The MF/PM system involves
100% reserves. And that in turn involves loans being funded just by bank
shareholders or other types of loss absorber. And that in turn means that depositors
who are not prepared to put their money at risk cannot have their money loaned
on by a bank and thus earn interest.
Now a possible objection
to that system is that we’re failing to use all that lovely money which the
latter “no risk” depositors have stored up. So assuming there are viable
lending opportunities out there, interest rates would have to be raised in
order to attract more shareholder / loss absorber money to fund those loans
(boo hoo). Indeed the latter sort of objection was put in section 3.21 of the
Independent Commission on Banking’s final report.
But there’s a flaw in
that argument, as follows.
Assume to keep things
simple that the economy is at capacity. And assume that the above “lovely
stored up money” is used to fund loans. That amounts to, or causes an increase
in aggregate demand, and that’s no allowable, assuming the economy is already
at capacity. Thus to counteract that increase in demand, interest rates would
have to rise: just as in the case of where loans are funded just by shareholder
/ loss absorbers!
So . . . the idea that
there is some sort of free lunch to be had from using the money in dormant
accounts is a myth.
_________
P.S. (same day). By way
of trying to rebut the above argument, advocates of using dormant accounts
could claim that if the economy is NOT AT capacity, then using money in those
accounts to fund loans would raise demand which would be beneficial. However,
the answer to that is that effecting stimulus by conventional means costs nothing in real terms. E.g.
having government / central bank print money and spend it and/or cut taxes
would raise demand. But printing £20
notes (to put it figuratively) costs nothing. So using money in dormant
accounts yields no benefits can can’t be obtained for free in other ways.
Whether new money is created by banks or government, a decision maker must decide upon WHO GETS the money and under what circumstances. Banks seem to do much better at this decision, usually requiring the recipient to repay and perform in some way.
ReplyDeleteIf the recipients DO repay, the increase in bank money supply will turn out to be temporary.
Given the billions if not trillions lent to NINJA mortgagors in the US and to loony property developers in Ireland and Spain, in the last ten years, I think the idea that private banks are good at deciding who gets new money is a joke. Though of course there will always be a place for lending by private banks.
DeleteRe the temporary / permanent point, we actually need permanent annual increase in the money supply given real annual growth. And given 2% or so inflation, we need in addition, a NOMINAL annual top up of the money supply.