Thursday, 17 June 2021

How banksters fool politicians and everyone else.


The existing (fractional reserve) bank system has given us truly amazing benefits like the 2007/8 bank crisis which did untold economic and social damage.  

But when anyone proposes a move from fractional to full reserve, banksters always respond by saying it would raise interest rates and thus cut the overall turnover of banks which would harm the economy. Well there’s a phenomenally simple flaw in that argument – the flaws in arguments put by bankers and economists very often are phenomenally simple. The flaw is that the latter bankster argument rests on the “all else equal” assumption: i.e. the idea that if banks’ turnover is reduced, the turnover of the rest of the economy does not rise to compensate.

The truth of course is that if a switch to full reserve DID CUT the turnover of banks, there’d be absolutely nothing to stop governments and their central banks creating and spending a bit more money into the economy to compensate. The net result would be a fall in debt based economic activity (debt owed to banks, that is) and a rise in non debt based economic activity.

Moreover, fractional reserve is a system under which lending by banks is SUBSIDISED: that is, those who want banks to lend out their money (i.e. depositors) are protected from loss gratis taxpayer backed deposit insurance and bank bail outs. And it is widely accepted in economics that subsidies do not result in GDP being maximised. Ergo it is actually fractional reserve which fails to maximise GDP and full reserve which does maximise it, even if full reserve involves higher interest rates.

Incidentally, anyone wishing to cite the now fashionable view that banks do not lend on depositors’ money, please see here.

Sunday, 13 June 2021

The strange logic behind bank stress tests.


Bank regulators and indeed economists in general think they face a dilemma, namely that if bank regulations are too stringent, that cuts into bank profits to an unnecessary extent, and consequently reduces GDP. On the other hand, if regulations are too lax, then there is likely to be a repeat of the 2008 bank crises which had very severe economic consequences including loss of GDP.
Thus the purpose of bank stress tests is supposedly to determine the minimum level of “stringency” that is compatible with a high level of certainty there is no repeat of the 2008 episode.

Well the first major question mark over that whole idea is that Sir John Vickers, chairman of the main UK  investigation into banks in the wake of the 2008 crisis said that  bank regulations are still nowhere good enough and that it is only a matter of time before we have another 2008. The title of his article was “Storm is coming” and it was published by the Express.

However a more fundamental and theoretical flaw is the assumption that a very high level of stringency, say enough to reduce the chance of a repeat of 2008 from one in fifty in any given year to one in five hundred actually involves any cut in GDP. One reason for saying that is that it is false logic to think that because the activities of one particular type of lender (banks) declines, that therefor GDP declines. Obviously GDP will decline ALL ELSE EQUAL. But the all else equal assumption is badly flawed first to the extent that lending by banks is replaced by lending by other lenders, e.g. mutual funds (“unit trusts” in the UK) and second to the extent that loan based (i.e. debt based) economic activity is replaced by non loan / non debt based activity.

So the crucial question here is: what sort of set up maximises GDP? Is it one where the risk of a repeat of 2008 is possible, but low (e.g. the above mentioned one in five hundred chance), or is it a set up where there is absolutely no chance of such a repeat?

Well it’s widely accepted in economics that GDP is maximised where market forces prevail, unless there are very specific and clear reasons for thinking those forces should not prevail (which is often the case). Now the big problem with the “significant risk of repeating 2008, e.g. the above one in five hundred chance” is that it is quite clearly not a free market set up and for the following reason.

Any depositor who wants a bank to earn interest for them is into commerce just as much as if they deposit money with a stockbroker or private pension fund for the same reason, and it is widely accepted that in a free market those who are into commerce should carry relevant risks. But letting bank depositors earn interest while being protected by a state run deposit insurance system and the possibility of bank bail outs, however remote, is not a free market set up!

So the most genuine free market (i.e. the scenario where GDP is maximised) is one where those who are into commerce get no protection WHATEVER from state run deposit insurance systems or bank bail outs. I.e. the most genuine free market set up is (shock horror) a full reserve banking system where those who fund loans carry all relevant risks.

Do depositors fund bank loans?

Some readers may object to the above paragraphs by claiming they  get too near to saying depositors fund bank loans and by citing a view that has become fashionable of late, namely that depositors do not fund loans.  I actually dealt with that point on this blog recently here.

