Deposit insurance is a taxpayer funded gift to private banks and the wealthy.

 


Over the two thousand or more years for which banks have existed, banks have never ceased to make the entirely dishonest promise to depositors that their money is safe. And with equally monotonous regularity it has transpired (as should have been obvious all along) that the latter promise is indeed spurious and dishonest. (For some literature on banks over the last two thousand years, see for example Fuller, E.W. (2019). 100% Banking and Its Advocates: A Brief History. Cobden Centre. https://www.cobdencentre.org/2019/10/100-banking-and-its-advocates-a-brief-history/ or https://espace.library.uq.edu.au/view/UQ:350004 “Fractional reserve banking in the Roman Republic and Empire”)

Banks' motives in making that promise are obvious: it's to induce saver/depositors to place their money at banks rather than with other institutions which also accept savings and lend out the money concerned: and those institutions are quite rightly prohibited from making the above promise. Plus letting banks indulge in that dishonesty is blatant inconsistency: it equals preferential treatment for banks relative to other institutions;

The ACTUAL REASON for that prohibition is obvious: loaned out money is NEVER SAFE: that is, any bank, mutual fund, pension fund etc is GUARANTEED to make a series of silly loans at some point (think Spanish and Irish banks in the run up to the 2007 band crisis).

So what on Earth induced governments to let banks off the hook when it comes to the “silly loan” problem? Well it's easy: private bank created money became such a dominant or major part of the money creation process, that governments became convinced that privately created money was INDISPENSABLE with banks of course spending millions assisting politicians “come to the right” conclusion on that question

But the latter idea is pure nonsense, since governments and their central banks can create limitless amounts of money any time – as indeed they have done, more or less, in reaction to the 2007 crisis and more recently, Covid.
 

Who pays for deposit insurance?

It would not be quite so nonsensical if banks and their depositors ACTUALLY PAID for DI. They have in fact been doing so in the US since the early 1930s, for some time, while in the UK various “bankers' poodle politicians” have only recently had to admit that banks and depositors ought to pay.

But even where depositors DO PAY, they only pay for the risk to the DI system of losing out as a result of some bank making a “silly loan” c*ck up.I.e. it is still possible for depositors to earn interest WITHOUT taking any risks worth talking about. That is, DI protects them from losing capital while at the same time they can still earn interest.

The ACTUAL RATE of interest earned is of course at an all time low right now. Though you can still earn significant interest on term accounts. But the actual rate earned is irrelevant: the simple possibility of being able to earn interest is unacceptable because there are only two reasons for paying interest. First, the risk of losing capital and second, the inconvenience of losing access to a sum of money for some period.

But where your money is protected by DI, there's no risk of losing capital, and as for instant or quick access accounts, no loss of access to your money.

Pure genius! Privately issued money plus DI has for most of the time since DI first started enabled the cash rich to have their cake and eat it!

It's a gift to the cash rich, i.e. large depositors and private banks!

George Selgin's poor criticisms of Prof Saule Omarova.

Omarova is Biden's choice for “Comptroller of the Currency”, which more or less equals chief bank regulator in plain English far as I can see. She is relatively pro strict bank regulation, while Selgin has pro free market views on banks which make the GOP look almost socialist. A clash of views is almost inevitable.

The paragraphs below deal with Selgin's criticisms.

Selgin's main mistake, which actually renders most of his other criticisms irrelevant starts in his second paragraph. He says, “According to your own description of it, your plan would ideally see public Fed Accounts "fully replace—rather than uneasily coexist with—private bank deposits." Consequently it would "likely cause a massive contraction in bank lending" to businesses and individuals. Most if not all of the lending now done by banks would instead be done by the Fed, either directly or through Fed purchases of securities issued by a National Investment Authority.”

Well the first answer to that is that under the Omarova plan, which has close similarities to full reserve banking, there'd be nothing to stop banks funding loans via equity rather than deposits. Indeed billions of dollars of lending is already done that way in that mutual funds attract money from savers and lend out the money concerned – mainly to cities and corporations that issue bonds.

Moreover, there is not a big difference between the rate of interest charged on loans funded via deposits and loans funded via equity: witness the wide variation in the debt/equity ratio of different corporations: corporate treasurers evidently cannot see a big difference in the cost of funding a corporation via equity and in contrast via loans to a corporation which will ostensibly be paid back at some stage, dollar for dollar – that's bonds.

Moreover, it might seem that stakes in mutual funds which specialise in lending would be seen as a poor deal by former depositors: reason being that on the face of it, a deposit earns the depositor a return, with the depositor undertaking no risk in order to earn that return, whereas stakes in mutual funds involve risk.

