Sunday, 10 May 2015

Charles Goodhart moves towards full reserve banking.

This article by Charles Goodhart and Enrico Perotti is a big step towards full reserve banking. (Hat tip to Frances Coppla for highlighting the article).

Under full reserve anyone wanting their money loaned on by a bank or any similar entity, i.e. anyone who wants a significant return on their savings must accept the risks inevitably involved in doing that, rather than expecting the taxpayer to carry the risk, as obtains at the moment. In contrast, if they want total safety, they lodge their money with government, which means they get little or no interest.

Moreover, those who want the former option have a choice as to what their money is put into (mortgages, small business or whatever).

And what Goodhart and Perotti (GP) want in the case of mortgages is “much   greater maturity matching and no insured deposit funding.” Well that’s straight out of the full reserve book. Positive Money who advocate full reserve suggest funding mortgages and other investments partially by equity and partially by long term deposits. And long term deposits gives the “greater maturity matching” that GP want.

In contrast, under Laurence Kotlikoff and Milton Friedman’s  version of full reserve, the funding is done just via equity. But certainly “insured deposits” do not fund mortgages or other investments under ANY version of full reserve.

Well now, given the VERY LARGE proportion of total lending that funds mortgages, Goodhart and Perotti have gone a long way towards full reserve. So I have a question for them: “Why not go the whole way?”

In other words where someone wants their money put not into mortgages, but into small business loans, solar energy, wind farms, whiskey distilleries, you name it, why not apply the same principle?

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