Friday, 11 June 2021

Whoopee: New Economics Foundation will research a problem solved long ago.



Details are in an article on the Brave New Europe site entitled  “We don’t need cuts to pay back pandemic debt.” The author is NEF researcher Dominick Caddick.

One of the central claims in the article is that a rise in interest rates would not matter for government finances because the Bank of England can always buy up debt and pay less interest to the resulting holders of reserves at the BoE, or indeed pay them no interest at all. See the two paras starting “In addition a side effect….”  

Thus, so the article claims, “So even if interest rates were to rise, there would be many options for the Bank to make it more manageable (a subject of future NEF research).”

Well simply saying there are many options does not tell us exactly what government and central bank (henceforth “the state”) need to do given a rise in interest rates. And the fact that the NEF is apparently going to “research” this topic indicates that Caddick doesn’t know what to do for the best in different circumstances. But never mind: the solution was worked out long ago on this blog and by MMTers and others. I’ll assume first that public spending as a proportion of GDP is to remain constant. The solution is thus.

First possible scenario is that continued significant stimulus is needed. In that scenario the liklihood is that all the state needs to do is create money and pay off debt as it matures. The fact that interest rates have risen indicates a reduced willingness on the part of creditors to hold large amounts of base money without being offered a reward in the form of an elevated rate of interest for doing so. And that by definition means those creditors if not offered that reward will tend to try to spend away what they regard as their excess stock of cash / base money / reserves, and that equals a rise in demand, which is exactly what is needed. So no problem there. That attempt to spend away is sometimes referred to as “the hot potato effect”. (Any readers wishing to claim that only commercial banks hold reserves, please see appendix below.)

A second possibility is that little or no stimulus is needed. In that case, obviously the latter rise in demand is a problem.  So what to do?

Well obviously if no extra demand is needed then the latter “spend away” is a problem. But like all instances of excess demand, that can be dealt with via cutting the deficit (i.e. raising taxes and/or cutting public spending).

But note the sole effect, or at least intended effect, of that cut in the deficit, is the damp down that excess demand. Ergo there ought to be no effect on GDP or living standards.

Problem solved.

As for where there’s a rise in the proportion of GDP going to the public sector, that is easily achieved simply by raising taxes and public spending by about the same amount.

Examples of articles were I dealt with the above points several years ago include an article at the MPRA site entitled “Consolidation causes little austerity” and also this article on this blog.


Appendix. Do only commercial banks hold reserves?

It might seem that way, but actually the claim that only commercial banks hold reserves is misleading for the following reasons.

Governments and central banks create base money and spend it into the economy when stimulus is needed, something they’ve done on an astronomic scale over the last ten years. Recipients of that money bank it, and relevant banks credit the accounts of those recipients and then lodge the money at the central bank, where such money is referred to as “reserves”.
But note that the latter “recipients” have control of that money. That is, if I draw a cheque on my account at Barclays and pay someone who banks at Lloyds, Barclays will have to transfer reserves to Lloyds (and of course the person who banks at Lloyds sees their account credited by Lloyds). So even though I don’t have an account at the BoE, it’s very much “little old me” who in in control of my little stock of reserves.

Put another way, I control my little tranche of reserves at the BoE: it’s just that my commercial bank acts as my agent when I deal with the BoE.

Of course I can also go to an ATM and demand that £X of my reserves are turned into actual physical cash. When I do that, Barclay’s stock of reserves at the BoE will fall by £X. There again, I am very much in control.

Wednesday, 9 June 2021

The UK government’s valiant attempts to hush up statistics on crime and race.


Just in case you’re unaware of the above “attempts”, this is the sort of thing I mean.

Anyway, I thought I’d see what I could find on the subject of knife crime and race. There’s plenty of statistics out there, but (surprise surprise) a lack of anything on the extent to which different races are responsible for knife crime.

Anyway far as I can see, a black in London is just over SEVEN times more likely to commit a knife crime than a white. In contrast, the liklihood of an Asian doing a knife crime is only slightly higher than for a white: about 20% more. And that’s about what any normal person (i.e. not a Guardian reader) would expect.

