tag:blogger.com,1999:blog-2277215496195926573.post4325985894394354050..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Jan Kregel of the Levy Economics Institute tries to criticise narrow banking.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-2277215496195926573.post-88519909968042215672012-08-31T04:42:04.036-07:002012-08-31T04:42:04.036-07:00To some extent in this discussion I may have been ...To some extent in this discussion I may have been assuming that under the type of scheme you suggest the current <i>gross</i> flow of private money creation and destruction would simply be taken over by the state. Now I think that is <i>not</i> actually what you are proposing, which alters things a bit.<br /><br />I think this passage from my paper sums up the issue at stake, but I do intend to revisit this topic in any case:<br /><br /><i>In balance sheet terms there is the potential to expand the asset side of productive potential, but this may be limited by the inability to issue acceptable liabilities that represent goods to be produced. This greatly increases the difficulty and uncertainty involved in initiating production processes, either because the new output must draw purchasing power away from other output, or because the government must be relied on to produce new purchasing power in time for the new output becoming available.</i>Diarmid Weirhttp://www.futureeconomics.orgnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-1720215057910116702012-08-30T10:00:48.069-07:002012-08-30T10:00:48.069-07:00I’ll take your points in turn again.
Re “real inw...I’ll take your points in turn again.<br /><br />Re “real inward flows aren't going to increase, so it implies a decision to hold bigger cash balances..” I’m not sure what you mean by that.<br /><br />Re “increasing the amounts available for projects” full reserve would result in LESS investment because interest rates would be higher. That’s a corollary of the fact that fractional reserve artificially reduces interest rates. I.e. under fractional reserve, private banks create “savings” out of thin air and lend them out: there is no need (at least on the face of it) for anyone to forgo consumption, which sounds too good to be true, and it is. The reduced consumption is actually forced onto random sections of the population, as I pointed out above. <br /><br />Of course it’s possible that the latter interest rate reducing effect of fractional reserve is minimal, in which case converting to full reserve would have a minimal interest rate increasing effect.<br /><br />Re “those with the biggest balances may not have the best projects”, I think you’ve assumed that those with big balances NECESSARILY allocate all their cash to their OWN projects. If they behave rationally (under fractional or full reserve) they’ll use their stock of cash to fund “own projects” that bring a commercial return on capital, and then if there is cash left over, do what most people do with spare cash: allocate it between plonking it in a building society, investing on the stock exchange, etc etc.<br /><br />Re “The inability of govts/CBs to fine-tune, money issue would be magnified by the greater quantity of money they were issuing”, the injection of central bank money into the economy would be a TEMPORARY phenomenon designed to get private sector cash balances up to the point that induced to private sector to PERMANENTLY increase its spending. To be more accurate, central banks are PERMANENTLY injecting monetary base into economies anyway: they HAVE TO if the monetary base and national debt are to remain constant relative to GDP. That’s why over the last century or whatever, deficits are the rule and surpluses are the exception. Thus the injection of CB money resulting from the switch to full reserve would be a temporary fillip to an already existing permanent injection process.<br /><br />Re your last paragraph, are you by any chance thinking of the full reserve systems advocated by Laurence Kotlikoff and Richard Werner / Positive Money? These systems (and I don’t see any other possible full reserve system) involve giving depositors a CHOICE between, 1, 100% safe taxpayer backed instant access accounts which pay no interest, and 2, so called “investment accounts” where there is no taxpayer backing, interest IS PAID, but the depositor carries the loss if the underlying loans or investments go bad.<br /><br />You could classify “1” as full reserve and “2” as fractional reserve. But I think that would be a mistake. I.e. both Kotlikoff and Werner’s systems are full blown full reserve, far as I’m concerned.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-83854408778288730452012-08-30T07:42:22.948-07:002012-08-30T07:42:22.948-07:00'...private sector entities have a bigger stoc...'...private sector entities have a bigger stock of cash, and thus don’t need to borrow so much.'<br /><br />I'm really not quite sure that this works - real inward flows aren't going to increase, so it implies a decision to hold bigger cash balances. If that were true it seems likely to lead to problems of its own, without necessarily increasing the amounts available for projects. There is also a distributional issue - those with the biggest balances may not have the best projects.<br /><br />The inability of govts/CBs to fine-tune money issue would be magnified by the greater quantity of money they were issuing. The monitoring and issue problems relate to determining where the money is issued to and from where it is withdrawn.<br /><br />'But it’s not specifically an argument for borrowing based on private money creation.'<br /><br />Perhaps not, but it might be an argument for sticking with it (if it has particular benefits) if that change would reduce its risks.<br /><br />Another suggestion I've come across recently is 'partial 100% reserve' with designated savings (with a fractional reserve) and non-savings (with 100% reserve) deposits. Any thoughts on that? Diarmid Weirhttp://www.futureeconomics.orgnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-1167949492519584442012-08-29T21:37:29.206-07:002012-08-29T21:37:29.206-07:00I’ll take your points in turn.
