Thursday, 17 June 2021

How banksters fool politicians and everyone else.

 




The existing (fractional reserve) bank system has given us truly amazing benefits like the 2007/8 bank crisis which did untold economic and social damage.  

But when anyone proposes a move from fractional to full reserve, banksters always respond by saying it would raise interest rates and thus cut the overall turnover of banks which would harm the economy. Well there’s a phenomenally simple flaw in that argument – the flaws in arguments put by bankers and economists very often are phenomenally simple. The flaw is that the latter bankster argument rests on the “all else equal” assumption: i.e. the idea that if banks’ turnover is reduced, the turnover of the rest of the economy does not rise to compensate.

The truth of course is that if a switch to full reserve DID CUT the turnover of banks, there’d be absolutely nothing to stop governments and their central banks creating and spending a bit more money into the economy to compensate. The net result would be a fall in debt based economic activity (debt owed to banks, that is) and a rise in non debt based economic activity.

Moreover, fractional reserve is a system under which lending by banks is SUBSIDISED: that is, those who want banks to lend out their money (i.e. depositors) are protected from loss gratis taxpayer backed deposit insurance and bank bail outs. And it is widely accepted in economics that subsidies do not result in GDP being maximised. Ergo it is actually fractional reserve which fails to maximise GDP and full reserve which does maximise it, even if full reserve involves higher interest rates.

Incidentally, anyone wishing to cite the now fashionable view that banks do not lend on depositors’ money, please see here.



Sunday, 13 June 2021

The strange logic behind bank stress tests.

 
 


Bank regulators and indeed economists in general think they face a dilemma, namely that if bank regulations are too stringent, that cuts into bank profits to an unnecessary extent, and consequently reduces GDP. On the other hand, if regulations are too lax, then there is likely to be a repeat of the 2008 bank crises which had very severe economic consequences including loss of GDP.
 
Thus the purpose of bank stress tests is supposedly to determine the minimum level of “stringency” that is compatible with a high level of certainty there is no repeat of the 2008 episode.

Well the first major question mark over that whole idea is that Sir John Vickers, chairman of the main UK  investigation into banks in the wake of the 2008 crisis said that  bank regulations are still nowhere good enough and that it is only a matter of time before we have another 2008. The title of his article was “Storm is coming” and it was published by the Express.

However a more fundamental and theoretical flaw is the assumption that a very high level of stringency, say enough to reduce the chance of a repeat of 2008 from one in fifty in any given year to one in five hundred actually involves any cut in GDP. One reason for saying that is that it is false logic to think that because the activities of one particular type of lender (banks) declines, that therefor GDP declines. Obviously GDP will decline ALL ELSE EQUAL. But the all else equal assumption is badly flawed first to the extent that lending by banks is replaced by lending by other lenders, e.g. mutual funds (“unit trusts” in the UK) and second to the extent that loan based (i.e. debt based) economic activity is replaced by non loan / non debt based activity.

So the crucial question here is: what sort of set up maximises GDP? Is it one where the risk of a repeat of 2008 is possible, but low (e.g. the above mentioned one in five hundred chance), or is it a set up where there is absolutely no chance of such a repeat?

Well it’s widely accepted in economics that GDP is maximised where market forces prevail, unless there are very specific and clear reasons for thinking those forces should not prevail (which is often the case). Now the big problem with the “significant risk of repeating 2008, e.g. the above one in five hundred chance” is that it is quite clearly not a free market set up and for the following reason.

Any depositor who wants a bank to earn interest for them is into commerce just as much as if they deposit money with a stockbroker or private pension fund for the same reason, and it is widely accepted that in a free market those who are into commerce should carry relevant risks. But letting bank depositors earn interest while being protected by a state run deposit insurance system and the possibility of bank bail outs, however remote, is not a free market set up!

So the most genuine free market (i.e. the scenario where GDP is maximised) is one where those who are into commerce get no protection WHATEVER from state run deposit insurance systems or bank bail outs. I.e. the most genuine free market set up is (shock horror) a full reserve banking system where those who fund loans carry all relevant risks.


Do depositors fund bank loans?

Some readers may object to the above paragraphs by claiming they  get too near to saying depositors fund bank loans and by citing a view that has become fashionable of late, namely that depositors do not fund loans.  I actually dealt with that point on this blog recently here.



Friday, 11 June 2021

Whoopee: New Economics Foundation will research a problem solved long ago.

 



 

Details are in an article on the Brave New Europe site entitled  “We don’t need cuts to pay back pandemic debt.” The author is NEF researcher Dominick Caddick.

One of the central claims in the article is that a rise in interest rates would not matter for government finances because the Bank of England can always buy up debt and pay less interest to the resulting holders of reserves at the BoE, or indeed pay them no interest at all. See the two paras starting “In addition a side effect….”  

