tag:blogger.com,1999:blog-2277215496195926573.post6565116202869592628..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: A switch to full reserve banking could be less disruptive than is commonly thought.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-2277215496195926573.post-78591203505106727412017-03-09T02:34:47.005-08:002017-03-09T02:34:47.005-08:00Thanks lol,high interest rates in 90s to blame plu...Thanks lol,high interest rates in 90s to blame plus the banks were told to ease off on foreclosures.No one blamed the banks in 90s,so it was politically sensitive issue.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-17049049710005453842017-03-08T11:53:20.235-08:002017-03-08T11:53:20.235-08:00Interesting. I put that on Twitter and gave you cr...Interesting. I put that on Twitter and gave you credit. "Vince Richardson" will soon be a household name...:-)Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-92110974508460669922017-03-08T11:14:45.211-08:002017-03-08T11:14:45.211-08:00Amazing the stuff you find on looking for info.
h...Amazing the stuff you find on looking for info.<br /><br />http://voxeu.org/article/mortgage-delinquency-and-foreclosure-uk<br /><br />Mortgage foreclosures in each year from 1990-96 were higher than in any year from 2008-11.They were nearly double the precentage of total mortgages forclosing in the 90s as well.<br /><br />Here is a chart from another site....(hope it works)<br /><br />http://voxeu.org/sites/default/files/image/FromMay2014/muellbauerfig2.png<br /><br />from this website<br /><br />http://voxeu.org/article/mortgage-delinquency-and-foreclosure-ukvincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-14380296491608014212017-03-08T05:30:20.382-08:002017-03-08T05:30:20.382-08:00So using the PM calculation the average capital re...So using the PM calculation the average capital required on mortgage investment funds would start from 2.125% min to a 8.5 % max.<br />(Based on a 8.5% capital buffer target)Of course this is only a recommendation they say it could be set higher by a regulator.They say you could use a straight leverage ratio which is 3%,but that would be far too low IMO.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-70878958253423916922017-03-08T03:40:05.441-08:002017-03-08T03:40:05.441-08:00Sorry that should have been the Basel III has gone...Sorry that should have been the Basel III has gone from 35% (Basel II) to 25%-75% under Basel III.Though they have another risk added in there now too based on the customers past paymnet record which could take that up to 100% in extreme cases.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-36886040226701627572017-03-08T03:22:01.207-08:002017-03-08T03:22:01.207-08:00Well main risk is from property lending due to the...Well main risk is from property lending due to the sheer amount rather than the actual default risks.AS KK pointed out mortgages are the real worry here.<br />They used to carry 50% RWA but under new Basel III mortgages will go from 35% and grade up to 75 % for LTVs up to or greater than 100%.So the average is likely still about 50% in very significant lending sector.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-87459049022128657042017-03-08T02:57:14.578-08:002017-03-08T02:57:14.578-08:00After a quick bit of Googling I found this (link b...After a quick bit of Googling I found this (link below) where a fund lost about 90% of its value.<br /><br />http://www.valuewalk.com/2016/06/worst-mutual-fund-ever/<br /><br />Coincidentally the worst ever bank failure in the US I know of involved about the same level of loss: i.e. assets dropped to about 10% of book value. That was a small bank in Chicago. It's a bit difficult to see how that level of loss is possible without fraud / theft being involved.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-89460781045978498642017-03-08T01:30:56.307-08:002017-03-08T01:30:56.307-08:00Well whats the worst case scenario loss you would ...Well whats the worst case scenario loss you would expect?Obviously this is just a base line figure for example.Riskier funds would take higher capital.<br />They have given this some thought and I am trying to get my head around it.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-71136896284917613252017-03-07T07:07:50.884-08:002017-03-07T07:07:50.884-08:00KK,
1. I answered this point above. I.e. "co...KK,<br /><br />1. I answered this point above. I.e. "continuity" is guaranteed by safe accounts, not by investment accounts.<br /><br />2.I agree the Chicago plan and for that matter Friedman and Kotlikoffs plans are simple. Problem with them, as I said in the above article is that as pointed out by Vickers, a significant % of those who have their money loaned out while enjoying government protection against loss under the existing system can no longer do that. That's a big negative. So a better solution is to rely on commercial banks's computer systems being sufficiently well integrated with the BoE computer, that private money creation is blocked. In fact I see no reason why commercial banks shouldn't have the option of adopting the "computer" solution or the "Chicago" solution. The former would suit large high street banks, while the Chicago solution would tend to suit shadow banks (not that I'm suggesting it is necessary to keep tabs on every single small shadow bank.<br /><br />4. There is no reason for deposit insurance for funds which concentrate on bog standard UK mortgages to be all that expensive. In any case, deposit insurance under the EXISTING SYSTEM jolly well ought to be on a commercial basis, thus the cost of deposit insurance for a bog standard UK building society OUGHT TO BE the same as insurance for a fund concentrating on bog standard mortgages.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-83488297056329838742017-03-07T05:24:43.298-08:002017-03-07T05:24:43.298-08:00Ralph & Vince,
