Sunday, 21 September 2014

Alan Moreira and Alexi Savov try to defend shadow banking.

In this Vox article entitled “Shadow banking and the economy” the authors’ first point in favour of shadow banking is that it creates “money like liquid securities”. As they put it, “shadow banking adds value by creating money-like liquid securities from risky illiquid assets. While this process is inherently unstable, simply shutting it down risks damaging liquidity provision to the real economy.”
Well the first flaw in that argument is that it’s NOT JUST shadow banks that perform the above function: ALL BANKS create money – at or least under the existing / fractional reserve banking system they do. Under full reserve, COMMERCIAL BANKS don’t create money.
Second, we do not need shadow banks, or indeed commercial banks in general, in order to supply us with “money-like” stuff (aka “money”). The government / central bank machine (gcbm) can supply ANY AMOUNT of money ANYTIME. That is, it can create and spend base money into the economy (net of taxes collected) whenever an economy looks like it’s short of liquidity and unemployment in consequence is on the rise. Indeed there has been an UNPRECEDENTED increase the proportion of our money supply coming from central banks over the last three years or so thanks to QE.
Just to clarify, the statement that gcbm can “create and spend money net of taxes collected” means that gcbm can supply the economy  PURELY by increased spending, OR BY cutting taxes while leaving government spending constant, or some mixture of the two.
Now who is best at supplying us with money? Is a collection of “shadowy” organisations which trick households into taking out NINJA mortgages, and NINJA car loans, and which cause the world economy to almost collapse? Or is it gcbm which at least has its heart in the right place, even it is less than 100% competent? (And central bank staff are doubtless the first to admit that their forecasts are less than 100% accurate.) There’s no choice is there?
And just to add insult to injury, even if we do have shadow and other banks supply us with money, gcbm STILL HAS TO do a HUGE AMOUNT of money creation / destruction when the commercial banks mess things up. You’ve doubtless hear of Quantitative Easing, the biggest central bank money creation episode since WWII.
And just to add even more insult to injury, the fact of having gcbm supply us with all the money we need does not stop commercial banks granting NINJA mortgages or granting other risky loans. In favour of allowing risky loans there is the fact that if risky loans had never been allowed over the last 300 years, the industrial revolution would never have taken place. On the other hand it could be argued that government should tighten up on NINJA mortgages and loan sharks preying on the less well off. That’s a grey area.
The important point is that stopping commercial or shadow banks creating money does not of itself stop them offering any specific type of loan, like NINJA mortgages.

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