To a large extent, the
Euro shambles was caused by silly loans made by Euro banks as Mark Blyth points
out. Where a bank makes silly loans under fractional reserve, a bank run tends
to ensue. In contrast, under full reserve, there is not much point in bank
creditors running.
To be exact, full reserve
necessarily involves forcing depositors to choose between having their money
lodged in a near 100% safe fashion, and in contrast, having their money loaned
on by their bank, in which case the depositor carries the risk (or much of the
risk), rather than taxpayers carrying the risk. That “forced choice” is explicitly
advocated by Positive Money and others.
The latter “forced
choice” can actually be imposed on banks without necessarily adopting full
reserve lock stock and barrel. For example John Cochrane advocated “forced
choice” in the Wall Street Journal recently without mentioning full reserve.
Thus it’s the forced
choice that would actually have ameliorated the Euro shambles rather than full
reserve as such. As to exactly why full reserve (which involves “forced choice”)
would have ameliorated the Euro shambles, reasons are set out in an article by
me on the Positive Money site.
Having a credit risk free deposit system is not possible. Every deposit in the system is a claim on a loan in the system. Having banks not "loan on" deposits , as you say, doesn't change that.
ReplyDeleteAh yes, you are refering to Central Bank reserves. Those reserves also require loans to give them value. For example the Central Bank aquires a Bond and pays for it with reserves, which results in an asset and liabilaty pair the same way as commercial bank lending does.
ReplyDeleteIt depends on what you mean by full reserve and the purpose of it. I was looking at the system as a whole.
Dinero,
ReplyDeleteThis blog system is behaving strangely. Your comments are being duplicated 5 to 10 times. Any problems your end?
In the process of trying to rectify things, I’ve managed to delete about four comments. I might try to replace them later. Anyway, to answer your latest point:
The idea that central bank issued money requires deposits of private bank money in order to give central bank money its value is a new one on me. Chartalists claim CB money derives its value from the fact that government accepts CB money in payments in taxes, and/or insists that tax can only by paid in CB money. That’s quite an incentive to get hold of CB money.
Another factor given CB money its value is the declaration by government that only CB money is legal tender. Strikes me that those are both good points.
I agree that in practice, CB money under current arrangements gets into the economy when the CB prints money and buys government debt. But that’s only because of the arrangement we have that is supposed to keep politicians away from the printing press.
There are plenty of people and groups who think that arrangement is defective. I’m one. Milton Friedman and Warren Mosler advocated a system where there are no government bonds or debt. So in that scenario it would be impossible by definition for CB money to enter the economy via bond purchases by the CB. Also Positive Money, Prof. Richard Werner and the New Economics Foundation in their submission to Vickers advocated a system where CB and government simply create new money and spend it straight into the economy. See:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Yes it is very difficult to put comments on your blog. I don't know why. I get no confirmation that he comment has been sent. I will see if this one comes up and if so I will not re send and look for the confimation in future.
ReplyDeleteYes blogger comment seem to be accepted erratically , Don’t know why.
ReplyDeleteThe reserves don't require deposits for their value they require assets, such a government bonds. The value in that case coming from the goods and services created by the tax payer.
On the subject of the government having a special status and a source of debt free money. - If the government was free from the imperative to raise taxes in order repay its bonds and simply spent money without incurring debt, then there would be no measure of the consequences of that spending , good or bad. The fact that a tax base is required, and not harmed, is the objective yardstick by which Government activity is ultimately measured.