Wednesday, 28 November 2012

Does the Church back the occupy movement or not?

If there is one issue where the Church of England might have stuck it’s neck out just a little bit, it’s on the issue of the occupy movement. Remember all those tents parked outside St Pauls cathedral? 

Here the Archbishop of Canterbury supported the occupy movement, while here, he opposed it. White priest speak with forked tongue.

Of course, if accused of supporting the criminals and fraudsters who work in the financial sector, bishops can always point to the small print in some article they’ve written which criticises banks. Yep: most bishops would make good lawyers.

And if one of the perpetrators of the Iraq war (Tony Blair or George Bush) turned up a bishop’s palace, the relevant bishop would be all smiles. But if criticised for smiling, the relevant bishop would point to the small print…. You get the picture.

Prior to the French revolution the priesthood backed the aristocracy, not the peasants. When it comes the important social issues of the day, the church is always on the side of the establishment and respectability – while pointing to the small print.

That’s why the Church of England is often described as “The Tory Party at Prayer”.

And if Hitler had landed on British shores in the early 1940s, who would have been the first to lick his boots while pointing to the small print?

And if you think I’m being rude about two faced choir boy molesting Christian priests, my views on adulterer stoning, cartoonist murdering, suicide bombing, forced marriage promoting, female genital mutilating, free speech supressing, Islamic clerics aren’t a whole lot more complementary. But as a rough guide, my views coincide with Pat Condell’s.  (Oh by the way, I forgot to mention Halal animal cruelty, and apostate murder – silly me. The list is so long that if you want a synonym for Islam, then the words “evil” or “Nazism” wouldn’t be far off the mark.)

By the way, Pat Condell re-invents existentialism here. Assuming you adhere to logic and philosophy rather than fairy tales, there is no way religion beats existentialism.

Vive Jean Paul Sartre.

But unfortunately J.P.Sartre is what the politically correct call a “dead white male”, which means – according to PC logic  - that he should be ignored - and that we should have more respect for the cartoonist and author murdering brigade.

Conclusion: the politically correct are obscene, depraved nutters. 

Well that was a good rant. Now I’m feeling better.

Monday, 26 November 2012

Steve Keen’s objections to full reserve banking.

Steve Keen does not deny that full reserve would work, but thinks the change would not be worthwhile. He gives three reasons, all of which are a bit shaky.
First, he claims that under full reserve, government’s ability to fine tune the economy would not be perfect. He says, “I am sceptical about the capacity of government agencies to get the creation of money right at all times.”
Well now, failure to achieve perfection is not a desperately strong criticism, is it? Has anyone, or any system ever been perfect?
No advocate of full reserve to my knowledge has ever claimed that fine tuning would be vastly better under full reserve, although there is one respect in which it would be slightly better, set out below.

Short memories.
Second, he claims that if full reserve brought a period of “tranquillity”, people would forget the reasons for imposing full reserve, and fractional reserve would re-assert itself. No doubt the latter process would be assisted by a multi-million pound lobbying effort by banks. (In Britain, the finance industry spends £93 million a year on lobbying.)
As a historian, Keen clearly has some insight. Fractional reserve might easily re-assert itself. That has close parallels with the way in which Glass-Stegall was imposed, and then removed.
But we’ve learned from that episode haven’t we? In ten or twenty years’ time when the criminals and the filth that run the banking industry try to get bank regulations relaxed, we might be a bit more wary.

Keen’s third point is that there are ways of dealing with instability other than full reserve. And he cites two examples, both of which are his own creations, and both of which have come in for a fair amount of criticism: Jubilee shares and “the pill”.
The pill is a system under which the amount that can be borrowed to purchase a house is limited. Well the problem there is that if someone has a secure and decent income, and wants a 100% mortgage, that can be a perfectly viable and safe proposition for a lender. Why ban it?
In contrast, full reserve tends to counter a much more fundamental cause of instability (which Keen himself has rightly drawn attention to) namely the feed-back loop that is inherent to fractional reserve: an asset price rises, which makes the asset a better form of collateral, which in turn allows more money creation and borrowing based on that collateral, which in turn boosts the asset price still further, etc etc.
In contrast, under full reserve, the amount of money is more stable, which means that given a rise in demand for money to fund property speculation, interest rates rise, which ameliorates the speculation.
And finally, the latter instability point is not the CENTRAL merit in full reserve, or the central flaw in fractional reserve. The central flaw in fractional reserve is that it just cannot operate without a taxpayer funded subsidy.
There is no more of an excuse for keeping fractional reserve alive, than there was for keeping the loss making car manufacturer British Leyland alive.

Saturday, 24 November 2012

Vickers false logic.

Can you work out the flaw in the following argument? 

“The Mafia controls the cement industry in Naples, therefor nothing should be done about the Mafia, else Naples would run short of cement”.

If you’ve spotted the flaw in that argument then you’ve got more brain than Sir John Vickers, the somnambulant chairman of the Independent Commission on Banking.

John Vickers and his pals think that if private banks’ money creation activities are curtailed, that will constrict credit and hit economic growth. Well it won’t because the government / central bank can make up for any deflationary effect that comes from constraining private banks’ money creation and lending activities.

Likewise (assuming you’ve got more brain than John Vickers & Co) you’ll have worked out that if the Mafia was closed down in Naples, that would not hit cement production because there will be plenty of honest cement producers waiting in the wings who would take over or replace the Mafia’s cement production activities.