Thanks for your comments. Let m...Ralph & Vince,<br />Thanks for your comments. Let me make a few further remarks:<br />1. PM’s investment accounts would be liabilities of a bank (see pages 4, 23 and figures 2 & 3 of PM’s Dec. 2016 document). Vince points out that these liabilities would be reduced if bad or under-performing loans caused losses in excess of 10% of the principal of the loan assets of an Investment Fund. However, the bank would still bear the first tranche of losses, i.e. 10% of loan assets. <br />Such losses to a bank would not be “contained within individual Investment Funds”. And PM’s proposals do not include any provisions for liquid assets to cover this eventuality. So the illiquidity caused by losses in Investment Funds could “spill over to bring down an entire banking group”. <br />So I repeat my earlier charge that PM’s current proposals would not achieve the original primary purpose of Full Reserve Banking, that of ensuring the continuity and security of the payments system without subsidies.<br />.<br />2. I share Vince’s concerns that PM’s proposals are becoming increasingly complicated. Why not go back to the simplicity of the original Chicago Plan?<br />.<br />3. I agree with Ralph that mutual funds are preferable to PM’s Investment Funds. The former would have 100% equity with less risk of total loss, whereas PM’s funds would be very risky being highly leveraged with only 10% equity. <br />.<br />4. I agree with Ralph that deposit insurance for Investment accounts would reduce the risks to investors and the payments system. However, this is likely to be very expensive due to the risks of bad loans. Insurance fees would greatly reduce the interest rate on investment accounts, rendering them unattractive compared with other investments. So you could well end up with banks having little more than just transaction accounts. Better to go back to the simplicity of the original Chicago Plan!<br />KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-19634086585608938912017-03-06T23:40:22.132-08:002017-03-06T23:40:22.132-08:00Not quite the same: the 10% capital idea would onl...Not quite the same: the 10% capital idea would only deal with losses up to 10%. Deposit insurance deals with much bigger losses. Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-70126890620393491292017-03-06T10:47:30.790-08:002017-03-06T10:47:30.790-08:00Would not this 10% capital be the pre equivalent ...Would not this 10% capital be the pre equivalent of an post imposed depsosit insurance scheme...just in another form?vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-18620938353244746842017-03-06T10:02:30.517-08:002017-03-06T10:02:30.517-08:00Re "skin in the game", yes, I'm fair...Re "skin in the game", yes, I'm fairly sure I've seen PM literature which makes that point. However, in the case of existing mutual funds / unit trusts it seems that banks and other organisations which run those trusts normally abide by the description of the trust given to potential investors, and all without the bank itself having skin in the game. E.g. where Lloyds bank says that trust X will invest in medium risk engineering firms, that's what the trust actually does. Of course there is always a finite amount of skin in the game in that the Lloyds bank staff who actually administer the trust probably get a cut of the profits each year, but I would guess those staff are not exposed to profits and losses to the extent of the 10% mentioned in the PM work you refer to.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-46524057263208136422017-03-06T07:42:00.346-08:002017-03-06T07:42:00.346-08:00"Mutual fund" is just the US term for &q..."Mutual fund" is just the US term for "unit trust" (UK parlance). You'll find lots of them listed in the financial pages of e.g. The Telegraph, and obviously far more in the FT. Some are run by banks and some not.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-85923540669869109762017-03-06T07:03:43.545-08:002017-03-06T07:03:43.545-08:00I would say in addition that PM reckon that the ba...I would say in addition that PM reckon that the bank should take a share of some of the risk.They will be less likely to take big risks having some "skin in the game".I am Ok with that.<br />As to shareholders taking a hit ,why is that assumed?The bank could reduce its bonus/salary levels or cut its costs rather than hitting the shareholder only doing so as a last resort.<br /><br />I know nothing about Mutual funds to be honest ,but they could follow the same rules on this too.<br /><br />End of the day we cannot have a system that protects all parties investing in a bank.Personally I'd rather have my eyes poked out with hot needles than invest majorly in a bank.<br />We have to decide who we are looking after here ,what is the goal?My view is that it is to make a more stable banking sector and we are protecting the state against private banks and their investors.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-9980528816762330142017-03-06T06:42:25.010-08:002017-03-06T06:42:25.010-08:00Hello KK,