Well the answer to that is that depositors under the existing system pay a price for being excused risk: their banks are charged for deposit insuance, a cost for banks which is inevitably passed on to depositors in the form of less interest. In contrast, those buying stakes in mutual funds actually CARRY risk themselves, and are so to speak rewarded for carrying that risk. Thus any idea that former depositors would refuse en masse to buy stakes in mutual funds as an alternative to depositors is nonsense.

Commerce.

Next, where a depositors expect a bank to lend on depositors' money, those depositors are quite clearly into COMMERCE – just as much as where they deposit money with a stock broker, pension fund or mutual fund for the same purpose.

Now in the case of banks, what on Earth is the state doing assisting that commercial activity in any way? That's state assistance for commerce, which is distortionary and which reduces GDP.

Thus if Selgin's complaints about banks' not being able to lend so much is valid, then my answer is: so s*dding what? i.e. they are already lending too much and their activities should be curtailed. (According to Mervyn King's work “Bagehot to Basel”, the UK's bank industry expanded a whapping TEN FOLD relative to GdP in the fifty years prior to his work. See under his heading “The practice of banking” near the start.
 

In short, there'd be no need whatever for the Fed to lend to private sector borrowers, as Selgin claims.

Re the above mentioned points that Selgin makes which are rendered irrelevant by his “Boo hoo – there'd be less bank lending”, I have not explained exactly WHY those subsequent points are rendered irrelevant: I have simply ignored them, as I assume readers (at least the clued up ones) can work out for themselves the REASONS for the latter irrelevance themselves.

Do banks create money or intermediate between lenders and borrowers?

Re Selgin's fifth para (which starts "The public's scarce savings?”, I actually agree with Selgin here. He makes the point that banks as well as creating money out of thin air and lending it out, ALSO act as intermediaries between savers and borrowers.

There has, as he rightly said been some argument over this point in recent years, with some taking the “money creation” point too far and claiming that banks do not intermediation at all.

As a 2014 Bank of England article intimates in its first sentence, private banks both create money and intermediate between lenders and borrowers.



Douglass and Diamond.

Next, Selgin criticises the D&D claim that fractional reserve banking is inherently risky because it involves funding a bank largely or to a significant extent via deposits.


That's in Selgin's para starting “It's true that many people....”.

The risk there is that a deposit is a promise by a bank to repay a depositor's money dollar for dollar, AT THE SAME TIME AS lending out that money. The blindingly obvious problem there is that every bank at some stage in its history makes a series of silly loans, at which point it plain simple WONT BE ABLE to repay depositors!!! Think Spanish and Irish bank during the bank crisis which started in 2007, for example.

Indeed, it is plain simple ILLEGAL for several types of organisation, both in the US and UK and doubtless elsewhere to engage in the latter confidence trick: e.g. mutual funds in the US and their equivalent in the UK, Unit Trusts are not allowed to tell savers their money is safe if in fact it is being loaned out (to anyone except government).

Why the blatant inconsistency? Well I suggest the explanation is simple: banks have mastered the art of bribing, cajoling and perverting politicans to an extent that other organisations have not. As Senator Dick Durbin said “And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own place."

And finally, the above criticism of Selgin's ideas are not to suggest Omarova's are totally correct: I have not been thru them in detail yet. But one thing is certain: Selgin needs to do a serious re-think of his ideas in this area.

Another conclusion is that senior economists are still as clueless on banks as they always have been. In the 19th century there was a popular joke which was that only two people in the country understood the bank system: a Rothschild and a junior clerk working at the Bank of England.

No apologies are offered for the undiplomatic style of some of the articles on this blog.

Reasons are as follows.

Adam Smith said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”

To illustrate, doctors in the US are quite clearly not motivated for the most part by a desire to save lives or cure diseases: their main aim in life is to screw as much money out of those with health problems as possible. One of the strategies they use to further that aim is to limit the number of people who can train as doctors and limit the number of foreign doctors entering the country. Hence their “generous” salaries. See e.g. here and here.

This sort of skullduggery takes a slightly different form in economics, where one of the main aims of economists is to maintain the dignity of the profession, despite the obvious and grotesque incompetence of some of those at the top of the profession. The purpose of maintaining dignity is first that it tends to result in more pay for economists, and second, it gives economists more political clout. Ken Rogoff's campaign to impose austerity type policies, which will have resulted in millions being unemployed over the last ten years who need not have been unemployed is a classic example.

In other words even where one or more economists know perfectly well that economist X is a complete pillock, they will never actually say so. The furthest they typically go is to say something like “I disagree ever so slightly with your third para.”

The net result is that incompetents get to to the top.

