Prior to the days when governments and their central banks (i.e. “the state”) created fiat money, money creation by private / commercial banks made sense. But now that states create money, the question arises as to which is better: state created money or private / commercial bank created money (henceforth just “banks”). After all, full employment is easily attained in “state money only” system simply by creating and spending state issued money into the economy up to the point where households have enough money to induce them to spend at a rate that brings full employment.
Well the first big advantage of state money is that it costs nothing to create and distribute, whereas banks have to check up on the credit worthiness of those they supply money to, obtain collateral / security off them etc. That all costs a significant amount.
Of course people can hold state money in the form of physical central bank notes, e.g. $100 bills, but precious few people want to store their money in the form of wads of $100 bills under the mattress.
Pro cyclicality.
A second drawback of bank money is that those banks create and lend out that money like there’s no tomorrow during a boom, thus exacerbating the boom. I.e. they act in a pro cyclical manner. That means that states have to take counter cyclical measures: mainly by issuing or withdrawing state issued money from the economy in a COUNTER cyclical manner. In short, given the availability of state created fiat money, bank money is just a nuisance.
Duplication of effort.
A third drawback of bank money, is that it has a nasty habit of going up in smoke unless it is backed by states (via deposit insurance and bank bail outs). That money “goes up in smoke” when a bank fails.
But that means that the state is in effect creating TWO FORMS of money: first state created money, and second, bank money which the state then stands behind. As Martin Wolf said, bankers are simply the most highly paid civil servants we have. Or as Steve Waldman put it, "Jamie Dimon is just a poorly supervised public servant who’s fibbed his way into exemption from the General Services pay scale."
That smells like duplication of effort: i.e. one of those two forms of money must be better than the other. And given the pro cyclical characteristics of bank money, which helped cause the biggest economic disaster in living memory, the 2007/8 bank crisis, it looks very much like it’s state created money which is better.
Conclusion.
State backing for bank money should cease, i.e. deposit insurance and bank bail outs should cease. The only form of totally safe money should be state created money. That’s not to say ALL FORMS of privately issued money (e.g. Bitcoin) should be banned, but where there is the remotest chance of the public getting the impression that those forms of money are safe, there should be clear health warnings on all relevant literature and web sites to the effect that the state will not give assistance to those who lose out where a bank, stablecoin outfit or similar fails and depositors’ money vanishes – except for accounts at private banks which are 100% backed by reserves, i.e. state created money.
That health warning would hopefully keep the market for risky money relatively small, as is currently the case with Bitcoin. Though obviously if the popularity of privately issued risky money grows too much and that form of money poses systemic risks, there would be a need to re-think that point.
The hardest to employ are the marginal workers. On the other hand, the skilled workers are the first called upon when new money is created.
ReplyDeleteAs a result, to relate loans to full employment is to misapply a tool toward solving a much more nuanced problem.
I quite agree that shortage of skilled workers places a limit on how far unemployment can be reduced. I actually published an article on a possible way of subsidising the less skilled into work:
Deletehttp://www.kspjournals.org/index.php/JEPE/article/view/1237
But the above "Why should taxpayers support...." article was an attempt to deal with the question as to what the best way of implementing stimulus is for a GIVEN AMOUNT of stimulus, or if you like, it addressed the question as to what TYPE OF money should be created in order to bring unemployment down to some GIVEN level.
Perhaps I oversimplify things when I divide the economy into private and government but my most understandable logic flows from that breakdown.
DeleteThen I say that government always "pays using real fiat money". That translates into a prohibition on private banks creating money. Which means that private banks must lend real fiat money.
That fact that private banks increase the money supply is because we count all the money in private banks as money supply, forgetting that real fiat money, once created, can be re-loaned to anyone, including government.
With that background and turning to unemployment, we need to ask whether government or privates should provide jobs (a political question). Government can create money to pay workers (real fiat money) or the private sector can reuse real fiat money to employ and pay workers.
I think this comment offers a somewhat heterodox framework for further thinking about stimulus.