Steve Keen does not deny that
full reserve would work, but thinks the change would not be worthwhile. He
gives three reasons, all of which are a bit shaky.
First, he claims that under full
reserve, government’s ability to fine tune the economy would not be perfect. He
says, “I am sceptical about the capacity of government agencies to get the
creation of money right at all times.”
Well now, failure to achieve
perfection is not a desperately strong criticism, is it? Has anyone, or any
system ever been perfect?
No advocate of full reserve to my
knowledge has ever claimed that fine tuning would be vastly better under full
reserve, although there is one respect in which it would be slightly better,
set out below.
Short memories.
Second, he claims that if full
reserve brought a period of “tranquillity”, people would forget the reasons for
imposing full reserve, and fractional reserve would re-assert itself. No doubt
the latter process would be assisted by a multi-million pound lobbying effort
by banks. (In Britain, the finance industry spends £93 million a year on
lobbying.)
As a historian, Keen clearly has
some insight. Fractional reserve might easily re-assert itself. That has close
parallels with the way in which Glass-Stegall was imposed, and then removed.
But we’ve learned from that
episode haven’t we? In ten or twenty years’ time when the criminals and the
filth that run the banking industry try to get bank regulations relaxed, we
might be a bit more wary.
Instabilities.
Keen’s third point is that there
are ways of dealing with instability other than full reserve. And he cites two
examples, both of which are his own creations, and both of which have come in
for a fair amount of criticism: Jubilee shares and “the pill”.
The pill is a system under which the
amount that can be borrowed to purchase a house is limited. Well the problem
there is that if someone has a secure and decent income, and wants a 100%
mortgage, that can be a perfectly viable and safe proposition for a lender. Why
ban it?
In contrast, full reserve tends
to counter a much more fundamental cause of instability (which Keen himself has
rightly drawn attention to) namely the feed-back loop that is inherent to
fractional reserve: an asset price rises, which makes the asset a better form
of collateral, which in turn allows more money creation and borrowing based on
that collateral, which in turn boosts the asset price still further, etc etc.
In contrast, under full reserve,
the amount of money is more stable, which means that given a rise in demand for
money to fund property speculation, interest rates rise, which ameliorates the
speculation.
And finally, the latter
instability point is not the CENTRAL merit in full reserve, or the central flaw
in fractional reserve. The central flaw in fractional reserve is that it just
cannot operate without a taxpayer funded subsidy.
There is no more of an excuse for
keeping fractional reserve alive, than there was for keeping the loss making
car manufacturer British Leyland alive.
The current private money creation system makes is like an Austin Allegro when we could be cruising along in a Bugatti Veyron with Full Reserve Banking.
ReplyDeleteI would drive a Morris Ital for the rest of my life if it would help get us on a sensible banking system.
Hello Ralph, I am trying to continue this discussion here http://clintballinger.edublogs.org/2012/12/18/post-keynesianism-mmt-100-reserves-project-question-1/
ReplyDeleteon post=Keynesian and other views on endogenous money and Full Reserves.
Cheers