Sunday, 24 November 2019

Yet another feeble defence of private money printing.

I set out the flaws in many of the excuses proffered for letting private banks create money here recently. (Article title: “Silly excuses for letting private banks print money”)

 Another attempt to defend the existing bank system (i.e. allow private money creation) appeared in the Financial Times recently authored by Isabella Kaminiska. To be exact, she tries to argue that Stablecoin comes to the same as full reserve banking, a system under which private money creation is banned. (Article title: “Stablecoins as a euphemism for full-reserve banking.”)

Well Stablecoin (i.e. a central bank issued crypto currency tied to the £ or some other stable unit) is certainly similar to an element of FR. To be exact, under FR, depositors can keep their money in the latter form of totally safe, central bank guaranteed money, or they can choose to have their money loaned on to mortgagors etc, in which case depositors carry relevant risks themselves.

Unfortunately, as Kaminiska makes clear, Stablecoin does not necessarily involve a total abolition of private money creation. Stablecoin thus has similarities to one element of FR, but certainly does not equal FR. 

As for her  final three paras, they are nonsense.Her third last para says, “Love them or hate them, banks -- especially when unconstrained by the need to keep investments liquid -- offer a highly efficient economic service that the government or the central bank cannot emulate. That service is entirely connected to their ability to lend first and fund later, notably by finding appropriate liabilities to match against assets on a so-called “matched book” basis. This allows them to sidestep the economically costly requirement of having to acquire large sums of liquid cash float on an intraday basis to bridge any exchange.”

Well now, the idea that “government or central bank” cannot lend without first attracting funds to lend is a bit of a joke: unless I’m much mistaken the Fed produced around a trillion dollars from nowhere at the height of the recent recession and loaned it to sundry banks.

I suggest Kaminska’s ideas on full reserve can be dismissed until she gets her act together.

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