Sunday, 21 October 2018
Prof Morgan Ricks's less than brilliant grasp of full reserve banking.
Morgan Ricks (Associate Professor of Law at the Vanderbilt University Law School) published an article in 2016 criticising Adam Levitin’s full reserve banking proposals. The title of Ricks’s article is “Safety First? The Deceptive Allure of Full Reserve Banking”.
Ricks’s main criticism of full reserve is in his Part II, and he starts by pointing out (correctly) that if money issued by commercial / private banks is banned, government and central bank will have to make up for that by issuing more central bank created money (i.e. base money).
Ricks suggests that can be done by having the central bank create base money and buy up government debt, and certainly that’s one way of doing it. But Ricks then gets worried about what happens if there is not enough government debt: he says that government will have to implement fiscal stimulus so as to create such debt. That is, government will have to borrow $X, spend it, and give $X worth of government bonds to lenders. Then the central bank can create more base money and buy up some or all of those bonds.
But according to Ricks there is a problem there, namely that money creation is then dependent on politicians agreeing on how to implement fiscal stimulus: e.g. should the stimulus come in the form of more public spending or tax cuts, and if it’s the former, should the extra spending involve more education, health care or what? And as Ricks rightly says, politicians (particularly in the US) often spending months if not years arguing over those sort of details before actually implementing the stimulus.
As Ricks says, “In this world, fiscal expansion must precede monetary expansion. Monetary stimulus therefore becomes contingent upon the resolution of contentious political questions. Who gets a tax cut? What additional expenditures should the government undertake?”
Well luckily the advocates of full reserve tumbled to the existence of the latter “Ricks problem” years before Ricks’s article, plus the advocates of full reserve thought of answers which are as follows.
The first answer is that fiscal adjustments do not necessarily have to be delayed for months while politicians argue about them: in the UK, the finance minister has powers to adjust taxes at the flick of a switch and the UK finance minister did precisely that during the recent crisis: he adjusted the sales tax VAT twice.
And that is moderately democratic in that the finance minister is democratically elected. But in addition, there is nothing to stop other politicians (the House of Commons in the case of the UK) subsequently making adjustments to “finance minister instigated” fiscal adjustments.
Another possibility is to have some sort of committee of economists decide how much stimulus is needed in the next year or so. Indeed such committees already exist: for example there is the Bank of England Monetary Policy Committee, which currently decides whether to adjust interest rates, though it could easily be given the additional task of deciding how big the deficit should be over the next year or so.
As to exactly what form that deficit takes (e.g. tax cuts or more public spending), politicians could be given a relatively SHORT TIME to decide on their preferences there, and absent a decision, the above committee could be given powers to simply raise public spending AND cut taxes in about equal measure (where a country already devotes about 50% of GDP to public spending). That would not be wildly undemocratic.
But of course, there’d be nothing (as in the case of the above mentioned UK finance minister instigated fiscal adjustments) to stop politicians in general making subsequent changes to for example the mix of public and private spending as a proportion of GDP.
Moreover, there’d be nothing to stop politicians, if they have their wits about them, deciding PRIOR to any fiscal stimulus, what form that stimulus should take. The above delay of about a month would then not be necessary. At least there’d be nothing to stop politicians deciding ROUGHLY what their preferences are, even if they don’t decide every detail.
The latter sort of system, where a committee of economists decides on the size of deficits, while politicians decide on the exact nature of the deficit was set out several years ago by Positive Money and co-authors. Plus Ben Bernanke claimed more recently that such a system would not be difficult to arrange – see Bernanke’s para starting “A possible arrangement….” In this Fortune article entitled “Here's How Ben Bernanke's "Helicopter Money" Plan Might Work.”
Incidentally the above mentioned “government creates debt and the central bank then buys back that debt” process is a bit cumbersome, and indeed Positive Money’s proposals involve short circuiting that process: that is, under the PM system, the central bank simply creates what it thinks is the right amount of money and politicians spend that. Under that system of course, politicians do not gain direct access to the printing press, which is an important consideration for many people.
It would be nice if Morgan Ricks had read more of the literature before putting pen to paper.