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.
Thursday 10 October 2019
Opponents of full reserve banking are so predictable they’re a joke.
A popular objection to full reserve is that would result in less lending and in the bank industry contracting, ergo, so the argument goes, economic growth is hit.
The flaw in that argument, as I explained in this series of tweets, is that the bank industry is as big as it is partly because of the subsidies and various forms of preferential treatment it receives, one of those being the right it is given to print / create money from thin air and lend it out at interest. Thus the argument that removing that “right to print” (and full reserve involves removing that right) would cut growth or GDP is nonsense. In fact ALL SUBSIDIES, unless there is a very good reason for them, REDUCE GDP!! Thus removing an unjustified subsidy or form of preferential treatment enjoyed by the bank industry (or any other industry), far from reducing GDP, ought to raise it.
And what do you know? Within about six hours of that series of tweets of mine, Vitor Constancio, former vice president of the ECB, did a tweet which fell for precisely the above flawed argument.
To be exact, he said "Narrow banking or similar approaches do not guarantee the amount of credit to finance investment and economic growth." (“Narrow banking” is just another name for full reserve.) Of course I can’t be 100% sure he has fallen for the above flawed argument, but it very much looks like he has.
A further weakness in his argument, is that much if not most investment is not funded via bank loans: it’s funded via equity or retained earnings. Plus large corporations do not as a rule use banks for loans: they go direct to money markets.
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Ralph I am a fan of some of your work and I appreciate the lucidity contained in it. I know you are a supporter of Positive Money and Fulll Reserve Banking. (FRB) I could never understand why economists like Milton Friedman were supporters of FRB,in that they were ideologically linked to unabashed notions that free markets were always the most efficient option for allocating resources. What is your response to those that say FRB i.e creation of money solely by government is not feasible as it can't respond
ReplyDeletequickly enough to meet all the requests for money in an economy in a given period. Therefore private commercial banks are better able to ensure that money flows through the economy more efficiently and meets demands without time lags or bottlenecks.
Sorry about the slow response. I assume the reason Friedman was pro FRB was that while he was generally pro free markets, I assume he was also aware of the old saying "Money is a creature of the state". I.e. governments invariably play a large / dominant role in money creation and organisation.
DeleteRe the idea that commercial banks respond more quickly than central banks, I'm sure they do: when there's a house price bubble, commercial banks join in the frenzy. Governments / central banks then have to clamp down on that idiocy. Alternatively if commercial banks rapidly increase their lending for some other reason, that will raise demand, thus central bank have to raise interest rates to clamp down on demand.
All in all, commercial banks' alleged ability to respond quickly is of questionable benefit.
To be honest, Friedman did backtrack on his pro FRB stance later in life. I've forgotten the name of the article / paper where he did that. But I found his alleged backtracking much less forthright than his early advocacy of FRB when I read the paper.
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