This is
the last of a little series of posts on criticisms of full reserve put by
Messers Diamond, Dybvig, Goodhart and Wolf. Previous items in the series see
here, here and here.
A strange
aspect of DD’s thinking on banks is that while they criticise full reserve
here, in another paper they actually advocate a system that is not a hundred
miles from full reserve. To be exact, they propose that, given a crisis,
depositors’ freedom to withdraw funds from banks is restricted.
Well now,
that is very close to Kotlikoff and Werner’s full reserve proposals. That is, part of both K and W’s proposals
involves restricting the speed at which those who have asked their bank to lend
on or invest their money can withdraw such money.
To expand
on that, full reserve is a system under which commercial banks cannot create
money. And as regards money which depositors want their bank to lend on or
invest, those investors lose access to or have limited access to their money as
long as it remains invested.
That way,
banks cannot engage in the “money creation” trick of lending on depositors
money while promising depositors they still have instant access to their money.
The latter “trick” means that every £X deposited effectively becomes £2X
because both depositor and borrower have access to £X.
However,
DD’s system is crude in that (far as I can see) it makes no distinction between,
1, depositors who SPECIFICALLY WANT instant access to their money and are
prepared to pay a penalty for that privilege, and 2, depositors who want their
money loaned on or invested.
Some
depositors VERY SPECIFICALLY want and need instant access. There would be chaos
if millions of depositors who expect instant access were suddenly denied it
(wholly or partially). As long as those depositors don’t engage in the “have my
cake and eat it” charade of wanting their money invested at the same time as
demanding instant access, there is no reason they shouldn’t have instant
access.
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