Wednesday, 26 January 2011

Krugman says zero interest rate loans to banks aren’t a subsidy.

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.



  1. I've added your blog to my blogroll. I don't know much about MMT, which you appear to be conversant in. It will be interesting to follow your posts.

  2. Here's my own blog reference to Plato's Symposion.


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