Sunday, 10 March 2019

Pathetic criticisms of full reserve by Messers Bentata, Giménez Roche and Janson.

In 2017, Pierre Bentata, Gabriel Roche and Nathalie Janson  (BRJ) authored a paper entitled “Full reserve banking reform proposals: The wrong answer to the relevant question of the control of the money supply.”

The paper is a litany of mistakes and errors, which I will run through.  On page 3, the paper deals (ironically) with an alleged weakness in the EXISTING system. The authors claim that when commercial banks (henceforth just “banks”) lend more, they require more reserves. As the paper puts it, “This increase implies a need for more narrow money as liquidity reserves to cover liquidity leaks from the interbank clearing system. Central banks, independent or not, hardly refuse to provide these reserves against the banks’ government debt holdings precisely because their mandate involve safeguarding banking solvability and sustaining economic growth. This generates a moral hazard situation where deficit-prone governments increasingly issue debt knowing that banks will buy it to back the refinancing of their reserves, which allow in their turn to accommodate a growing demand for credit by increasing the broad money supply.”

There are two errors there.  First, banks cannot just “buy back” government debt if banks are short of reserves (aka base money) because central banks will only accept base money in payment for government debt: i.e. banks cannot use their own home made money to buy back government debt. Governments and central banks just won’t accept the stuff.

Second, central banks do not just supply banks with reserves willy nilly, as BRJ suggest. Central banks DO MAKE reserves available to banks which are short of reserves, BUT AT A PRICE. And it is precisely that price that damps down lending and borrowing when such damping is needed. I.e., and contrary to BRJ’s claims that central banks can “hardly refuse to provide these reserves”, the price charged by central banks for supplying reserves in effect amounts to refusing to supply extra reserves.

The paper then claims (p.4) that full reserve (FR) claims to solve the latter problem by stripping “banks of their broad money creation abilities”. That’s in the para starting “To eliminate both…”.

Well actually, while FR does propose the latter “strip”, it’s not for the outlandish reason dealt with a couple of paras above, namely anything to do with banks  alleged ability to buy back government debt willy nilly.

Cantillon effects.

Next, the paper claims (p.4) that large Cantillon effects would accompany the introduction of FR. As BRJ put it, “First, the transition mechanisms to shift the banking system from the fractional to the full reserve systems would result in massive Cantillon effects (i.e., real purchasing power redistribution), which could result in large intersectoral movements of resources in the economy.”

The Cantillon effect is basically the idea that given a money supply increase, those who get hold of the newly created money can profit at the expense of the rest of the community. That is certainly a possibility, and in fact the Cantillon effect comes in two basic forms.

First, it is always possible that a money supply increase causes a GENERAL rise in prices (as opposed to a rise in the price of a limited set of commodities). But (amazing as this might seem) the advocates of FR do not propose increasing the money supply by so much that hyperinflation, or anything approaching hyperinflation is the result. They propose limiting the amount of money created by enough to  ensure that inflation stays close to the existing inflation target: 2% or thereabouts.

A second way the Cantillon effect can work is that the newly created money is concentrated on the purchase of relatively few products, which clearly means that the firms supplying those products do very nicely – possibly at the expense of the rest of the community.

However, EXACTLY THE SAME problem can arise under the existing system. That is, if government and/or central bank decide to implement stimulus, and that stimulus is concentrated on relatively few products or sectors of the economy, then clearly the problem mentioned in the above paragraph can arise, namely those specific sectors may profit at the expense of the rest of the community.

In short, the latter “profit” problem is a potential problem under the existing bank system just as much as under FR. Thus the conclusion is that the Cantillon criticism made by BRJ is nonsense.

Predicting how much stimulus is needed.

Next, BRJ claim “…it is impossible to know in advance what the money supply should be, as lags and aggregation problems would still plague monetary authorities in the new system. The resulting discrepancies between money supply and demand could entail lingering and cumulative distortions in the economy.”

Well again, exactly the same problem applies under the existing system! That is, governments and central banks have big problems in knowing EXACTLY how much stimulus to apply: to illustrate, while unemployment in the US is at a fifty year low, there are those (e.g. the leading MMTer Stephanie Kelgon) who claim it could go significantly lower without inflationary consequences.

Next, BRJ say “….the independence of the monetary authority would be doubtful since its money creation is intimately linked to government policies.” Again, exactly the same problem applies under the existing system: that is, while some central banks are supposedly independent, the reality is that politicians are always putting pressure on central banks to do those politician’s bidding (normally to cut interest rates) rather than have central bankers go by their own judgement. Indeed, Donald Trump is putting pressure on the Fed at the time of writing.

Moreover, prior to 1997 when the Bank of England was given independence, the BoE was controlled by the UK Treasury, i.e. the UK finance minister. To put it bluntly, the UK finance minister had access to the printing press. That however did result in rampant inflation between WWII and 1997.

Plus, while my preference is independent rather than non-independent central banks, Bill Mitchell produced evidence that there is no relationship between central bank independence and inflation. Scroll down to the chart in his article entitled “Central bank independence – another faux agenda.”


I’ve had enough of this paper by by Messers Bentata, Giménez Roche and Janson. It’s clearly nonsense on stilts. I can’t be bothered with any more of it.

No comments:

Post a Comment

Post a comment.