In contrast, I am not a member of the profession, and can thus perform the useful service (as indeed do others) of calling a pillock a pillock. I make no apologies for doing so.

Project Syndicate's fake claim to be interested in submissions containing “original” and “insightful” ideas.

E.g. see the first para of this self congratulatory intro to PS.


If PS is so interested in “original and insightful” material, you have to wonder why they have published so many articles by one of the World's most antedeluvian and “totally lacking in insight” economists, namely Kenneth Rogoff of Harvard. Rogoff has been advocating pro-austerity policies ever since the 2008 bank crisis.

Of course, he is not pro austerity per se, but he and his side-kick, Carmen Reinhart (also formerly of Harvard) have advocated policies which are effectively austerian: reason being that he and Reinhart cannot get their heads round the simple point made by MMT, namely that the optimum size of the deficit is whatever minimises unemployment without pushing inflation above the 2% target. As for the SIZE of the deficit and debt as such, that size is irrelevant because reducing it, (if that proves necessary, and it WON'T necessarily prove necessary to do that), that can easily be achieved via tax hikes or public spending cuts

 Of course for the economically illiterate that might seem to support the Rogoff / Reinhart argument in that they'd claim that all they are trying to highlight is the probable cost subsequent to a debt build up, namely the need to raise taxes and repay some of the debt. But what the latter point misses is that the PURPOSE of those tax rises would simply be to keep demand down to the maximum feasible level without excess inflation being sparked off. i.e., there'd be no REAL COST for the population. Living standards would not fall one iota. .

But PS is far from unique in engaging in the above bit of virtue signalling. Most so called “blog content aggregator” sites (e.g. Brave New Europe) do much the same: i.e. claim to publish original or insightful material, while in fact just publishing material by well-known or household name authors.

After all, aggregator sites know perfectly well that the average reader is not the least bit interested in original or insightful material: the average reader is much more interested in gawping at and being mesmerised by household name authors than in original material.

If Tony Blair, who is famous for his ignorance of history where to write an article on some historical subject, the aggregators would fall over themselves to re-publish it

And finally, in defence of the above “aggregator / virtue signallers”, it should be said that actually RECOGNISING an original and worthwhile idea for what it is is EXTREMELY DIFFICULT. Only one in ten thousand people are capable of original thought. And only about one in a thousand can recognise and original idea when presented to them.
 

As an American inventor said, you never need worry about anyone stealing your original idea: in  fact to get an idea across you'll have to "ram it down peoples's throats". (Can't find the inventor who said that, but will note it  down here soon as I find it.  .

____________

P.S. (19th Nov, 2021).  The inventor: Harold H. Aiken said, "Don't worry about people stealing an idea. If it's original, you will have to ram it down their throats."

 

Strange argument by Simon Wren-Lewis on fiscal rules.

 
SW-L is a former Oxford economics prof. He argues in an article entitled “The danger of imprecise exceptions from fiscal rules” that the danger of imprecise fiscal rules is that come a serious recession, interest rates may quickly fall to zero, with the result that govt and central banks' main weapon against recessions is then rendered impotent.

Well there's a simple solution to that non-problem which is not to have interest rate adjustments as the main tool used aginst recessions!!! Instead, have the system advocated by Ben Dyson (founder of Positive Money) and ( I think ) most MMTers, which is come a recession, just have to state create and spend more money (and/or cut taxes)!!!! Milton Friedman also argued against artificial interest rate adjustments, except in emergencies.

The latter of course is a combination of fiscal and monetary policy in that govt spending rises (and/or taxes are cut) and more money is created. Or if you like,fiscal and monetary policy are joined at the hip.

The latter “adjust fiscal and monetary stimulus at the same time” policy does of course require some thinking through (shock horror). But frankly it's not too difficult. VAT in the UK was adjusted twice in the recession after the 2007 bank crisis. And govt spending departments can perfectly well be told to prepare for possible changes in what they are allowed to spend per year. Plus upping the state pension and other benefits maybe on a temporary basis is not difficult.

Moreover, who pays for the extra interest on govt debt and other debts when interest rates rise? It's taxpayers in the case of govt debt, and “taxpayers” includes millions of below national income households. And in the case of mortgages, it's those with mortgages who pay – they pay extra interest to those who have cash to spare and who dump money in banks!

None of that smells to me like social justice.

Moreover, Wren-Lewis likes to cite the fact that adjusting interest rates is simple for the authorities compared to fiscal changes. Well King James I thought transporting the unemployed to the colonies would be a quick and easy cure for unemployment. Perhaps it would have been. But that's not a brilliant argument for that policy.

More to the point is whether a policy actually makes economic sense. If it does, and the authorities find it a trifle awkward to implement, who cares? Not me.