Note that the only figures I could find for knife crime committed by different races after an hour of searching on Google were from a freedom of information request: i.e. the information had to be forced out of the authorities (big surprise). Plus those figures are unsatisfactory in that they give the number of people “proceeded against” not the number convicted. But given the authorities’ determination to hush up the figures, I offer no apologies for producing less than perfect figures.

I got the figures for the racial make up of London’s population from here.

As for the figures on knife crime, I got those from here. I took the latest figures, i.e. the figures for 2018.

This all very much ties up with figures from the US: in particular, it seems from this source that blacks are over a hundred times more likely to attack Asians than Asians are to attack blacks.

If you’re as dumb as a leftie journalist you won’t of course understand the reason for the above “hushing up”, so I’ll explain. The above figures do not “fit the narrative”. That is they do not fit the narrative coming from the left, and indeed from the political centre ground to some extent, that multiculturalism is a boon.

Therefor in line with the intellectual dishonesty that is the norm on the political left, the figures must be hushed up.

The political left would gain millions of votes from the political right if the left abandoned its loonier aspects: wokeism, political correctness, the loony left and intellectual dishonesty in the form of hushing up statistics.  

Monday, 7 June 2021

Richard Murphy claims banks do not need deposits before lending.



That’s in an article of his entitled “Banks do not need any deposits to make loans.”

I’ve actually run through this question as how reliant banks are on deposits before on this blog. But no harm in briefly running thru it again.

The problem with Murphy’s article is not that it is totally wrong, but that there are important ifs and buts which he ignores, and as follows.

First, he is not clear on whether he is referring to INDIVIDUAL banks or commercial banks as a whole. There’s a big difference. But I’ll start by assuming he means individual banks.

It is perfectly true that a bank under the existing “fractional reserve” system can make a LIMITED NUMBER of loans without getting money in from depositors (or for that matter, bond holders or shareholders). But a bank that does that on any significant scale will run short of reserves (i.e. base money) and thus has to borrow reserves from the central bank or other commercial banks.

It runs out of reserves because when the home made money which the bank gives to borrowers is spent, most of it is deposited at other banks, which in turn will want reserves off the original bank. That’s OK as long as those other banks have confidence in the original bank’s ability to settle its debts. But if they don’t, then the original bank is in a Northern Rock position, i.e. up shit creek without a paddle.
Another big question mark over the claim that a bank can grant loans without money coming in from depositors (and bond holders and shareholders) is this: why have banks over the decades dished out billions by way of interest and dividends to the latter three type of funder if banks don’t need their money?

In contrast to INDIVIDUAL banks, there is the commercial bank sector as a whole. That sector has greater freedom to expand its lending than an individual bank does because assuming all banks expand their lending by about the same amount, money created and loaned out by one bank ends up as a deposit at another. Thus no individual bank runs short of reserves. But there a still SOME constraints even on the bank sector as a whole: e.g. banks have to abide by capital ratio and reserve ratio rules, so to that extent they have to get money in from shareholders. (Those “ratio” rules vary from one jurisdiction to another of course.)

Murphy is also wrong to say in his article that according to this Bank of England article “Loans are quite emphatically not the recycling of depositors' money: all loans are made from newly created money.” Actually that BoE article says in its second sentence that commercial banks do two things: first create money (as Murphy says) and second, intermediate between lenders and borrowers, i.e. in effect, lend out depositors’ money.


Positive Money.

It is also relevant to note that Murphy gives pride of place on this issue to the Bank of England when in fact Positive Money was making a song and dance about the fact that commercial banks create money several years before the BoE article. In fact a bunch of Positive Money supporters in the North East of England (of which I’m a member) had a special celebration in a pub where we consumed a bottle of champagne when the BoE article was published.  That was to celebrate the BoE tumbling to what we’d been saying for some time.

But that’s not to say that the better economics text books long before Positive Money was founded were unaware that commercial banks create money: they certainly were aware of that fact. Some of those text books are on my bookshelves.

As to why Murphy did not give credit to Positive Money, that’s no doubt because he is no friend of PM: see his article entitled “Why Positive Money is wrong.”

And finally, and on the plus side, it’s good to see Richard Murphy putting a lot of effort into spreading MMT ideas.

