Charlie Bean
is deputy governor for monetary policy at the Bank of England. In this recent
speech he makes three mistakes (not something I ever do, of course).
First, he trots
out a piece of conventional wisdom, namely that banks should be safe enough to
reduce risks to acceptable levels, while not ending up with the stability of the
graveyard. In his words he wants to ensure the “resilience of the financial
system in a way that does not unduly impede economic growth.”
Well now,
would reducing the risk of bank failure to near zero actually impede economic
growth? Certainly not. At least not if we adopt the banking regime advocated by
Positive Money / Richard Werner and the New Economics Foundation. See here.
Under that
regime, the loans and investments made by banks are 100% covered by loss
absorbing creditors (of each bank). In particular, depositors who want
interest, i.e. who want their bank to lend on or invest their money carry the
costs if and when those loans or investments go bad. That way, the bank itself
cannot fail (absent blatant criminality by senior bank staff).
Now does
that impede that much vaunted “economic growth”? Far from it! It actually
results in a better allocation of resources and for the following very simple
reason.
If someone
invests directly in a small business or in corporation X, Y or Z on the stock
exchange and it all goes belly up, the investor takes a hit, or may lose
everything. But if the same investor plonks money in a bank and the bank
invests in or lends to small businesses or corporations X, Y, Z, etc and it
goes belly up, the taxpayer comes to the rescue for some bizarre reason.
That is a
TOTALLY UNWARRANTED AND IRRATIONAL subsidy for banks. It is a distortion of the
market. It’s a misallocation of resources. And any misallocation of resources
hits economic growth.
Conclusion:
far from bank safety and economic growth being in any way mutually exclusive,
virtual 100% bank safety (done the above way) actually ENHANCES economic
growth.
The
second mistake.
Bean’s
second very questionable claim (p.3) is that central banks can forsee credit
crunches and should act to ameliorate them before the event. Now that idea is
straight out of cloud cuckoo land.
What proportion
of “professional” economists foresaw the recent crisis? 1%? Or was it nearer
0.1%?
The
third mistake.
Next, Bean
claims that with a view to ameliorating crises, a central bank should “undershoot
its inflation target temporarily, if it believes that it will thereby improve
its chances of meeting the target later on by avoiding a disruptive bust.”
(This of course assumes that central banks really can foresee crises.)
Now “undershoot
it’s inflation target” is weasel words for “impose a mini-recession and excess
unemployment”. And that’s not too clever – unless there’s no alternative.
But there is
a blindingly obvious and very simple alternative! That’s to counteract the
recessionary effect of raised interest rates with fiscal stimulus. Simple. That
way a country gets less lending based economic activity and more non-lending
based activity.
______
Thanks to Gary Brooks for bringing the above Bean article to my attention.
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