Friday, 3 November 2017

Francis Coppola tries to defend private money printing.


That’s in two recent articles of hers. One is on her blog (1) and the second at Forbes (2).  Those two articles are very similar.

The first problem with her articles is that she confines herself to criticizing an “anti private money” article by Zoe Williams in the Guardian (3). But Zoe Williams is just a bog standard broadsheet newspaper journalist: someone without specialist knowledge of banking, though Williams obviously mugged up the subject quite well in preparing her article.

In contrast, Coppola does not mention the numerous leading economists including at least four Nobel laureates have argued for a ban on privately issued money. I.e. Coppola is attacking a soft target. Or maybe she didn’t actually know that several leading economists back a ban on private money.

Anyway, I’ll run through the Forbes article.

First, Coppola criticizes Zoe Williams for saying that money created by private banks is “spirited from thin air”. The flaw in that idea, according to Coppola, is that private banks create money when they lend, ergo such money is backed by a loan, which apparently means it is not “spirited”.

Well that’s a strange argument, isn't it? When a private bank grants a loan, it simply adds numbers to the account of the borrower. That constitutes “spiriting from thin air” in my books.  Also the bank debits its loan ledger. That loan to the borrower is an asset as viewed by the bank. But that loan is also “spirited from thin air”. The fact that a second bit of “spiriting” takes place at the same time as the first does not stop the first being “spiriting”, seems to me.  The whole exercise simply consists of entering numbers in accounts, i.e. “spiriting”.

In contrast, in the case of a commodity based money system, say gold coins, a bank would not lend gold coins unless it actually had gold coins in stock. That gold coin scenario most certainly does NOT constitute “spiriting from thin air”.

Likewise, under full reserve banking, the only form of money is central bank created money (base money). In that scenario it’s the central bank that does the spiriting, not private banks.


Excess inflation and excess debt.

Next, Coppola criticises Williams for saying that private banks can stoke inflation via their money creation activities, whereas according to Coppola it is just governments and central banks that can stoke hyper-inflation.

Well seems to me that Williams gets that point about right. In reference to central bank / government money creation, Williams says:

This does not mean that creation is risk-free: any government could create too much and spawn hyper-inflation. Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened.”


Controlling aggregate demand.

Next, Coppola says, “Williams calls for a “public authority” to create money. But, given how difficult it is to estimate the present and future productive capacity of the economy, I find it hard to see how a public authority can be a better creator of purchasing power than banks. Flawed though it is, money creation through bank lending at least responds to demand.”

Well if it’s “difficult to estimate the future productive capacity of the economy”, why do we have “public authorities”, i.e. the Treasury and central bank determine how much stimulus is appropriate (fiscal and monetary stimulus respectively)?

Moreover, under the existing system, the latter two public authorities actually expand the money supply (Coppola will be shocked to learn) when implementing stimulus. That is, the Treasury borrows and spends more, and/or the central bank prints money and buys back government debt so as to make sure interest rates don’t rise, or they may take that further and implement an interest rate cut. And the latter enables commercial banks to create and lend out more money. In short, money creation is very much under the control of “public authorities” under the existing system. So the differences between the existing system and OVERT money creation by public authorities is less than Coppola seems to think.

Next, let’s consider Coppola’s phrase “money creation through bank lending at least responds to demand.” Presumably she is not advocating that when anyone wants a loan, a private bank should automatically create money and dish it out without looking at the credit-worthiness of the borrower.

I.e. the basic question here is this. Given an increased desire to borrow, should private banks automatically accommodate that demand, as Coppola seems to suggest? Well there’s a big problem there namely that it is PRECISELY the erratic nature of the desire to borrow, and private banks’ freedom to accommodate that desire that is behind the boom bust cycle.

That is, private banks create and lend out money like there’s no tomorrow in a boom, exactly what’s not needed. Then come the bust, they clamp down on loans and call in loans: again, exactly what we do not need. In short, the behaviour of private banks is “pro-cyclical” to use the jargon.

To summarise, money creation under the existing system is very much under the control of “public authorities”, thus full control of money creation as under full reserve banking would not be a big change.

In fact the only remaining question here is whether money should come only in the form of state issued money, or whether that should in addition be levered up by private banks. Well turns out there is a good reason to prefer the former option, a reason which has to do with the basic purpose of economic activity.

The purpose of the economy is to produce what people want, both in the form of the items they purchase out of disposable income, and the items they vote at election time to have delivered to them via public spending. Thus given inadequate demand, the obvious remedy is to increase both household spending e.g. via tax cuts and increase public spending, with private banks competing for those new funds on equal terms with other businesses as occurs under full reserve, rather than private banks being given the special privilege of being able to boost the above money supply increase by printing more of their own DIY money.

The latter is a subsidy of private banks, and it is widely accepted in economics that subsidies are not justified, unless there is a clear social reason for them.

_______

References.

1. “Money Creation in a Post Crisis World.”
2. Article title: “How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free”.
3. “How the actual money tree works”.
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