Thursday, 3 June 2021

Are ordinary depositors smarter than bank regulators?

One of the most common criticisms of full reserve banking is that it would mean higher interest rates. And on the face of it, that would certainly seem to be the case because when switching from fractional to full reserve, a significant proportion of the funding for loans ceases to come from deposits, and instead comes from equity (or what amounts to equity, e.g. stakes in mutual funds held by those who want their money to be loaned out).

Now it might seem that equity holders will charge more for their services than depositors because equity holders carry a risk. But a big flaw in that argument is that risk is far from absent from “deposit funded fractional reserve banks”: it’s just that the risk is carried by the deposit insurance system, which of course charges banks for that insurance, with relevant costs being passed on to borrowers. And assuming that system and the latter equity holders both estimate the risk correctly, then they’ll charge the same! Ergo there should be no difference when it comes to the cost of loans as between full and fractional reserve!

Of course it’s possible banks recoup the latter costs by cutting the interest they pay to depositors, but the effect there is much the same: people will then have a reduced incentive to place deposits at banks with a view to earning interest, ergo loans from banks will be more difficult to obtain or the cost of loans will rise.

The only possible escape from that argument for fractional reserve enthusiasts is to claim that depositors in a full reserve system OVER ESTIMATE the risks, thus (so they might argue) it might make sense for government in its wisdom to step in and set up a system where risks are more accurately gauged.

But there’s a big problem with the latter argument, namely that in 2007/8 we had a major bank crises as a result of which a good ten million people worldwide lost their jobs, tens of thousands were thrown out of their homes, and which was followed by a ten year long recession. Thus the idea that “government in its wisdom” (i.e. bank regulators) are able to estimate risks accurately is obvious nonsense.

And any idea that bank regulators have now got it right is doubtful given that the chairman of the main UK investigation into banking in the wake of the 2007/8 crisis, Sir John Vickers said that bank regulation is still nowhere near good enough. (See his Daily Express article entitled “Storm is Coming”)

The conclusion is that far from bank regulators having a better idea as to what the risks involved in fractional reserve are than depositors, it’s depositors who are the more clued up. Or at the very least, the idea that governments / bank regulator are more clued up than depositors looks doubtful.

And that in turn casts doubt on the idea that depositors overestimate the risks involved in fractional reserve. And that in turn is a big flaw in the idea that interest rates would be higher under full reserve.


Wednesday, 2 June 2021

A poor criticism of MMT by Alexander William Salter.


Alexander Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University. In an article entitled “There’s nothing modern about MMT”, his central claim is that MMT won’t work if there is ineffective control of money creation. Well that’s pretty obvious!

But the flaw in that idea is that stimulus has actually been effected over the last ten years or so by organising an astronomic and unprecedented money supply increase (base money in particular), yet serious inflation is nowhere to be seen. I.e. stimulus has been implemented very much as prescribed by MMT, yet control of the money supply increase has been well under control. Ergo effective control cannot be all that difficult.

It is true that MMTers do not go into nearly enough detail on exactly how control should be organised, but that’s not much a problem because numerous other organisations and economists (including one former Fed chairman and one former vice chairman) have also advocated implementing stimulus via money creation and they have in fact set out “control” mechanisms.

The favourite control mechanism advocated by the latter economists is simply to have some sort of independent committee of economists, possibly at the central bank, decide how much money to create. For one organisation that advocates that, see p.10 here.

Re senior Fed people, Bernanke put in a good word for that sort of system. See para starting “A possible arrangement….” in his Fortune article “Here’s How Ben Bernanke’s Helicopter Money Plan Might Work.”

Plus Stanley Fischer, former vice chairman of the Fed, and co-authors supported that sort of system. See their article “Dealing with the next downturn” published by “The European Money and Finance Forum”.


P.S. (4th June 2021).    Having said above that MMT is a bit vague on exactly who decides the size of the deficit, Stephanie Kelton in her book “The Deficit Myth” does actually say that a committee of economists in the form of the Congressional Budget Office should take that decision. See just under the heading “Guardrails for Discretionary Fiscal Adjustments”, Ch8. Thus Alexander Salter’s criticisms are even weaker than I suggested when writing the above paragraphs.