Friday, 17 May 2013

Jan Kregel addresses a problem already solved by Positive Money & friends.

In this paper, Jan Kregel addresses the following problem.

It’s desirable for obvious reasons for governments to back bank deposits, or at least to guarantee some minimum amount of those deposits. Unfortunately, this gives rise to moral hazard: it induces banks to behave more recklessly. And second, that guarantee inevitably involves subsidising what is in effect commerce.

That is, if you invest direct in the stock exchange, a buy to let property or whatever, there are no government guarantees for you in case your investment goes wrong, and rightly so. On the other hand, if you place money in a bank, and the bank makes a series of bad loans or investments in firms large or small or in mortgages and it goes wrong, the taxpayer comes riding to your rescue.

As Kregel puts it, “It would thus seem impossible to design a truly fair deposit insurance scheme that eliminates the inherent moral hazard….”

Well actually Positive Money, Prof. Richard Werner and the New Economics Foundation solved that one some time ago. See here.


  1. Ralph,
    Thanks for correcting that which seemed impossible so very recently, according to Dr. Kregel.
    Also thanks for your excellent response to Dr. Kregel's public policy overview of narrow banking, which I had bookmarked a while ago, and just read today.
    Which is what caused me to write, and to catch your Positive Money comment here recommending a read of the Jackson-Dyson "Modernizing Money" book.
    If not a recommended textbook very soon, I think their book will become a standard for much of the coming discussion about modern money systems.

    The part I don't understand about Dr. Kregel's narrow-banking paper is why it uses much older views of Minsky as a basis for the suggested policies. Misky's 1994 paper on the expanded full-reserve banking proposals addressed Fisher's specific '100 Percent Money' plan very favorably, even calling for a national monetary commission.
    Of course, Jan's narrow banking critique was ostensibly in response to the favorable reaction being given to the Chicago Plan revisit by Benes and Kumhof, of which I understand you are also not a big fan.

    Thanks, again.

    1. Hi Joebhed,

      Thanks for drawing my attention to Minsky’s 1994 paper. I’ve just had a quick read thru it. I find it utterly boring. It reads like something written by a committee of bureaucrats desperate to keep themselves employed.

      If you say Minsky favoured Fisher’s 100% money plan, I’ll take your word for it, though I didn’t spot that bit in the paper.

      Half of the paper deals with the litany of mistakes that the Fed and other regulatory authorities have made in relation to banking over the last hundred years. My response to that is, “Yes I know the authorities are clueless. That’s why I’m pushing something which I think is better, namely full reserve banking (i.e. Fisher’s 100% idea).”

    2. Ralph
      I was referring to Working Paper 127, dated October 1994

      Financial Instability and the Decline(?)of Banking: Public Policy Implications
      Hyman P.Minsky*
      Working Paper No. 127
      October 1994

      Its 100 Percent Money perspective begins on pg 16 under the Policy Proposal with a discussion of Ronnie Phillips’ findings that reform of the money system was alive and well even after the banking acts were passed.
      I believe on pg. 19 he specifically reflects on Fisher and 100 Percent Money, including these observations (Also see the Conclusion)

      “Thus, as the 21st century is about to be ushered in, an idea which was on the table during the 1930's discussion of reform can once again be on the table. One virtue of the 100% money scheme is that it separates the two functions that the monetary and
      banking system has to perform: the provision of a safe and secure
      means of payments, and the capital development of the economy.

      By separating these functions it makes us aware that an economy can have too little, as well as too much, government debt. We now are in a position to realize the dual set-up of 100% money: financing the capital development of the economy by contingent-valued liabilities such as mutual funds, and a payments mechanism that is based upon a portfolio of government bonds that is held by the authority responsible for the payment system.

      The weakness of the mutual fund way of financing business is that the position-taker, the manager of a mutual fund, does not hazard his capital in order to protect the fund holders against loss of principal. A surrogate for bank capital in the form of a high-risk, high-expected-return tranche in the portfolio will need to be developed.”

      My Dad always said that prior to this Minsky was avoiding any suggestion of a ‘solution’ to financial instability – being kind of like the weather. But with this paper, we see that he was clearly turning the corner.
      Again, my wonder is why the Minsky-ites avoid discussion of his embrace of 100 Percent Money - even calling for a National Monetary Commission to advance the needed structural changes.


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