Thus, so the article claims, “So even if interest rates were to rise, there would be many options for the Bank to make it more manageable (a subject of future NEF research).”

Well simply saying there are many options does not tell us exactly what government and central bank (henceforth “the state”) need to do given a rise in interest rates. And the fact that the NEF is apparently going to “research” this topic indicates that Caddick doesn’t know what to do for the best in different circumstances. But never mind: the solution was worked out long ago on this blog and by MMTers and others. I’ll assume first that public spending as a proportion of GDP is to remain constant. The solution is thus.

First possible scenario is that continued significant stimulus is needed. In that scenario the liklihood is that all the state needs to do is create money and pay off debt as it matures. The fact that interest rates have risen indicates a reduced willingness on the part of creditors to hold large amounts of base money without being offered a reward in the form of an elevated rate of interest for doing so. And that by definition means those creditors if not offered that reward will tend to try to spend away what they regard as their excess stock of cash / base money / reserves, and that equals a rise in demand, which is exactly what is needed. So no problem there. That attempt to spend away is sometimes referred to as “the hot potato effect”. (Any readers wishing to claim that only commercial banks hold reserves, please see appendix below.)

A second possibility is that little or no stimulus is needed. In that case, obviously the latter rise in demand is a problem.  So what to do?

Well obviously if no extra demand is needed then the latter “spend away” is a problem. But like all instances of excess demand, that can be dealt with via cutting the deficit (i.e. raising taxes and/or cutting public spending).

But note the sole effect, or at least intended effect, of that cut in the deficit, is the damp down that excess demand. Ergo there ought to be no effect on GDP or living standards.

Problem solved.

As for where there’s a rise in the proportion of GDP going to the public sector, that is easily achieved simply by raising taxes and public spending by about the same amount.

Examples of articles were I dealt with the above points several years ago include an article at the MPRA site entitled “Consolidation causes little austerity” and also this article on this blog.

________


Appendix. Do only commercial banks hold reserves?

It might seem that way, but actually the claim that only commercial banks hold reserves is misleading for the following reasons.

Governments and central banks create base money and spend it into the economy when stimulus is needed, something they’ve done on an astronomic scale over the last ten years. Recipients of that money bank it, and relevant banks credit the accounts of those recipients and then lodge the money at the central bank, where such money is referred to as “reserves”.
 
But note that the latter “recipients” have control of that money. That is, if I draw a cheque on my account at Barclays and pay someone who banks at Lloyds, Barclays will have to transfer reserves to Lloyds (and of course the person who banks at Lloyds sees their account credited by Lloyds). So even though I don’t have an account at the BoE, it’s very much “little old me” who in in control of my little stock of reserves.

Put another way, I control my little tranche of reserves at the BoE: it’s just that my commercial bank acts as my agent when I deal with the BoE.

Of course I can also go to an ATM and demand that £X of my reserves are turned into actual physical cash. When I do that, Barclay’s stock of reserves at the BoE will fall by £X. There again, I am very much in control.



Wednesday, 9 June 2021

The UK government’s valiant attempts to hush up statistics on crime and race.

 

Just in case you’re unaware of the above “attempts”, this is the sort of thing I mean.

Anyway, I thought I’d see what I could find on the subject of knife crime and race. There’s plenty of statistics out there, but (surprise surprise) a lack of anything on the extent to which different races are responsible for knife crime.

Anyway far as I can see, a black in London is just over SEVEN times more likely to commit a knife crime than a white. In contrast, the liklihood of an Asian doing a knife crime is only slightly higher than for a white: about 20% more. And that’s about what any normal person (i.e. not a Guardian reader) would expect.

Note that the only figures I could find for knife crime committed by different races after an hour of searching on Google were from a freedom of information request: i.e. the information had to be forced out of the authorities (big surprise). Plus those figures are unsatisfactory in that they give the number of people “proceeded against” not the number convicted. But given the authorities’ determination to hush up the figures, I offer no apologies for producing less than perfect figures.

I got the figures for the racial make up of London’s population from here.

As for the figures on knife crime, I got those from here. I took the latest figures, i.e. the figures for 2018.

This all very much ties up with figures from the US: in particular, it seems from this source that blacks are over a hundred times more likely to attack Asians than Asians are to attack blacks.

If you’re as dumb as a leftie journalist you won’t of course understand the reason for the above “hushing up”, so I’ll explain. The above figures do not “fit the narrative”. That is they do not fit the narrative coming from the left, and indeed from the political centre ground to some extent, that multiculturalism is a boon.

Therefor in line with the intellectual dishonesty that is the norm on the political left, the figures must be hushed up.

