank assets and liabilities in the UK have expanded a whapping ten fold in the last 30 years or so. To what benefit? Economic growth is no better now than in the 1960s.
Channel stimulus to the Main Streets of this world rather than the Wall Streets, and that puts cash into the pockets of ordinary households, plus banks are cut down to size.
Saturday, 8 January 2011
Positive Money’s ideas on bank reform are better than Dennis Kucinich’s.
Positive Money’s only mistake is that they make a concession to their opponents they don’t need to make. That is, they suggest their proposals will lead to a reduced bank lending – and the suggestion (implicit rather than explicit) seems to be that this is a weakness in their proposals. I beg to differ for the following reasons.
1. Bank assets and liabilities have increased by a staggering amount in the last 30 years (by a factor of around ten, relative to GDP, I seem to remember). This has brought with it some lending which is clearly on a massive and irresponsible scale, e.g. NINJA mortgages. Thus any idea that a reduction in bank lending is necessarily harmful is positively hilarious.
Put another way, the size of the role that banks play in an economy is very variable for given GDP.
One knee jerk reaction to the idea that we have higher interest rates and less lending is the fewer poor people will be able to buy their own houses. My answer to that is that while having a roof over one’s head is a basic human right, actually owning a house is not. Indeed, the WEALTHIEST country in Europe (Germany) has the LOWEST rate of owner occupation!!!!
2. Positive Money’s suggestion that all bank accounts be split into two two types, “transaction” and “savings” is good, but the idea that 20% of savings accounts can then be withdraw more or less instantaneously is a mess. That 20% effectively then becomes “transaction money”. So I suggest just keep clean and simple: transaction accounts and savings accounts, and leave it at that.
Friday, 7 January 2011
Thursday, 6 January 2011
Hundreds of thousands of hours have been expended in academia over the last century over the argument as to whether government borrowing “crowds out” private sector employment. The alleged problem is that when government borrows, this raises interest rates, which in turn stifles private sector economic activity.
There is one awkward fact which is actually a big hint that the whole argument is a waste of time, namely that sometimes governments actually WANT crowding out to take place. This occurs where government borrows AS A SUBSTITUTE for tax.
Half the purpose of tax is to rein in private sector activity or private sector demand so as to make room to the relevant public sector activity (e.g. make labour available for such public sector activity).*
Now this makes a bit of a nonsense of the “crowding out doesn’t occur” argument, doesn’t it?
To put that in more general terms, where government WANTS crowding out to take place, it will LET interest rates rise, or deliberately raise them, or impose some other deflationary measure.
In contrast, where government borrows with a view to stimulus, it JUST WON’T LET interest rates rise in consequence. Indeed, the chances are that the relevant government will be LOWERING interest rates!
To that extent, the whole question as to whether government borrowing crowds out is a waste of time.
A possible answer to the above argument is that it would nevertheless be nice to know the EXACT EXTENT of crowding out. Well, sorry, but not even this excuse for the argument stands inspection, and for the following reasons.
Where government borrows with a view to stimulus, it won’t let interest rates rise, and indeed, will probably lower them. And this is done by creating money ex nihilo and buying government bonds. But wait a moment: when government borrows, it CREATES government bonds!
Now what is the point of this exercise? That is, what is the point of creating and distributing something, only to buy it back a few weeks later? There is no point!
Put that another way, where governments go through the motions of borrowing with a view to stimulus, they actually end up effecting the stimulus by plain old money printing. Thus we don’t even need to know the extent to which crowding out takes place!
And wouldn’t you know it: Abba Lerner advocated effecting stimulus by plain old money printing rather than by having government borrow and spend.
Abba Lerner and Modern Monetary Theory win again.
*To be more accurate, the CONVENTIONAL WISDOM is that the purpose of tax is obtain money for government spending. In contrast, as the advocates of Modern Monetary Theory correctly point out, collecting money cannot possibly be the purpose of taxation because governments can produce any amount of money any time from the printing press. Thus the REAL purpose of tax is to rein in private sector demand to a level at which the additional demand coming from the public sector won’t be inflationary.
Moreover, it is highly unlikely that the amount of money that needs to be collected in tax so as to rein in private sector demand by a given amount will exactly equal the amount of demand stemming from spending that amount of money on public sector projects. That is, the idea that one needs to collect exactly £X in tax to cover £X of government spending is actually nonsense: the final nail in the coffin of the above mentioned conventional wisdom.
Tuesday, 4 January 2011
Tim Congdon is one of the UK’s leading economists. For example he served on the Treasury's panel of independent economic forecasters in the l990s.
