Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Saturday, 8 January 2011
This is better than Dennis Kucinich’s bill.
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.
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Ralph, I am queasy about giving total control of money creation to government. Too much opportunity for abuse from the political side, too.
ReplyDeleteI would rather see the dual system as now with the taxing away of economic rent, as well as greater fiduciary responsibility put back on the private system after its having wiggle away from this for some time.
Tom, How do you allow the private sector a role in money creation without suffering the problems that come from fractional reserve and the instability that the latter brings?
ReplyDeleteRe “abuse”, yes there is potential for political interference. On the other hand Bill Mitchell produced evidence that there is no relationship between central bank independence and inflation. I.e. in practice, political interference with bodies that are supposed to be independent, like central banks, is not TOO bad (though the Argentinas of this world are obviously an exception). I conclude that interference with the bodies proposed by Kucinich and Positive Money to control the money supply would not be too bad either. Indeed these “bodies” might as well the central bank, seems to me (i.e. I don’t see the need for new bodies or committees as proposed by K and PM).
Another point is that as soon as the private sector creates instability (booms or slumps), almost everyone claims the government or central bank should do something or take countervailing measures. MMTers have been saying this during the present recession.
This situation seems to me like a car controlled by two steering wheels, one of them controlled by a child, which cannot steer properly, with the adult rectifying the child’s mistakes. Much simpler just to have one steering wheel, controlled by the adult.
We may have to agree to disagree one this! Perhaps it’s all a choice between two equally bad evils!