The political left would gain millions of votes from the political right if the left abandoned its loonier aspects: wokeism, political correctness, the loony left and intellectual dishonesty in the form of hushing up statistics.  




Monday, 7 June 2021

Richard Murphy claims banks do not need deposits before lending.

 
 


 

That’s in an article of his entitled “Banks do not need any deposits to make loans.”

I’ve actually run through this question as how reliant banks are on deposits before on this blog. But no harm in briefly running thru it again.

The problem with Murphy’s article is not that it is totally wrong, but that there are important ifs and buts which he ignores, and as follows.

First, he is not clear on whether he is referring to INDIVIDUAL banks or commercial banks as a whole. There’s a big difference. But I’ll start by assuming he means individual banks.

It is perfectly true that a bank under the existing “fractional reserve” system can make a LIMITED NUMBER of loans without getting money in from depositors (or for that matter, bond holders or shareholders). But a bank that does that on any significant scale will run short of reserves (i.e. base money) and thus has to borrow reserves from the central bank or other commercial banks.

It runs out of reserves because when the home made money which the bank gives to borrowers is spent, most of it is deposited at other banks, which in turn will want reserves off the original bank. That’s OK as long as those other banks have confidence in the original bank’s ability to settle its debts. But if they don’t, then the original bank is in a Northern Rock position, i.e. up shit creek without a paddle.
 
Another big question mark over the claim that a bank can grant loans without money coming in from depositors (and bond holders and shareholders) is this: why have banks over the decades dished out billions by way of interest and dividends to the latter three type of funder if banks don’t need their money?

In contrast to INDIVIDUAL banks, there is the commercial bank sector as a whole. That sector has greater freedom to expand its lending than an individual bank does because assuming all banks expand their lending by about the same amount, money created and loaned out by one bank ends up as a deposit at another. Thus no individual bank runs short of reserves. But there a still SOME constraints even on the bank sector as a whole: e.g. banks have to abide by capital ratio and reserve ratio rules, so to that extent they have to get money in from shareholders. (Those “ratio” rules vary from one jurisdiction to another of course.)

Murphy is also wrong to say in his article that according to this Bank of England article “Loans are quite emphatically not the recycling of depositors' money: all loans are made from newly created money.” Actually that BoE article says in its second sentence that commercial banks do two things: first create money (as Murphy says) and second, intermediate between lenders and borrowers, i.e. in effect, lend out depositors’ money.

 

Positive Money.

It is also relevant to note that Murphy gives pride of place on this issue to the Bank of England when in fact Positive Money was making a song and dance about the fact that commercial banks create money several years before the BoE article. In fact a bunch of Positive Money supporters in the North East of England (of which I’m a member) had a special celebration in a pub where we consumed a bottle of champagne when the BoE article was published.  That was to celebrate the BoE tumbling to what we’d been saying for some time.

But that’s not to say that the better economics text books long before Positive Money was founded were unaware that commercial banks create money: they certainly were aware of that fact. Some of those text books are on my bookshelves.

As to why Murphy did not give credit to Positive Money, that’s no doubt because he is no friend of PM: see his article entitled “Why Positive Money is wrong.”

And finally, and on the plus side, it’s good to see Richard Murphy putting a lot of effort into spreading MMT ideas.



Thursday, 3 June 2021

Are ordinary depositors smarter than bank regulators?

 
One of the most common criticisms of full reserve banking is that it would mean higher interest rates. And on the face of it, that would certainly seem to be the case because when switching from fractional to full reserve, a significant proportion of the funding for loans ceases to come from deposits, and instead comes from equity (or what amounts to equity, e.g. stakes in mutual funds held by those who want their money to be loaned out).

Now it might seem that equity holders will charge more for their services than depositors because equity holders carry a risk. But a big flaw in that argument is that risk is far from absent from “deposit funded fractional reserve banks”: it’s just that the risk is carried by the deposit insurance system, which of course charges banks for that insurance, with relevant costs being passed on to borrowers. And assuming that system and the latter equity holders both estimate the risk correctly, then they’ll charge the same! Ergo there should be no difference when it comes to the cost of loans as between full and fractional reserve!

Of course it’s possible banks recoup the latter costs by cutting the interest they pay to depositors, but the effect there is much the same: people will then have a reduced incentive to place deposits at banks with a view to earning interest, ergo loans from banks will be more difficult to obtain or the cost of loans will rise.

The only possible escape from that argument for fractional reserve enthusiasts is to claim that depositors in a full reserve system OVER ESTIMATE the risks, thus (so they might argue) it might make sense for government in its wisdom to step in and set up a system where risks are more accurately gauged.