For some time he has argued that the money supply declines during recessions, thus artificially maintaining the money supply will help in a recession. E.g. see here and here. This is a crude argument. It overlooks various subtleties.
The first of the above links is concerned with QE, and Congdon argues that since QE maintains the money supply, this alleviates the recession. Well certainly QE boosts asset prices: nice for the asset rich. That in turn induces the wealthy to spend more (not MUCH more, though). But getting out of recessions by inducing the rich spend more is not a measure that has “social justice” written all over it. Moreover, why try to escape a recession by having ANY particular group spend more? Would it make sense to induce men to spend more but not women?
Private bank created money comes into existence as a RESULT of the private sector’s desire to do business and borrow for the latter purpose. Conversely, this stock of money declines in recessions, as a result of a REDUCED desire to do business. That is, deleveraging takes place. (Nothing new there: Walter Bagehot described this process a hundred and fifty years ago.)
Or as Robert Skidelsky put it in the second of the above links “….the basic cause of the collapse of the money supply was a collapse in the demand for loans…” Congdon, it seems, still does not understand this point.
The next “subtlety” is that boosting the money supply has no effect whatever till that money is SPENT – as David Hume pointed out in his essay “Of Money” 250 years ago.
To illustrate with a silly example, if government (as per Congdon’s advice) were to “borrow from the banking system” and withdraw all the new money in cash and store it in the vaults of the Treasury, there would be precisely no anti-recessionary effect – no effect on demand.
Or as David Hume put it in connection with money supply increases, “If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated…”
In short, simply maintaining the money supply achieves nothing. The fundamental anti-recessionary factor is SPENDING.
The next question mark over Congdon’s idea is thus. What is the point of a government borrowing from the “banking system” when the government has its OWN bank: the central bank? That why let private banks take a cut out of what is really taxpayers’ or citizens’ money?
Presumably Congdon wants to expand private bank created money rather than central bank created money, as it is the former which collapses in a recession.
However, and first, he obviously does not regard this as too important because he is happy enough with QE which expands central bank created money, as pointed out above.
Second, a possible argument for expanding commercial bank created money is that expanding the monetary base expands banks’ reserves, which in turn enables them to lend more which could at some stage be inflationary. This idea is now generally regarded as obsolete. For example some countries (e.g. Canada) have NO reserve requirement. Second, the reality is that banking system lends when it sees viable lending opportunities. If adequate reserves are not there, the central bank just has to provide reserves, else the central bank loses control of interest rates.
Modern Monetary Theory is better.
One of the basic ideas in Modern Monetary Theory (MMT) is that in a recession, the government / central bank machine should simply create and spend more money (and/or lower taxes and leave more money in taxpayers’ pockets). And conversely, when inflation looms, the process should be put into reverse. The above anti-recessionary idea is pretty much what Keynes advocated, though a contemporary of Keynes’s, namely Abba Lerner, made the above point in a more open and blunt fashion than Keynes. Plus I think Lerner added the bit about “putting the process into reverse” (though I might be wrong there). Thus Lerner is often regarded as the founding father of MMT.
Now creating AND SPENDING extra money in a recession makes more sense than just creating money, for reasons given above. So MMT beats Congdon there.
Second, MMT advocates having the government / central bank machine do the money creation, not commercial banks. As pointed out above, there is not much sense in letting commercial banks charge millions to do something that the central bank can do with a click on a PC mouse. So MMT beats Congdon there as well.
Game, set and match to MMT.
Monday, 3 January 2011
Having been on the receiving end of a fair amount of bank bashing, banks in the UK are fighting back.
As is entirely predictable, they are fighting to do what banks always try to do: capture government. The propaganda effort seems to have been stepped up in recent days. There is a “don’t be nasty to banks” article in some newspaper every, written by members of the establishment, who no doubt mix socially with senior bankers.
1. 29th December, 2010: article by former deputy prime minister, Lord Heseltine.
2. Article by Boris Johnson, mayor of London.
This is actually a volte face by Boris: he used to be a champion bank basher. Plus more stuff by Boris here:
3. Ruth Lea article in The Times “Be kind to bankers - or get shopping."
Ruth Lea was chief UK economist at Lehman Brothers, and currently Non-Executive Director and Economic Advisor to the Arbuthnot Banking Group.
All three of the above articles are based very much on the argument that banks earn lots of money for the UK so they need featherbedding. Much the same argument applies to supplying third world dictators, like Saddam Hussein, with armaments.
In huge contrast to the above, the UK is lucky to have Mervyn King as head of its central bank. Mervyn King is actually prepared to THINK about what the best banking set up is, and to think some very unconventional thoughts on the subject.