George Selgin tries to argue that fractional reserve banking is not fraudulent.

 

That’s in his work entitled “Should we let Banks Create Money?” published by the Independent Review.

The basic reason for claiming the existing bank system (fractional reserve) is fraudulent, as Selgin rightly says, is that where bank depositors are not covered by deposit insurance (DI), any claim by or suggestion made by a bank to the effect that deposits are safe is fraud and for the simple reason that deposits are quite clearly NOT SAFE: witness the hundreds of bank failures thru history. Depositors were not covered by DI prior to the introduction of DI (early 1930s in the US). And today, deposits over some stipulated amount (100k Euros in the EU) are not covered.

In the case of deposits over and above the latter stipulated amount, it is probably fair to say that no fraud is involved because the fact that those excess amounts are not covered by DI is well advertised. But the situation prior to the introduction of DI is another matter.

In the case of the pre 1930s set up, Selgin’s answer to the above fraud charge that is that depositors have always been aware that their money is not entirely safe for the simple reason that depositors normally get interest, at least on term accounts, if not on current accounts (“checking accounts” in US parlance). I.e. how, Selgin asks, do depositors think banks are able to pay interest on deposits if they don’t lend out money at the same time as accepting deposits? And as everyone knows, loaned out money is never entirely safe.

Well the simple answer to that is that a significant proportion of depositors are just not sophisticated enough to ask the latter question. Thus to a significant extent, pre-1930s deposits were a confidence trick aimed at fooling the innocent.

Moreover, if depositors, as Selgin claims, regard their deposits as being much like equity, i.e. you can lose half your money anytime, then why was deposit insurance ever introduced?

The answer is simple: the general view was that a significant proportion of depositors though their deposits were in fact safe and/or that deposits OUGHT TO be safe. By “general view” I mean the view of politicians and millions of depositors.

Incidentally, in addition to the pre 1930s set up, there is always the possibility of that pre 1930s set up being re-introduced (i.e. the possibility of DI being scrapped) since numerous economists are not happy with DI (including, Selgin himself - see here. Thus the discussion here of the fraudulent element in fractional reserve while of obvious relevance to the pre-1930s set up, is also of potential relevance today or in the near future.)

 

Non-bank lenders.

Another point which supports the claim that a significant degree of deception or fraud is involved in fractional reserve has to do with non-bank lenders like mutual funds, unit trusts and pension funds. The latter three types of organisations (and doubtless some others) are forced by law (at least in the UK) to make it very clear in bold print and those placing money with those organisations can lose as well as make money.
 
Now if banks are to compete on a level playing field basis with other lending organisations like the above mentioned three, then the wording in the publicity put out by all those organisation should be similar. But any idea that banks prior to the introduction of DI advertised the LACK OF SAFETY of depositors’ money is a joke. No bank would attract deposits if it advertised the lack of safety of its deposits given that other banks kept quiet about the lack of safety of their deposits.

This is clearly a very grey and murky area. It is thus an area where banks will try to get away with any deception that they can.  While Selgin is clearly right to say that sophisticated depositors are not defrauded, that is clearly not the case for less sophisticated depositors.

To summarise, fractional reserve banking, prior to the introduction of DI quite clearly involved an element of fraud, though one can argue forever over the exactly extent of the fraud.

And as for the idea that the fraudulent element in fractional reserve is somehow OK once DI is introduced, that is a very questionable argument. If government were to legalise theft while introducing a government run insurance scheme for everyone which compensated them when anything was stolen from them, that would not be a brilliant argument for legalising theft.

 

Warning: social media platforms may be hacking your computer.

 

 

Reason for the above title is that one popular platform has deleted part of an image on my PC which suggested there are similarities between the book burning that Hitler’s Nazi party engaged in and censorship that is common on social media nowadays. I’ll be taking legal action against them.

The image is one you may have seen, the top half of which is a black and white image of book burning in Nazi Germany. Obviously social media platforms don't like the suggestion that they have similarities to Hitler's Nazi Party.