There’d be no prob...I’ll take your points in turn.<br /><br />There’d be no problem with a VERY “worthwhile productive plan”: it would get priority treatment, as under fractional reserve.<br /><br />As to marginally worthwhile plans, borrowing under full reserve is certainly more restricted than under fractional reserve, but private sector entities have a bigger stock of cash, and thus don’t need to borrow so much.<br /><br />What “monitoring problem” are you referring to? The government / central bank would just create and spend money into the economy where stimulus was needed (or do the opposite when inflation looms: raise tax and withdraw money).<br /><br />Why would there be “excessive money issue”? That problem would occur to the extent that governments and central banks are incapable of fine tuning demand, but their competence in that regard is questionable anyway. So full reserve would be no worse in that respect than the existing system.<br /><br />Re hair-dressers and the under-supply of credit, I come back to the point about borrowing being more difficult under full reserve, but that’s balanced by private sector entities having more cash.<br /><br />Re your last paragraph, I agree that “sensible people in touch with their local communities” can spot worthwhile borrowing funded opportunities or projects. That’s an argument for, 1, borrowing in some shape or form, and 2, decisions about borrowing to be made by people with local knowledge. But it’s not specifically an argument for borrowing based on private money creation. <br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-61785447779111138682012-08-29T05:28:38.465-07:002012-08-29T05:28:38.465-07:00'The branch in Aberdeen would get instructions...'The branch in Aberdeen would get instructions or suggestions (as now) from its head office as to what the bank’s current lending policy was: lax or restrictive, etc.'<br /><br />Except under full reserve, there is an additional limitation in that there must be agents with surplus funds. It's not necessarily the case that the existence of agents with surplus funds will coincide with the existence of a worthwhile productive plan.<br /><br />'under full reserve, private entities would have a greater stock of money: i.e. there’d be less need for anyone to borrow.'<br /><br />Are you suggesting that we would all have higher real money balances? <br /><br />But more generally I assume that current 'private' money (or much of it) would be replaced by money issued by the government, and so there would be less demand for private money creation anyway. The issue here is that you are then centralising the flow of money into and out of the economy. Apart from a monitoring problem, one effect of this is that the consequences of excessive money issue will <i>always</i> affect everyone. There will be no buffer in the form of bank equity.<br /><br />'I’m not in favour of hair-dressers or plumbers getting so much as 10p a week of subsidy, and I don’t see why any bank should get so much as 10p a week of subsidy either.'<br /><br />That's not really an economically meaningful analogy. The role of a subsidy is where the true social value of some good or service is greater than the market price, and so it is undersupplied. Generally this is not the case with plumbers and hairdressers. My argument (and presumably Kregel's in essence) is that 100% reserve banking would lead to the undersupply of credit relative to the potential quantity of productive economic activity.<br /><br />As a thought experiment try and imagine banks run by sensible people in touch with their local communities. Would there then still be nothing to be said for private money creation?Diarmid Weirhttp://www.futureeconomics.orgnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-81076244601155555162012-08-28T23:46:28.540-07:002012-08-28T23:46:28.540-07:00I agree that 100% reserve would moderate but not e...I agree that 100% reserve would moderate but not eliminate booms and slumps.<br /><br />I don’t agree that potential external benefits are an argument for any given form of economic activity. There are external benefits and costs to nearly every form of activity, and I don’t see any reason to suppose the external benefits deriving from fractional reserve funded activities are spectacular or better than the external benefits deriving from full reserve funded activity.<br /><br />Re centralisation, I don’t see why this would occur under full reserve. Under full reserve, any entity in say Aberdeen wanting to borrow would approach a bank branch (probably in Aberdeen) and try to get a loan, just as under the current system. The branch in Aberdeen would get instructions or suggestions (as now) from its head office as to what the bank’s current lending policy was: lax or restrictive, etc. <br /><br />There’d actually be LESS centralisation under full reserve in that under full reserve, private entities would have a greater stock of money: i.e. there’d be less need for anyone to borrow. To that extent, economic decisions would be taken more by individual households and firms with less need to go begging to a bank. And banks are just geniuses at allocating resources aren’t they? Look at those NINJA mortgages.<br /><br />Re your claim that there is no point in trying to totally eliminate risk, Martin Wolf made a similar claim recently, which I answered here:<br /><br />http://ralphanomics.blogspot.co.uk/2012/07/martin-wolf-criticises-lawrence.html<br /><br />As a supporter of full reserve, I don’t believe in trying to ELIMINATE risk. But I do believe that ALL RISK should be loaded onto those who benefit from such risks: that’s bank shareholders and depositors who want a return on the money they’ve deposited in banks. Plus I don’t think we shouldn’t have so much as 10p a week of “risk bearing” (i.e. subsidy) born by taxpayers. I’m not in favour of hair-dressers or plumbers getting so much as 10p a week of subsidy, and I don’t see why any bank should get so much as 10p a week of subsidy either.<br /><br />I might expand on the latter point in a post in a day or two, as it’s a crucial point. <br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-4863459019311803642012-08-28T05:03:55.725-07:002012-08-28T05:03:55.725-07:00Not stated, but of great import.