But there’s a big problem with the latter argument, namely that in 2007/8 we had a major bank crises as a result of which a good ten million people worldwide lost their jobs, tens of thousands were thrown out of their homes, and which was followed by a ten year long recession. Thus the idea that “government in its wisdom” (i.e. bank regulators) are able to estimate risks accurately is obvious nonsense.

And any idea that bank regulators have now got it right is doubtful given that the chairman of the main UK investigation into banking in the wake of the 2007/8 crisis, Sir John Vickers said that bank regulation is still nowhere near good enough. (See his Daily Express article entitled “Storm is Coming”)

The conclusion is that far from bank regulators having a better idea as to what the risks involved in fractional reserve are than depositors, it’s depositors who are the more clued up. Or at the very least, the idea that governments / bank regulator are more clued up than depositors looks doubtful.

And that in turn casts doubt on the idea that depositors overestimate the risks involved in fractional reserve. And that in turn is a big flaw in the idea that interest rates would be higher under full reserve.

Q.E.D.
 

Wednesday, 2 June 2021

A poor criticism of MMT by Alexander William Salter.



 

Alexander Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University. In an article entitled “There’s nothing modern about MMT”, his central claim is that MMT won’t work if there is ineffective control of money creation. Well that’s pretty obvious!

But the flaw in that idea is that stimulus has actually been effected over the last ten years or so by organising an astronomic and unprecedented money supply increase (base money in particular), yet serious inflation is nowhere to be seen. I.e. stimulus has been implemented very much as prescribed by MMT, yet control of the money supply increase has been well under control. Ergo effective control cannot be all that difficult.

It is true that MMTers do not go into nearly enough detail on exactly how control should be organised, but that’s not much a problem because numerous other organisations and economists (including one former Fed chairman and one former vice chairman) have also advocated implementing stimulus via money creation and they have in fact set out “control” mechanisms.

The favourite control mechanism advocated by the latter economists is simply to have some sort of independent committee of economists, possibly at the central bank, decide how much money to create. For one organisation that advocates that, see p.10 here.

Re senior Fed people, Bernanke put in a good word for that sort of system. See para starting “A possible arrangement….” in his Fortune article “Here’s How Ben Bernanke’s Helicopter Money Plan Might Work.”

Plus Stanley Fischer, former vice chairman of the Fed, and co-authors supported that sort of system. See their article “Dealing with the next downturn” published by “The European Money and Finance Forum”.

_________


P.S. (4th June 2021).    Having said above that MMT is a bit vague on exactly who decides the size of the deficit, Stephanie Kelton in her book “The Deficit Myth” does actually say that a committee of economists in the form of the Congressional Budget Office should take that decision. See just under the heading “Guardrails for Discretionary Fiscal Adjustments”, Ch8. Thus Alexander Salter’s criticisms are even weaker than I suggested when writing the above paragraphs. 





Monday, 31 May 2021

Fractional reserve banks create money / liquidity?



 

Douglas Diamond, Philip Dybvig and Raghuram Rajan have claimed over the years that while fractional reserve banking gives rise to bank fragility and bank failures (not to mention bank crises like the 2007/8 one which lead to tens of millions losing their jobs worldwide) there is at least the compensating advantage that fractional reserve creates money / liquidity. See abstract of their NBER working paper No 7430.

Unfortunately there’s a flaw in that argument which is that governments and central banks can create any amount of money any time simply by pressing buttons on computer keyboards and all without the above attendant risk of bank crises and tens of millions being thrown out of work! Indeed a system where government and central bank are pretty much the only money creators is what full reserve banking consists of. Thus it’s a bit debatable as to whether money / liquidity creation by fractional reserve really counts as a merit in fractional reserve.

Isn't that a bit like arguing that while the injuries that result from drunk driving involve serious costs, drunk driving does at least have the merit of keeping medics employed?

To repeat, the above three authors are not any old three authors. Rajan is former governor of India’s central bank and those three have been cited well over two thousand times in the literature. (For confirmation of that two thousand figure, see top centre right of this version of an article of theirs entitled “Bank runs, deposit insurance and liquidity”.

Of course, that is not to say that under full reserve there would be a total absence of “boom and bust”. But certainly the highly risky “borrow short and lend long” policy which is the basis of fractional reserve greatly exacerbates booms and busts. (Incidentally “borrow short and lend long” is often referred to in economics as “maturity transformation”, but I’ll stick with the former phrase here.)

But there is another weakness in the idea that money creation is a saving grace of fractional reserve, which is as follows. It is actually quite unnecessary to deliberately or officially adopt full reserve banking if the extent of borrow short and lend long is curbed. That is, the benefits of full reserve will appear AUTOMATICALLY by simple reason of the latter irresponsible aspect of fractional reserve being curbed or banned. Reasons are as follows.