You make some good points ,reading the P...Hello KK,<br />You make some good points ,reading the PM new Sov Money paper they say this;<br />"Significant losses would be contained within individual Investment Funds, rather than <br />spilling over to bring down an entire banking group. In essence small parts of the bank <br />could fail in isolation, without the whole failing. "<br /><br />I think that they would split up the I.A's into various funds that their customers could buy into.A fnd may be wiped out orpartially wiped out without having to shut down the bank.Though as you say if there were multiple failures of many funds panic may still ensue.The time element may help because investors could not demand their money be switched all at the same time.Hopefully giving the bank/central bank time to sort out a solution.Even if that involves moving the transaction accounts to other banks to save the payments system.vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-70616346201118061452017-03-06T06:32:10.194-08:002017-03-06T06:32:10.194-08:00It took me by suprise too,we had better red the wh...It took me by suprise too,we had better red the whole thing agaon in full!.<br /><br />We are drifting back to regulations and more supervision here for sure.PM have always pushed for simplicity,this stikes me as going backwards on that score.Maybe they have been getting strong feedback about easing off on the I.A rules.As you point out it is a second "blocker" and maybe one that is step too much.This seems to be PM's solution to it.But seems to me both you and they have pipointed a previous flaw.<br />vincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-27782727366894488382017-03-06T06:24:12.706-08:002017-03-06T06:24:12.706-08:00KK,
You say “a far more important purpose of Full...KK,<br /><br />You say “a far more important purpose of Full Reserve banking is to ensure the continuity and security of the payments system without the need for subsidies to banks from the government (deposit insurance…”.<br /><br />The answer to that is that government run deposit insurance can perfectly well “ensure continuity and security” under the existing system WITHOUT any subsidy element, if banks are charged an appropriate insurance premium. The US FDIC does that. I.e. the FDIC is entirely self funding, far as I know. George Osborne implemented something roughly along those lines, but it’s a mess. In contrast to FDIC which quite rightly varies the premium in accordance with the riskiness of each bank, Osborne’s equivalent does the opposite: it involves cross subsidisation of risky banks by the safer ones. <br /><br />Thus we do not actually need full reserve in order to achieve “contionuity and security”, though obviously any full reserve system must incorporate that continuity and security.<br /><br /><br />You then say that PM’s proposals would not achieve “continuity and security” of the payments system because “Many depositors might well be tempted into PM’s risky investment accounts which would offer higher interest rates and lower charges than safe transactions accounts. But in the event of rumours that the bank’s investments were performing badly, investors would panic and scamper to switch their money into safe transactions accounts.”<br /><br />The answer to that is that “safety and contionuity” are ensured by PM’s safe / transaction accounts. And if someone puts too much money into investment accounts and finds themselves caught short when those loans / investments fail, more fool them. Exactly the same applies under the existing 2017 system: that is, if someone puts all their money into shares or unit trusts or whatever and they then find themselves short of cash, no one comes to their rescue.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-56049421997913280552017-03-06T06:16:39.557-08:002017-03-06T06:16:39.557-08:00Thanks for doing some home-work I ought to have do...Thanks for doing some home-work I ought to have done myself..:-)<br /><br />PM’s thinking there seems muddled to me. The basic idea behind full reserve as per Friedman and Kotlikoff, and which is beautifully simple is: 1, split the bank industry in two, 2, one half accepts deposits which are kept in a totally safe manner, 3, the second half is for those who want their money loanded out, plus those people carry all risks involved, i.e. they effectively buy into a mutual fund. And that system blocks private money creation because stakes in mutual funds are not money.<br /><br />Something very much along the lines of “3” already exists in that numerous banks run mutual funds: there are probably several hundred of those funds at a guess in the UK. But when those funds make a loss, it is just stake-holders who lose out: shareholders in the bank running such funds do not lose out (far as I know). And I don’t really see why they should. Of course the offer to potential fund stake-holders that they are protected to some extent by bank shareholders is an attractive feature. But there’s be a price: less risk inevitably means a lower return.