I do like this chart – copied from an article
by Frances
Coppola.
The chart shows the big expansion in the
amount of central bank created money (“debt free” money as Positive Money sometimes calls it) in
the US since QE began. The blue line is total bank deposits and the red is
total bank loans or total debts attributable to commercial banks.
As Positive Money has pointed out a hundred
times, normally almost 100% of money in circulation is created as a result of
commercial banks “lending money into existence”. That is, for every hundred
pounds of money in circulation there is a good £95 of debt owed by someone
somewhere to a commercial bank.
However, QE has transformed the situation. If
the above chart is any guide, about 20% of money in the US is now central bank
or “debt free” money. (Though there numerous ways of measuring the money
supply, so the 20% figure should only be taken as a rough guide.)
But the sky has not fallen in as a result of
that unprecedented and major change in the nature of US money. And that of
course lends support to the idea pushed by Positive Money and other advocates
of full reserve banking, namely that if the ENTIRE money supply were to consist
of central bank rather than commercial bank created money, there would not be
any huge problems.
How do you reach the conclusion in your last sentence?
ReplyDeleteThe chart merely indicates that banks are cautious about lending and/or firms and consumers are nervous about increasing their debts. This doesn't provide any support for full reserve banking.
Although bank lending is stagnant it remains very important, as shown in the chart.
Positive Money wants to forbid all lending by deposit banks. That's a radically different matter.
Hi King Kong,
DeleteThe chart certainly doesn’t prove the case for full reserve. It just “lends support” as I said above.
Re Positive Money wanting to “forbid all lending by deposit banks”, that prohibition is actually part and parcel of full reserve (as pointed out by the various economics Nobel laureates and leading economists who have pushed the same system in the past: Milton Friedman, James Tobin, etc). I.e. under the Pos Money / Friedman system, lending is done by entities (call them banks if you like) which are funded only by shareholders. While deposit taking entities (call them banks if you like) do not do any lending.
Correction: there’s a slight difference between the system advocated by Friedman and the system advocated by Positive Money. Friedman thought that lending and deposit taking institutions / banks should be separate entities. In contrast, PM thinks the two “beasts” can live under the same roof: bank customers are given the choice of “deposit taking accounts” and accounts where customers’ money is loaned on or invested. But fundamentally the two systems are the same.
DeleteHi Ralph,
ReplyDeleteThanks for your diligent responses.
Related to this, if you have time, perhaps you could also clarify claims made by Neil Wilson in comments on another blog, namely: http://bilbo.economicoutlook.net/blog/?p=26858
If Neil Wilson is right, Positive Money and full reserve banking "is like trying to un-invent nuclear weapons".
I had asked “How could a deposit bank lend to the public if all deposits received have to be kept as reserves?”
Neil Wilson replied:
"The advance is just the end of the lending process, not the beginning.
Lending doesn’t happen in an instant. It is a long process, that allows the Treasury department of a strong bank to line up the strategy to backfill on deposits, etc ahead of time.
A bank then makes an advance and then nicks the backfill deposits and capital from a weaker bank. The system is now short of reserves, but it isn’t the strong bank-that-made-the-loan’s problem. What happens now is a chase up of interest rates until either a bank goes bust, sufficient loans are called in, or the central system relents and provides the additional reserves to protect the payment system and steady the churn of interest rates in the economy.
In other words exactly how it works now – just with bigger numbers and Volker style volatility caused by once again trying to control quantity rather than price.
Trying to turn banks into old style per-computerised building societies is like trying to un-invent nuclear weapons. You can’t do it. There is no way you can enforce what you want – serialising of deposits before lending – because we have the computers and the asynchronous systems that allow a more profitable alternative that would be entirely within any enforceable ruleset you can come up with.
Sorry to pop your bubble."
Neil simply asserts that “There is no way you can enforce what you want..” without explaining why the Positive Money / Milton Friedman / Lawrence Kotlikoff system fails to “get what it wants”. Plus he then contradicts himself by saying (correctly) that under the PM/MF/LK system, bank lending is controlled by quantity whereas under the existing system, lending is controlled by price. I.e. he admits that lending IS CONTROLLED under the PM/MF/LK system.
DeletePlus there is actually a whapping great difference between the latter system and the existing system. And that’s that under the PM/MF/LK system, it’s virtually impossible for a commercial bank to suddenly go bust. Ergo there is no need for TBTF or other bank subsidies. To be exact, I think Positive Money’s system does allow banks to go bust, whereas Friedman’s and Kotlikoff’s doesn’t. So if I’m right there, I think PM’s system needs tweeking to make it more like Friedman and Kotlikoff’s.