Regardless of what bank system is in operation, people and firms will try to obtain the mix of assets they want, liquid and illiquid. E.g. if people do not have the stock of money they want, they will save so as to acquire that stock. That will cause Keynsian “paradox of thrift” unemployment, thus central bank and government will have to create and spend extra base money into the economy (incidentally, exactly what central banks and governments have done big time in recent years).

Conversely, if people and firms think they have excess liquidity, they’ll try to spend away that excess (e.g. on larger houses) and that will tend to induce government and central bank to withdraw money / liquidity from the private sector so as to curb the demand results from the latter “spend away”.

Ergo, if borrow short and lend long is curbed or banned, there will ultimately be no effect on the private sector’s stock of money / liquidity. Thus the claim by the above three authors that money creation is merit of fractional reserve banking is a bit of a myth: if the latter money creation characteristic were nowhere near as effective as it actually is, that wouldn’t make a scrap of difference, because governments and central banks would automatically be forced to step in the do more of their own money creation – and all without the attendant risk of bank crises and tens of millions being thrown out of work!

Indeed, we have actually made significant moves in the direction of full reserve over the last decade, for the following reasons.

First, the US mutual fund industry has in effect switched to full reserve: that is, funds which invest in anything other than US govt debt are now barred from telling saver /  depositors that their money is safe, i.e. that they won’t “break the buck”.

Second, governments and central banks have, as mentioned above, been forced over the last decade to greatly expand the stock of base money in the hands of the private sector.

Third, Central Bank Digital Currency is being activity considered by several central banks and the Chinese central bank has actually put CBDC into effect on a limited or trial basis. Now if central banks offer totally safe accounts to everyone, the question then arises as to why taxpayers should have to stand behind accounts at PRIVATE banks. Well there isn't much point! And that arrangement, i.e. CBDC plus abandoning taxpayer funded support for private banks equals full reserve banking. 

__________


PS (1st June 2021).   I’ve just noticed that the above three authors do actually give brief consideration to full reserve banking (aka narrow banking), i.e. a system where the state is the only issuer of state backed money (unlike fractional reserve, where money issued by commercial banks is also state backed (via deposit insurance and/or bank bailouts)). Thus I’ll do an article here asap dealing with their objections to narrow banking.

But I’ll deal briefly with just four of their objections right now. Diamond and Rajan say in their NBER Working Paper 7430 that “Our model suggests that such legislation (i.e. narrow bank legislation) would kill bank liquidity creation, and result in less credit being available to borrowers.)

Well first, it’s pretty obvious that narrow banking “kills bank liquidity creation”! That’s the whole point of narrow banking! I.e. it is precisely that liquidity creation (as explained above) that brings bank fragility and bank crises, thus we are better off without that form of liquidity creation assuming there is an alternative and less dangerous form of liquidity creation, which (as explained above) there is.

Second, if narrow banking did result in “less credit being available to borrowers” what of it – as long as demand remains high enough to bring full employment? Numerous economists and others claim there is too much debt, thus if an economy is less reliant on debt based economic activity and more reliant on non debt based activity, it is far from clear what would be wrong with that.

Third, Diamond and Dybvig in their 1986 paper “Banking Theory, Deposit Insurance, and Bank Regulation” claim that “…it will be impossible to control the institutions that will enter in the vacuum left when banks can no longer create liquidity.”

Well that’s a bit like saying it’s a waste of time passing laws against bank robbery because “it will be impossible to control” the new assortment of bank robbers who replace bank robbers put out of business by anti bank robber legislation.

In other words, legislation aimed at stopping all large and medium size banks engaging in the fraudulent “borrow short and lend long” activity would be easy to implement. Mutual funds in the US are already barred from that activity. Of course a few small banks and similar institutions might try to evade the rules, but it makes not a blind scrap of difference what rules are in place, there will always be some naughty individuals who try to evade the rules.

Fourth, Diamond and Dybvig describe narrow banking as a "a dangerous proposal". Well now that's a bit of a joke given that the existing (fractional reserve) bank system caused a major crisis in 2007/8 which resulted in tends of millons worldwide being thrown out of work and a ten year long recession!

To summarise, the above three author’s objections to narrow / full reserve / 100% reserve banking look about as feeble as the objection which former governor of the Bank of England, Mervyn King raised, namely that banks would object to their activities being restricted, which (as I point out here) is a bit like saying anti bank robbing legislation is undesirable because bank robbers would object to it.

P.S. 8th June 2021.    Two further fundamental weaknesses in the idea that fractional reserve creates liquidity are as follows. But first, let’s be clear on the definition of the word liquidity.