Moreover, don’t just copy anything you don’t want them to mess up onto a memory stick or similar and think you are then safe. Reason is that I actually had a copy of the relevant image on an old stick (which I copied onto the stick long ago) but the image there was messed up soon as I plugged the stick into my PC.

This is very sophisticated hacking, seems to me: not that I’m an expert in these matters.

The Chinese wrestled 2,500 years ago with all the monetary and bank problems we worry about today.

 

 

The above excellent book by Felix Martin has a few pages on Chinese base money creation long ago. The questions we face today seem to have troubled the Chinese as well 2,500 years ago. E.g.: who should create money: private entities / banks, or just the state? How much stimulus should the state implement in a recession? How do we stop politicians gaining access to the printing press? How much deflation should be imposed given excess inflation?
 

Here is a part of the relevant passage from the book.

One big advantage the Ancient Chinese had over us in the year 2021 is that they didn't have computers: by the time I'd finished scanning the above, dealing with the PC crashing, and a scanner that wasn't working properly I might just have well have copied all the above out by hand.....:-)

Stephanie Kelton’s flawed ideas on improving the unemployment / inflation trade off.

 

I’ve supported MMT for about ten years and thus agree with much of SK’s material. However her ideas in the second half of a recent New York Times article on how to minimise the inflationary effect of Biden’s stimulus plan are poor. The title of the article is “Biden Can Go Bigger and Not ‘Pay for It’ the Old Way.”

She starts this section by saying, “These mostly nontax inflation offsets could include industrial policies, like much more aggressively increasing our domestic manufacturing capacity by steering investment back to U.S. shores….”.

Well the first problem there is that Biden’s stimulus plan is very much into infrastructure, while US plants owned in other countries make a huge range of different items. Thus even if the relevant machinery was moved back to the US, it would not for the most part help with meeting demand for infrastructure related items.

Plus in as far as US firms are NOT CONCERNED with infrastructure related stuff, they manufacture in other countries because they regard that as being CHEAPER than manufacturing in the US. Forcing those firms to manufacture in a more expensive way won’t do much to ameliorate inflation, which is what SK aims to do.

Another of her less than brilliant ideas is that “The Biden team could also consider loosening its legal-immigration policies, so that even once America nears full employment there would still be an adequate labor pool to meet the increased demand for workers.”

Well that’s just a repeat of the age old fallacy that imported labour deals with labour shortages: a fallacy the UK fell for when it imported a large amount of labour from the West Indies just after WWII. The flaw in that argument is that (gasps of amazement), immigrants purchase food, housing, electricity and all the consumer items that natives purchase: i.e. immigrants ADD TO demand just as much as they add to aggregate supply.

At least the latter point is certainly as far as labour IN GENERAL goes. In contrast, the inflation / unemployment trade off can certainly be improved by importing SPECIFIC TYPES of skilled labour that are in short supply (and indeed by exporting specific types of labour that are in surplus). But simply importing a more or less random selection of different types of labour is of no help whatever when it comes to dealing with labour shortages.

Indeed, it’s worse than that. Most of the labour currently trying to get into the US is from central and south America is relatively unskilled, and certainly the labour imported to the UK just after WWII was relatively unskilled.

And finally, if her “industrial policies” do in fact bring benefits, shouldn't they be a PERMANENT FEATURE, rather than just some sort of temporary measure to help Biden’s stimulus, which seems to be the objective of said “industrial policies”?

Whoopeee: the IMF is back in schizophrenic mode..!!

 

 

For about the last ten years, the IMF, OECD and others have been utterly schizophrenic on the subject of government debts. Like every economic illiterate, they have been worried about the degree to which debts have been rising. On the other hand they don’t want to advocate big tax rises so as to cut debts because that would cause too much austerity.

