Monday, 30 June 2014

Randall Wray’s crank ideas on the Chicago Plan.

I use the word “crank” because Randy uses the word SEVENTEEN times in his article in reference to the Chicago Plan. The simpletons who are impressed by pejorative words will presumably be as impressed by my use of them as Randy's use of them.
Anyway, Randy has just published an article at Economonitor attacking the full reserve / Chicago idea. I left a comment, but Randy (and indeed UKMC’s blog) often don’t publish comments that are critical of their articles. So I’m repeating a version of my criticism here.
Randy clearly doesn’t have much idea as to what full reserve banking consists of. His worst mistake is the claim that “In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans.”
Nowhere in any of the literature produced by advocates of full reserve does it say that. Indeed, the literature makes it perfectly clear that banks or similar private sector lending entities continue to decide who gets credit.  And unlike Randy, I’ve actually read much of the relevant literature.

Bank subsidies.
But let’s run thru his article from the start. He says (I’ve put his words in green):
“However, with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.”
Well of course! But lender of last resort and deposit insurance provided by taxpayers is a SUBSIDY of banking. And subsidies misallocate resources, as it explains in the introductory economics text books.
Incidentally, Walter Bagehot, writing 150 years ago did not approve of lender of last resort. See the last chapter of his book, “Lombard Street”.
Randy puts the total subsidy at $29 trillion of subsidised loans. That is ONE HELL OF A SUBSIDY. Is he seriously suggesting there is no misallocation of resources there?
Even crazier is the trillions of lost GDP and thousands of suicides that resulted from our clapped out banking system’s collapse five years ago.

The Postal System.
He then suggests that the Postal Saving System “does the payments system”. That amounts (far as I can see) to something very near to what advocates of full reserve / Chicago plan propose. That is, the latter propose that money transfers are only done using accounts that are 100% reserve, i.e. 100% backed by base money.
However, under his Postal Saving System proposal, everyone and every firm would need to open an account at the postal system. In contrast, under full reserve / Chicago system advocated by Positive Money, everyone would use their EXISTING BANK: much more convenient.
Thin air money.
Next, he says, “So we’ll eliminate that kind of banking, and just let narrow banks take in deposits and then buy safe treasuries. No more money creation out of thin air.”
Wrong. As the many advocates of full reserve / Chicago explain perfectly clearly, money is still created out of thin air: it’s just that that function is performed only by the central bank.

Sharing profits with borrowers.
Next: “The savers effectively share in the rewards or the losses incurred by the investors.” Correct. And what’s wrong with that? Savers have tens of trillions invested in stock exchanges where they “share in the rewards or the losses…”. Where’s the problem?
Next, Randay says “As an enterprise model, this is as old as the hills…” And what exactly is wrong with “old” ideas? The idea that two plus two makes four is an old idea.
I can’t be bothered reading any further.
That’s got us about half way thru Randy’s article. Given the large number of blunders, I’m not going to waste time reading any further right now. But I might do when time permits.


  1. Seems like Wray and his supporters have closed their minds and ranks.
    Perhaps they are confusing Full Reserve with bank nationalisation, the preference of Bill Mitchell, another MMT guru ( ).

  2. Part of the problem is that full reserve is VERY DIFFICULT to get one's brain round. It's taken me months if not years. Plus there is a lack of an obvious easy introduction to the subject, though I listed some simple introductory articles in the right hand column. Plus the main advocate of my preferred version of full reserve (Kotlikoff's) is not written by Kotlikoff himself. K is clever, but he just hasnt produced a nice easy 1k or 2k word introduction.


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