The Oxford Dictionary of Economics starts its definition of liquidity with, “The property of assets, of being easily turned into money rapidly and at a fairly predictable price.”

Now where one of the above mentioned full reserve mutual funds takes money from saver / investors and lends the money out or invests it, the stakes that those saver / investors have in the firms to which the mutual fund has loaned money are far more liquid that were a saver / investor lends on a peer to peer basis. I.e. if you buy into a mutual fund – any mutual fund – there’s a good chance you’ll be able to turn your investment back into about the same amount of cash that you originally put into the fund. And that constitutes a “fairly predictable price”. Ergo the claim that fractional reserve banking creates liquidity is rather diminished by the fact that full reserve also creates liquidity.

But another weakness in the idea that fractional reserve creates liquidity is as follows. Fractional and full reserve are essentially just two ends of a spectrum: that is, where an entity that lends out money has a high capital ratio, it is ipso facto towards the fractional reserve end of the spectrum. And where it has a low capital ratio, it is towards the full reserve end of the spectrum.

Now as one moves from the full reserve to the fractional reserve end, stakes that depositors have in the entity become more “predicable in price”, while shareholders’ stakes become less so: indeed, shareholders can easily be wiped out given a high ratio. And that raises a rather big question: does moving from the full to fractional end of the spectrum actually create any liquidity at all? Certainly the liquidity creating effect is less spectacular that fractional reserve bank enthusiasts claim.






Sunday, 30 May 2021

BBC says Biden’s spending spree will be paid for by borrowing . . . no tax . . . oh who cares.

 


 

BBC1 TV news on the evening of 29th May said Biden’s spending spree would necessitate a large amount of extra borrowing. But a few minutes later in the same report they said it would be paid for via extra tax. So which is it?

Well if you’re a reporter for a TV channel or newspaper it really doesn’t matter: the important thing if you’re going to ensure you get paid is just to spew out lots of meaningful sounding words. If the words are BS, that doesn’t really matter.

So will the spending spree be paid for by tax or borrowing or good old money printing? Well paying for it all via tax (plus money printing as appropriate) would be make sense. As for paying for most of it via borrowing, that would push up interest rates to an excessive extent, so that’s not a brilliant idea.

In short, there are a range of options here, and we do not yet know exactly which option will be chosen – or forced on the US government.  
 

Thursday, 27 May 2021

How come depositors ever managed to get interest on instant access accounts?

 




Interest is a reward earned by a borrower for performing two functions. One is to abstain from spending a sum of money so that the borrower can spend that money. The second is accepting the risk that the borrower may not repay the loan.

Now where people deposit money at a bank under fractional reserve, they do not abstain from spending any money: the bank lends out depositors’ money while telling depositors their money is still available to said depositors, and indeed it is still available.

Now at this point, some readers may object by citing the currently fashionable idea that banks create money rather than intermediate between lenders and borrowers.

Well the reality is that a bank cannot simply create and lend out money willy nilly without money coming in from depositors, bond holders and shareholders: why else have bank over the decades dished out billions by way of interest and dividends to the latter three funders so as to attract their money? If a bank WERE TO “lend willy nilly”, it would run short of reserves: not a good position to be in for any length of time.

Moreover, as the second sentence of a Bank of England article entitled “Money creation in the modern economy” says, banks BOTH create money and intermediate between lenders and borrowers.

To summarise so far, depositors manage to have their money loaned out WITHOUT abstaining from the freedom to spend such money.

 

Risk.

As regards risk, depositors do not endure any sort of risk because the relevant risk is carried by the deposit insurance system.

So the big question is this: how come depositors with instant access accounts ever managed to earn interest? There is clearly something fishy here.

And as to the idea that instant access accounts currently pay almost no interest, that’s not actually true: interest earned by banks helps defray the cost of administering instant access accounts. Thus those with such accounts, even in today’s low interest rate environment in effect get interest.

 

David Hume.

What I think explains the latter “fishy smell” is a point made by David Hume over two hundred years ago in his essay “Of Money” when he said “It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government.”

In short, politicians are always tempted to pay for public spending via borrowing rather than via tax. Of course it might be argued that public sector INVESTMENTS should be funded by borrowing. But that’s not what happens at the moment. I.e. at the moment government borrowing funds a large amount of CURRENT spending. And that’s a gift to lenders, i.e. the cash rich: it results in a general and artificial rise in interest rates. And that in turn means those borrowing from banks have to pay an artificially high rate of interest – or at least for most of the time since David Hume’s day (and possibly long before that) they have had to.

And if you don’t think David Hume’s point explains why depositors with instant access accounts have for decades managed to earn interest, I’m always happy to listen to alternative explanations for the above “fishy smell”.