<br /><br />That shared risk feature is not fundamental to the objective, namely blocking private money creation, thus I don’t see the need for legislators to lay down any rules there. I.e. that shared risk feature is something banks should be free to incorporate or not as they wish.<br /><br />Of course, and to repeat, and assuming my arguments in the above article are right, an ADDITIONAL type of fund needs to be added to the variety of funds that PM sets out: that’s funds where depositors who want their money loaned out face no risk at all because the risk is carried by government backed deposit insurance, as is the case with retail bank deposits at the moment. My guess is that would prove by far the most popular fund because it comes to the same thing as existing deposit / term accounts: that is depositors get a bit more interest than on current / checking accounts while being protected by government run deposit insurance (up to some limit, of course, £80,000 or thereabouts.)<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-40957919712934451582017-03-06T04:47:36.806-08:002017-03-06T04:47:36.806-08:00I have had another look at the PM Sovereign Money ...I have had another look at the PM Sovereign Money paper which has has been reissued with a signifcant "warning" as below;<br /><br /> (This paper replaces and significantly revises Creating a Sovereign Money System, which was published in 2013 and revised in 2014.) <br /><br />So I had a look at the Investment Account(I.A) part and we have a more detailed proposal regarding banks running I.A.'s.Basically they want the bank to put in some capital to loan fund acounts, to offset losses to account holders(up to some officially set limit, say 10%)In the event of losses the bank absorbs the hit up to the capital amount.After that, I.A. account holderstake a hit equally across the board.The bank closes that I.A. fund(or puts in more capital) but crucially the whole bank does not have to fold.The bank could transfer funds into the loss making fund from it's own profit holding account,(but not from other I.A's) to avoid inflicting losses on its customers,which it might well do to avoid the bad publicity.They even say this might have saved HBOS.<br /><br />From page 29 under the title <br /><br />"Transparency of Investment Fund assets"<br /><br />http://positivemoney.org/wp-content/uploads/2016/12/SovereignMoney-AnIntroduction-20161214.pdfvincehttps://www.blogger.com/profile/05690045138539663594noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-8513666807559580262017-03-06T04:41:24.798-08:002017-03-06T04:41:24.798-08:00There is a fundamental flaw in your argument here....There is a fundamental flaw in your argument here. It stems from the monetarist purpose of Friedman, PM and others that, in your words, “The basic objective of FR is to prevent private banks printing or “creating” money”. <br />PM’s proposals might well achieve this misguided aim.<br />However, a far more important purpose of Full Reserve banking is to ensure the continuity and security of the payments system without the need for subsidies to banks from the government (deposit insurance, lender-of-last-resort facilities and bailouts). In the words of the original March 1933 Chicago Plan Memorandum, the aim was to “certainly and permanently prevent any possible recurrence of the present banking crisis”.<br />PM’s proposal would not achieve this original primary purpose. Many depositors might well be tempted into PM’s risky investment accounts which would offer higher interest rates and lower charges than safe transactions accounts. But in the event of rumours that the bank’s investments were performing badly, investors would panic and scamper to switch their money into safe transactions accounts. The bank would have insufficient liquidity to repay all investment account depositors, so the result would be a bank failure.<br />Transactions account holders would not lose their money - this would be 100% secure at the CB. But the bank which was administering their account would no longer be operational - it would have to dismiss staff, sell premises etc.<br />Thus the payments mechanism would be impaired, with potential catastrophic systematic collapse if there was a snowball effect among financial institutions. The CB would then be unable to secure the payments system except bailing out or taking over commercial banks.<br />The original 1933 Chicago Plan was therefore right about about the vital need for “a complete separation, between … the Deposit and the Lending functions of existing commercial banks.” Likewise all subsequent proposals for Full Reserve banking, with the sole misguided exception of PM. <br />P.S. I have ignored your idea of deposit insurance for investment accounts. This is unlikely to be possible except perhaps at very high cost, which would make the interest rate and charges for investment accounts less attractive.<br />PP.S. I accept all the points in your generous reply to my comment on an earlier post.<br />KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.com