Tuesday, 20 November 2012

Bank balance sheet changes on converting to full reserve.

Two IMF authors, Benes and Kumhof, set out their ideas on the changes to the consolidated balance sheet of commercial banks that would take place on converting to full reserve banking.
I expressed reservations about their ideas here. Now for something more positive: some ideas as to what the balance sheet changes WOULD look like.

A brief introduction to full reserve.
Full reserve is a system under which commercial banks do not “lend money into existence” as the saying goes. The only source of money is the central bank. Commercial banks are then free to continue borrowing and lending as under fractional reserve, but they cannot lend money they haven’t got (i.e. they just lend money they’ve obtained from depositors, shareholders or bondholders).
If depositors want their money to be 100% safe, such money cannot be put at risk by being loaned on or invested by a bank. And if such money is not loaned on, no money creation takes place. Also no interest is paid on such money.
In contrast, and where depositors want interest, they are acting in a commercial fashion, and there is no obligation on taxpayers to underwrite that commercial activity. That is, depositors bear any losses due to poor performance by the underlying loans or investments. Thus in effect such depositors become shareholders rather than depositors.
For a more detailed explanation of full reserve, see this work by Richard Werner and co-authors.     
Werner & Co suggest that depositors who want their money invested put their money into “investment accounts” at their bank.
In contrast, Laurence Kotlikoff, another advocate of full reserve advocates that those who want their money investing put their money into unit trusts (“mutual funds” in US parlance).
Effectively there is not much difference between those two above ways of implementing full reserve. Thus I’ll refer to “investment accounts” and “unit trusts” interchangeably.
Also, note that the investment accounts / unit trusts are essentially different entities from safe accounts. To illustrate, if ALL THE MONEY put into investment accounts / unit trusts for a particular bank is lost, that shouldn’t have any effect on “safe” money.
On their page 64, Benes & Kumhoff (B&K) show a consolidated balance sheet which has assets and liabilities equal to 200% of GDP. Let’s stick with that 200% figure. (All numbers henceforth are percentages of GDP).
Next, let’s ignore bank shareholders and bondholders since they form a relatively small part of bank balance sheets (and actually form a small part of the balance sheets shown by B&K.).
So prior to the change, commercial banks’ consolidated balance sheet would be thus.

Assets.                                       Liabilities.
200  loans and investments.      200 Depositors.

On announcement of the change, depositors then have to choose how much of their money they want to have in safe accounts and how much in investment accounts or unit trusts. Let’s say depositors go for a 50:50 split. The new consolidated bank balance sheet for safe accounts would then be thus:

Assets.                     Liabilities.
100 reserves.           100 Deposits.

As to investment accounts / unit trusts, they are essentially separate entities. And their initial balance sheet would be thus:
Assets.                           Liabilities.
100 loans and                 100 Deposits.

The two balance sheets look very similar, there is a fundamental difference. For safe accounts (the first balance sheet) the number next to “deposits” and “reserves” is always exactly equal to the amount lodged by depositors (net of withdrawals). In contrast, for the investment account / unit trust balance sheet, the numbers fluctuate with changes in the value of the underlying loans and investments.
Note that there has been a drastic reduction in the amount lent by and invested by banks, which would have a deflationary effect. That would need to be countered by having the government / central bank machine print and spend monetary base into the economy. Let’s say (to keep things simple) that depositors continue to split their money 50:50 as between safe and investment accounts / unit trusts.
It might seem that government would need to print and spend an extra 200 into the economy so as to return the amount lent and invested by banks to its original figure. However, that would be too much because the NET EFFECT would be to expand private sector net financial assets by 200, and that would have too much of an inflationary effect (assuming the economy was at capacity BEFORE the change to full reserve).
As to EXACTLY HOW MUCH money government would need to print and spend into the economy, that is impossible to know with any accuracy. And for that reason, it would be inadvisable to try to effect the change within just a year or so. That is, it would be better to raise commercial banks reserve requirements by perhaps 20% a year until they had reached 100% after five years.
But let’s assume that at the end of that five year period, the total amount of new money required is 100. In that case, the new balance sheets would be thus.
               Safe accounts:
Assets                        Liabilities
150 reserves            150 deposits
  Investment accounts / unit trusts
Assets                                Liabilities
150 Loans and                150 deposits.

The reduced amount of lending by banks (150 instead of 200) would mean, first, an overall reduction in investment, i.e. there’d be more labour intensive economic activity. Second, the proportion of investment funded by equity rather than lending would rise.
No doubt a number of simple folk will react to the latter by claiming that any reduction in investment must be “bad” because investment is “good”, “virtuous” and all the rest.
The answer to that is that it is very na├»ve to think that a simple increase or decrease in investment (or anything else) is beneficial or harmful. The IMPORTANT QUESTION is: what’s the OPTIMUM amount of investment (or anything else)?
And investment funded by a banking system that needs subsidising (as is the case with fractional reserve) is probably not optimum: on the face of it, the amount of investment brought about that way will be excessive. 

Other changes.

Another overall or “macro” change that takes place on conversion to full reserve is that private sector entities have a bigger stock of cash, and thus do not need to borrow so much.
As to GOVERNMENT DEBT, that is drastically reduced in the B&K scenario, which has got me baffled. Under the scenario set out just above, there is no effect on government debt.