Friday, 21 May 2021

Who should create safe money: central banks or commercial banks?

 

 


Governments render a proportion of commercial bank created money safe via deposit insurance and bank bail outs. In contrast, much private / commercially created money is not safe: e.g. deposits over the limit covered by deposit insurance (€100k in the Eurozone) and Bitcoin type money.  But whence the assumption that that safe money should come in the form of commercial bank money rather than central bank created money (often called “base money”)?

One reason for thinking base money is preferable is that commercial banks actually use their freedom to create money in a highly irresponsible way, that is to create and lend out money in a boom, just when stimulus is not needed, and then come a recession, they do the reverse, i.e. reduce or cease lending, or even call in loans: again, exactly what is not needed. That is, commercial banks act in a pro cyclical manner. And that means central banks have to create or destroy money (via QE, interest rate changes etc) that counter that erratic money creation / destruction by commercial banks. So why don't we just abandon commercial bank safe money and have base money as the only form of safe money?

Of course, the fact of banning commercial bank created safe money does not mean an end to commercial banks' pro cyclical behavior as they are still free to create unsafe money. But the latter ban would at least cut down somewhat on pro cyclical behavior. Moreover, safe money is more powerful stuff per dollar than non-safe money: in fact banks don't even trust each others "home made" money - they always settle up with each other using base money.

A second reason for thinking base money is preferable is that having taxpayers back commercial bank created money via deposit insurance and bail outs is a subsidy of commercial banks or at the very least, it makes commercial bank money marginally more attractive, and subsidies are not justified, i. e. they do not maximise GDP unless there are very good social reasons for such subsidies.

But the social aspect of rendering commercial bank money safe can perfectly well catered for via base money. That is, the process of making a given amount of money per person safe (e.g. the €100k in the Eurozone) is clearly socially motivated, rather than motivated by economics: if there was a good economic reason for making ALL MONEY safe, then governments would do that. Indeed, the latter social provision is fully justified: everyone has a right to a very safe method of storing some minimum amount of money. That is a basic human right.

To summarise so far, the arguments for having safe money in the form of commercial bank money look weak.

A possible argument for having safe money in the form of commercial bank money is that that gives commercial banks greater flexibility than in the base money option (where commercial banks, would have to first borrow money before being able to lend it out.)

Unfortunately that’s a poor argument. First, commercial banks do not have complete freedom to create and lend out money willy nilly: they are constrained by capital requirements and reserve requirements, though those constraints vary from one jurisdiction to another.

Second, as is the case at the moment, a commercial bank with a sudden need for more reserves (aka base money) is always free to borrow it from other banks.

Third, it might seem that where commercial banks are free to create and lend out money rather than borrow money before lending it out, that that means they can avoid paying higher interest rates for that money. Unfortunately that argument is questionable (though it is an argument put by Joseph Huber and James Robertson on p.31 of their work “Creating New Money”).

Obviously IN THE FIRST INSTANCE, when a bank creates and lends out money it doesn’t need to pay interest to obtain that money. Unfortunately as soon as that loaned out money is spent, it ends up on sundry bank accounts, and those account holders will want extra interest for holding that money rather than trying to spend it away. Thus the latter “first instance” is very short lived.

Put another way, as soon as that money ends up in “sundry bank accounts” it will tend to be spent away (the “hot potato” effect) which will cause excess demand, which will induce the central bank to raise interest rates. The net result is that it is very debatable as to whether commercial banks’ freedom to create the money they lend out from thin air actually benefits those banks.

Incidentally, I have in the past cited the above Huber & Robertson point with approval: i.e. think I actually made a mistake there.

 

Conclusion.

The conclusion is that advocates of full reserve banking are right: that is, depositors should have the choice of two types of account. First a totally safe account, which is backed 100% by reserves / base money at the central bank. Second, riskier accounts which have the advantage that depositors’ money is loaned out, which earns interest for depositors, but all relevant risks are carried by depositors.

Indeed, those who want their bank to lend out their money are into exactly the same business as those who want their stockbroker or a mutual fund (“unit trust” in the UK) to lend out or invest their money: they are into COMMERCE. And it is not the job of governments to support commerce, absent very clear social reasons for doing so.

Incidentally Huber & Robertson also argue for full reserve; i.e. I am saying they are right but for not quite the right reason.



Saturday, 15 May 2021

The unjustified privileges that banks enjoy.

