Thursday, 14 May 2015
Inane drivel from Neil Wilson on full reserve banking.
Neil Wilson has a good grasp of some areas of economics: in particular Modern Monetary Theory.
However this article of his on full reserve banking (FR) is trash. His attempt to summarise the basics of FR is straight out of la-la land. That’s in contrast to other critics of FR who at least have some idea what FR consists of. For example this article criticising FR by Brian Romanchuk summarises the basics of FR correctly. (That’s under his heading “The Proposals” at the start of his article). In fact I can’t flaw Brian Romanchuk’s summary.
Uri Geller and magic.
The first three hundred or so words of Neil Wilson’s article consist of accusing advocates of full reserve (FR) of trickery and magic. There are links to magician sites, references to Uri Geller and so on. That’s a bizarre way of starting an article which is supposed to be serious economics.
If Neil Wilson is trying to say that some advocates of FR engage in propaganda rather than logic, that’s certainly true. Indeed Positive Money (which advocates FR) is quite clearly a CAMPAIGNING organisation as well as publishing material which is completely serious. But the same goes for most areas of economics: part propaganda and part logic.
Incidentally, and re Positive Money, I’ll refer to “PM & Co” below. That’s a reference to the three authors of a submission to the Vickers commission: Positive Money, Prof Richard Werner and the New Economics Foundation.
The basics of FR.
Anyway Neil Wilson’s attempt to summarise FR appears under his heading “The Fundamentals”. He starts “Sovereign money stimulates the economy by increasing the price of and therefore reduces the level of bank lending and then replaces that in the economy by increased government spending or tax cuts. And that’s it.”
(Incidentally “Sovereign money” is just an alternative name for FR.)
Well if you actually read the works of FR advocates (Milton Friedman, Laurence Kotlikoff, John Cochrane, Positive Money, John Kay, etc) nowhere will you see the idea advanced that the basic objective is to raise the cost of borrowing and make up for that with more government spending. It MAY WELL BE that FR does raise the cost of borrowing, but that’s a side effect.
Anyway, to continue with the Neil Wilson effort, the next paragraph reads. “The basic theory is that increasing the price of bank lending automatically selects the correct projects to receive bank lending.”
Well first, as just mentioned, it is very definitely not the “basic” objective of FR to raise interest rates. Indeed Neil Wilson doesn’t cite any passages from advocates of FR to back up the idea that raising interest rates is a basic objective of FR. And that’s for the very good reason that such passages don’t exist: at least I read hundreds of thousands of words by numerous advocates of Sovereign money / FR and don’t recollect any such passages.
As for the idea that low interest rates don’t “select the correct projects to receive bank lending” whereas higher interest rates do, I absolutely agree that that’s a barmy idea. If that WERE a central ingredient in FR, I’d have nothing to do with FR. However (and to repeat) the above “high interest rate” idea is simply a figment of Neil Wilson’s imagination. It’s straight out of la-la land.
In fact this la-la land stuff from Neil Wilson makes his accusations to the effect that advocates of FR are engaged in magic and hocus pocus look decidedly odd: the words “pot”, “kettle” and “black” spring to mind.
The “undemocratic” committee.
Given that Neil Wilson clearly hasn’t the faintest idea what he’s talking about, I’m not going to waste time going right thru every sentence of his article. However, I WILL DEAL WITH just one further mistake he makes, first because it’s actually a mistake made by SEVERAL opponents of FR (including Anne Pettifor and Bill Mitchell). Second, Neil Wilson himself seems to think it’s an important point or “myth”. He introduces this alleged myth with the words, “The final myth is by far the most pernicious and the most disturbing.”
I’ve actually tried to explain the flaw in this alleged myth to Neil Wilson several times, but he clearly doesn’t have the brain to grasp it. Maybe Anne Pettifor and Bill Mitchell don’t either – I’m not sure. It’s a point that I’d have thought the average fifteen year old could understand. Anyway the “pernicious myth” is as follows.
Under a sovereign money system (i.e. under FR as advocated by SOME, but not others), stimulus takes the form of the state simply creating new base money and spending it, and/or cutting taxes. And clearly if that’s how stimulus is done, then SOMEONE or some committee or whatever has to decide how much stimulus is required from time to time.
And PM & Co’s answer to the latter question is that some sort of committee of economists (much like the Bank of England Monetary Policy Committee) should do the deciding. That committee is called the “Money Creation Committee” by PM & Co – I’ll call that the MCC.