So what have the IMF etc done? Well they’ve published any number of articles making the near useless claim that countries should implement enough stimulus to keep unemployment down, at the same time as aiming to cut stimulus and raise taxes with a view to cutting the debt. They might as well have told everyone to stand on their heads and stand on their feet at the same time. But never mind: doubtless the pay at the IMF is good, and I’m sure they have generous early retirement arrangements and good pensions for IMF staff, as long as said staff write enough nonsense.

Anyway, seems the IMF is back in full schizophrenic mode, if a recent article in the Telegraph by Ambrose Evans-Pritchard is any guide. The Title of his article is “Ballooning global debts need to be restructured before it is too late.”

Evans-Pritchard’s third para reads: “On the one hand, the IMF hints at austerity. It urges governments to head off the risk of runaway debt spirals before it is too late. On the other, it calls for more stimulus to prevent an economic relapse once the sugar rush from reopening has faded."

So what’s the solution to this allegedly horrendous debt problem? Well the answer in a nutshell is “Step forward MMT”. That is, as MMTers have been trying to explain for years, and as I’ve explained many times on this blog, the government of a country which issues its own currency has complete control over the rate of interest it pays on its debt, but it CANNOT control the SIZE OF the debt at a given rate of interest. That is, if the private sector goes into savings mode and decides it wants to hold more debt at let’s say a 1% rate of interest, government and its central bank will just have to run a deficit and let the private sector have what it wants. If government and central bank don’t do that, then the private sector will try save with a view to acquiring that extra debt, and as Keynes pointed out in his “paradox of thrift” point, saving up money raises unemployment, all else equal.

I.e. the debt will come down if and when the private sector goes into what might be called “spendthrift” mode and decides it wants to hold LESS debt.

One Fed chairman and one vice Chairman support Positive Money.

 

To be more accurate, one former chairman and one former vice chairman support a particular aspect of the idea put by Ben Dyson (founder of Positive Money) namely that the central bank should decide the SIZE OF the deficit, while politicians continue to be responsible for strictly political decisions, including the NATURE OF the deficit, e.g. whether it takes the form of more public spending or more tax cuts.

The chairman is Ben Bernanke. See para starting “A possible arrangement….” in his Fortune article “Here’s How Ben Bernanke’s Helicopter Money Plan Might Work.”

The former vice chairman is Stanley Fischer.  See article by him and co-authors: “Dealing with the next downturn” published by “The European Money and Finance Forum”.

To be even more accurate, Fischer & Co advocate the latter “fiscal / monetary coordination” policy only where interest rates are so low that there is little more that further interest rate cuts can do. In contrast, Dyson advocated that policy on a PERMANENT basis, with interest rates being determined by market forces: i.e. stimulus under a Dyson system would be implemented ONLY via the latter “coordination” system. But still, the Fischer proposal is support of a sort of the Dyson idea.

For more details on the Dyson proposal, see the book “Modernising Money” by Ben Dyson and Andrew Jackson, or for a shorter summary of their proposals, see a submission to the UK’s “Vickers Commission” by Dyson and co-authors (p.10 onwards).

 

Market forces.

A flaw in the Dyson proposal is that governments nowadays are such HUGE borrowers, that it is arguably a bit meaningless to refer to market forces which allegedly set interest rates unless one also states what government policy on borrowing should be: i.e. government borrowing policy itself influences interest rates.

My answer to that little conundrum is “step forward Modern Monetary Theory with its claim that interest on government debt should ideally be set permanently at zero”. One reason for the permanent or near permanent zero idea (at least as far as I’m concerned) is that any sort of positive return on government debt essentially equals rewarding money hoarders for hoarding money, with a variety of less well-off taxpayers footing the bill for that reward.

Thus if one accepts the permanent zero idea, then Dyson & Co’s idea about market forces becomes irrelevant, and stimulus is implemented just by creating new money and spending it (and/or cutting taxes): which is what Fischer, Bernanke, Dyson and MMT all advocate, though they all have their own variations on that theme.