Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Monday, 25 July 2016
Five videos on banking.
The first two are light hearted but quality stuff all the same. Prof Anat Admati, who specialises in banking, makes an appearance. These five videos were brought to my attention by Jack Haze, who works for a bank in the US.
I couldn’t fault the first video (the pair are actually a two part series). The second half of the second one made claims which I thought were true, but were not actually substantiated in the video. But that’s a minor blemish.
The third video is high quality stuff - apart from the poor sound quality for the first minute or so. It’s a presentation done for the Swiss CFA Society, by Prof Dirk Niepelt (University of Bern). It examines the Swiss Vollgeld initiative, i.e. the idea being pushed in Switzerland (and indeed in many other countries) that commercial banks should not be allowed to print or create money: “full reserve banking” (FR) as it is normally called. Niepelt concludes that FR could work, but he claims it would have significant problems.
However, he ends by making an odd claim, as follows.
He says he doesn’t like the idea of FORCING those with bank accounts to make the stark choice that FR forces bank account holders to make. That’s the choice between putting money into, first, a totally safe but zero interest earning account, and second, an account where interest IS EARNED, but account holders have to bear the costs if things go wrong with the bank (or where the particular type of loan chosen by the account holder (e.g. mortgages) goes wrong.
Instead, so he says, central banks should offer totally safe accounts for those who want them (perhaps managed by commercial banks). That’s actually something the Bank of England is contemplating and which Positive Money backs. And indeed those accounts would be just the same as the safe accounts contemplated by advocates of FR.
As to those who want a decent rate of interest, so Niepelt says, they could have accounts like existing bank accounts (where money is loaned on to mortgagors, small businesses, etc), but those account holders would bear the cost if things go wrong.
Now hang on: a system where account holders bear the costs when things go wrong is exactly what the advocates of FR argue for!!!!! In short, I’m puzzled as to what the difference is between Niepelt’s system and FR.
The final two videos are also produced by the CFA, but I’ll deal with those in a day or two. Relevant links:
https://blogs.cfainstitute.org/investor/2016/03/03/vollgeld-what-it-means-for-fractional-reserve-banking-in-switzerland/
https://blogs.cfainstitute.org/investor/2016/01/27/is-this-the-end-of-fractional-reserve-banking/
Subscribe to:
Post Comments (Atom)
this may sound silly but: why people say the bank base rate is the rate of interest that banks pay when they borrow from the central bank does that mean the rate of interest they pay on money they create?
ReplyDeleteUnder his model I think banks still had the power to create money
ReplyDeleteDifficult to say, first because he doesn’t say in this particular talk exactly how his system works, and second because there is no absolutely hard and fast definition of the word money. The fact that under his system people with traditional bank deposits bear the cost when things go wrong certainly means those deposits are less “money like” than bank deposits under the existing system. So to that extent under his system, banks would not create money.
DeleteHowever, traditional deposits under his system are too money like for my liking. Same goes (in my view) for the Positive Money full reserve system. So in that I’m right there, yes: private banks would still create money.
That last link has been taken down,very odd.I found that out this morning when I tried to rewatch it.
ReplyDeleteYes: I noticed that as well. There's a new link which I inserted above.
DeleteHe seems to be proposing voluntary FR rather than enforced FR.It may work but deposit insurance must end either way,or this cannot work.I guess this way is a "suck it and see approach".
ReplyDeleteThere would still be the too big to fail issue.Any significantly big bank facing collapse may well bring down other banks in this kind of two model banking world.In fact it may bring about that collapse far quicker as folk move their money out to safer central bank accounts.I fear this would in fact make a more destable banking system.As without deposit insurance even the small depositors risk losing their money.
So overall I prefer Positivemoney's idea of an instant introduction of FR,(though that does present certain unfair subsidies I believe to the bigger current account holding banks)and a slow write down of debt over the next decade or so.
I think your "suck it and see" idea is about right. It's possible that "Central Bank Coin" would prove so popular that about 90% of the population switched to it despite getting no interest. The question would then arise: why are the remaining 10% allowed to get interest on their current accounts, with the inevitable risks involved in that being born by taxpayers. The popular and entirely justifiable view might then be: "Those greedy so and sos who want the combination of total safety plus instant access to their money plus interest shouldn't be allowed that luxury. They should be treated like people who buy shares or set up a business: if they make a bomb, then fine, but if it all goes belly up, they should carry the cost, not anyone else."
DeleteBut I'm far from entirely sure it would work out that way.
Which is why I also like the equity option you often advocate for bank investments, rather than a straight forward interest baring deposit account.That way there is no guarantee of getting your money back and,even better, the bank does not become insolvent,it can still carry on through financial crises.
ReplyDeleteThat's not my idea: Milton Friedman, Laurence Kotlikoff and other backers of full reserve banking advocate the same. Positive Money doesn't go quite that far, and I think they should.
Delete