A sovereign curr...Not stated, but of great import.<br /><br />A sovereign currency issuer, eg the UK, US, AUS, CAN can never be revenue constrained. It always has the means to make good on it's bonds. That was the environment in which Minsky did his analysis. So, depositor monies can be safely invested in sovereign bonds, PROVIDED the Sovereign Bonds are denominated in the Sovereign's own currency, and PROVIDED the Sovereign's currency is a fiat currency.<br /><br />Given, elimination of money creation via loan origination, the author correctly mentions that the government should make up the difference through spending. As Mitchell mentions again and again, a sovereign currency issuer spends currency into existence via crediting of bank accounts. Not mentioned by the author is how different the consequences of this method will be for the economy vs the existing system. <br /><br />In the existing system currency is created when a loan is granted, and this currency is owed to the originating bank together with interest(rent).<br /><br />In the proposed system currency is created when the Sovereign purchases goods and services, and credits the corresponding accounts to pay for them. This currency is not owed to anyone, and no interest is due on it. The new system dramatically reduces indebtedness in the economy, and rent seeking.<br /><br />As before, the sovereign will tax to remove surplus savings, or spending power, from the economy via debiting bank accounts.<br /><br />With 53 trillion $ in debt, at 5% interest, nearly $2.7 trillion in interest is paid annually to the banking sector under the current regime.<br /><br />Had these funds been injected into the economy via sovereign spending, taxes could be $2.7 trillion greater than at the moment and the effect upon the economy would be identical, or taxes could be at the current level, and $2.7 trillion of additional demand would be operative in the economy. That level of additional demand would likely provide full employment.<br /><br />INDYDr. George W. Opriskohttp://www.publicresearchinstitute.orgnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-73396749529934491302012-08-28T04:09:22.294-07:002012-08-28T04:09:22.294-07:00'But it’s a very imperfect system: it gives ri...'But it’s a very imperfect system: it gives rise to booms and slumps, for example.'<br /><br />Booms and slumps would not be eliminated by 100% reserve, although <i>ceteris paribus</i> their amplitude would be reduced. But also reduced would be the possibility for private agents (including banks) to agree among themselves to proceed with projects which <i>they</i> thought would produce a future risk-adjusted return for them. Many of these projects will have externalities. <br /><br />Under a 100% reserve system many such decisions would be centralised, with all that implies.<br /><br />A well-run bank should absorb most of its own risk through equity write-downs. It's clear that banks have <i>not</i> been well-run, so why not start by tackling that issue? The aim should be to make the risk-adjusted social return (including externalities) positive, rather than eliminating all social risk.<br /><br />Diarmid Weirhttp://www.futureeconomics.orgnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-58176865883260452072012-08-28T01:21:31.849-07:002012-08-28T01:21:31.849-07:00Re Crusoe and Friday, I’m not arguing against “a ...Re Crusoe and Friday, I’m not arguing against “a bank and its money”. The basic question I’m addressing is whether money should just be created by the central bank / government, or whether private banks should get in on the act as well.<br /><br />“An effective but risky solution, but one that has supported thousands of years of human development.” Clearly fractional reserve banking works. And I agree it has supported “human development”: e.g. it was the banking system that funded the industrial revolution. But it’s a very imperfect system: it gives rise to booms and slumps, for example. So the question I’m addressing is whether full reserve is better. And when it comes to risks, it certainly is better. That is, under full reserve, it’s almost impossible for a bank to go bust (absent blatant criminality). Plus depositors who want 100% cannot lose their money, so there is no need for TBTF subsidies or occasional trillion dollar bail-outs.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-90584895029819471922012-08-27T04:35:52.257-07:002012-08-27T04:35:52.257-07:00'In a desert island economy, Robinson Crusoe c...'In a desert island economy, Robinson Crusoe cannot “invest” in a new fishing rod unless he makes a “voluntary saving decision”. If there is a problem there, I don’t see it.'<br /><br />A monetary economy involves more than one individual. Consider the arrival of Friday. With Friday's labour and Crusoe's fruit trees they can get a fine crop. But how can Crusoe convince Friday he will get his share of the yet-to-be realised production? Put shortly, <i>that</i> is the role of a bank and its money. The money represents the future crop - before it exists! <br /><br />An effective but risky solution, but one that has supported thousands of years of human development. It's also purely voluntary.<br /><br />'The people running banks are quite clearly a bunch of buffoons, charlatans, fraudsters and criminals.'<br /><br />Indeed - so what if we put some proper people with sensible incentives in charge?Diarmid Weirhttp://www.futureeconomics.orgnoreply@blogger.com