Now it’s that committee that causes the Wilson / Pettifor lot to go ballistic. They claim that involves having important economic decisions put into the hands of a selection of people who are not democratically elected, and that consequently that means the end of civilisation as we know it.
Well that objection from Wilson, Pettifor, Mitchell & Co is pure unmitigated nonsense and for the following five reasons.
1. Others also advocate “print and spend”.
Most MMTers advocate EXACTLY THE SAME form of stimulus as PM & Co: i.e. “create new money and spend it”. It’s just that most of them KEEP QUIET about who actually decides on the size of stimulus package. (And note that Neil Wilson and Bill Mitchell are MMTers)
Plus Keynes approved of “create and spend”.
So to that extent, the only difference between PM & Co and most members of the Wilson / Pettifor / Mitchell brigade is that PM ARE HONEST!!!! To repeat, PM & Co are totally clear on WHO DECIDES on stimulus, whereas most members of the Wilson / Pettifor brigade skate over the issue.
2. “Undemocratic” committees already decide stimulus.
Over the last few years and reaction to the recession we’ve actually ADOPTED a “create money and spend it” policy. That’s because we’ve implemented fiscal stimulus and followed that by QE, and that comes to the same thing as “create and spend”.
And who exactly decides in the size of that stimulus package? Well – shock horror – it’s one of those horrendous “undemocratic” committees: in the case of the UK, the Bank of England Monetary Policy Committee!!!
Looks like various members of the Wilson / Pettifor / Mitchell brigade have no idea what’s going on at the moment – never mind what might take place under full reserve banking.
And make no mistake: “undemocratic” central bank committees have the whip hand when it comes to determining the size of stimulus packages, not democratically elected politicians. That’s because (in the case of the UK at least) government has EXPLICITLY given the BoE responsibility for inflation. That means that politicians have given the BoE powers to override any fiscal stimulus that politicians might implement.
As to the US, much the same applies. Indeed market monetarists are always referring to what they call “monetary offset”: that’s the idea (just set out above) that if politicians implement stimulus, or too much stimulus, then the central bank may easily “offset” it.
But here’s the really strange thing. Despite the fact that stimulus is ALREADY DECIDED by “undemocratic” committees like central bank interest rate committees, VERY FEW objections to that fact have ever been raised by the Wilson / Pettifor brigade. In short, it’s blindingly obvious that their blather about “undemocratic” committees derives from their scratching around for any old bit of mud to throw at FR, rather than any sort of thoughtful analysis of FR.
3. The printing press.
There is a VERY GOOD REASON for giving “undemocratic” committees considerable powers: it’s that most of us do not want to see politicians having exclusive control of the printing press. I.e. about 90% of the population and 90% of economists (I’d guess) just don’t agree with the ultra-democratic ideas put by Wilson, Mitchell and Pettifor (assuming those “ideas” amount to anything coherent, which I don’t think they do).
4. Dispose of “undemocratic” committees?
Having said there are good reasons for “undemocratic”committees, that’s not to say we COULDN’T have a system where stimulus is ENTIRELY I the hands of politicians. FR is entirely consistent with doing that. I.e. (and the Wilson / Pettifor brigade will be in tears about this), undemocratic committees ARE NOT, repeat ARE NOT an essential ingredient in FR.
5. “Undemocratic” committees leave POLITICAL decisions to politicians.
As PM & Co have explained till they’re blue in the face, the fact that the MCC has the power to determine the TOTAL SIZE of a stimulus package DOES NOT, REPEAT NOT, REPEAT NOT, REPEAT NOT mean the MCC has powers over obviously POLITICAL decisions like what proportion of GDP is allocated to public spending, and how that spending is split between the usual public spending items like health, education, defence and so on.
Reason for that is, the MCC decides on the DIFFERENCE BETWEEN government income and expenditure (i.e. the size of the deficit). And that’s it. It does NOT, REPEAT NOT decide on obviously political matters. Indeed, in that respect, the MCC is very much like the existing BoE MPC (in the case of the UK).
Since members of the Wilson / Pettifor / Mitchell brigade seem to have extreme difficulty in understanding that point, I’ll repeat it red.
The fact that the MCC has the power to determine the TOTAL SIZE of a stimulus package DOES NOT, REPEAT NOT, REPEAT NOT, REPEAT NOT mean the MCC has powers over obviously POLITICAL decisions like what proportion of GDP is allocated to public spending, and how that spending is split between for example health, education, defence and so on.
Hope I’ve got that very simple point across. But I’ve got my doubts.