 
 


People who deposit money at a bank and think they’re entitled to interest are in effect asking their bank to lend out their money, which means they’re into exactly the same activity as those who deposit money at a stock broker, mutual fund, unit trust etc with the same end in view: earning interest or a return. I.e. they are into commerce. Why do those depositors think they’re entitled to taxpayer funded protection against loss (thanks to deposit insurance, bank bail outs etc) when those who deposit money at mutual funds, unit trusts etc are not entitled to such protection? There’s no good reason for that inconsistency. Plus, it is widely accepted that it is not the job of taxpayers to support commerce absent very good social reasons.

Moreover, that inconsistency results in a non level playing field as between banks, stock brokers, mutual funds, pension funds and so on.

It would clearly make sense for depositors who want interest on their money to be treated exactly the same way as those who want interest on their money but place their money at one of the other above mentioned institutions: that is, those wanting a bank to earn interest for them should have to carry loses when losses are made just like they do at the other above mentioned institutions.

As for depositors who simply want to store and transfer money safely (and that’s a basic human right) they are not entitled to interest. And what do you know: that system where there are two types of bank account, risky interest earning accounts and safe non interest earning accounts, which are 100% backed by reserves at the central bank, is essentially what full reserve banking consists of.

Of course the less economically literate politicians and economists object to the latter idea on the grounds that there then appears to be a large amount of money sitting in safe accounts doing nothing. The effect, so they claim, is a cut in lending, a cut in demand and a rise in unemployment. (See section 2.1 of my book “Full Reserve Banking” for some of the economists who have been fooled by the latter “rise in unemployment” sort of argument.)

The first flaw in that idea is that the money sitting in bank accounts is not a form of real wealth in the same way as houses, cars etc are a form of wealth: money in bank accounts nowadays consists of nothing more than numbers. Thus there is no stock of real wealth there which is not being used.

Moreover, the latter numbers, which is all that bank accounts consist of, can be added to at any time, and at zero real cost. That is, a central bank can create and hand out billions to all and sundry simply by pressing buttons on computer keyboards any time. Indeed, central banks have done just that and on an unprecedented scale over the last five years or so, among other things so as to fund QE. The net effect of that money creation and rise in demand is to cut unemployment.

In contrast, when the gold standard was up and running, it might have been possible to argue that money (i.e. gold) sitting in bank vaults doing nothing was a waste of real resources. But those days have long gone.

In short, if full reserve does in fact have an initial unemployment raising effect when it is first introduced, that is easily dealt with by creating more central bank money and spending that into the economy just like we’ve done in recent years. The net result would be a fall in loan based economic activity and a rise in the amount of “non loan based” economic activity. And given the never ending weeping and wailing we get from the great and the good about excessive debts (i.e. an excessive amount of lending), it’s a bit hard to see what’s wrong with that outcome.

Indeed, the do gooders who complain about the reduced amount of lending under full reserve are often exactly the same people who complain about excessive debts.
 

The optimum amount of lending.   

Indeed, the latter paragraphs give rise to a fundamental question, namely: is an optimum or GDP maximising amount of lending and debt likely to occur under full reserve or under the existing bank system, fractional reserve?

Well a system where banks are granted special privileges compared to the treatment given to the other above mentioned and similar organisations (mutual funds etc) is clearly not a GDP maximising set up. It is widely accepted in economics (and this is no more than common sense) that GDP is maximised where there is fair competition  between different firms: i.e. where car manufacturers compete on a level playing field basis, with the same going for chemical firms and every other type of firm and corporation.


Monday, 10 May 2021

Taxpayers support the very characteristic of banks which leads to bank crises and mass unemployment.




Economists tend to be enamoured of the benefits of one of the basic functions of private banks, namely “borrow short and lend long” or “maturity transformation” (MT) as it’s sometimes known. The alleged benefit is that it creates liquidity / money, which is stimulatory.

Unfortunately as Douglas Diamond and Raghuram Rajan say in the abstract of a paper of theirs, and in reference to that liquidity / money creation, “We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these functions.” (NBER Working Paper No. 7430).

Douglas Diamond has been cite thousands of times in economics literature: yes that’s thousands, not hundreds. So he’s presumably some sort of authority on the subject.

Even more ridiculous is the fact that central banks can and do create money / liquidity on a large scale and without the latter risks.

In other words, and to put it more bluntly, MT is the basic explanation for the hundreds of bank failures that have taken place thru history, and the explanation for the 2007/8 bank crisis.

Or to put it even more bluntly, we incur the risk of tens of millions being thrown out of work, tens of thousands being thrown out of their homes and ten year long recessions just to enable private banks to perform a function in a very risky manner which can perfectly well be performed, and is already being performed by central banks without any of the latter risks.

The words stark, raving and bonkers spring to mind.

But (and this may be hard to believe) that’s not the end of the absurdities of our existing banking set up. Another absurdity is that the need for the latter central bank money creation derives to a significant extent from the chaotic nature of private bank money creation: that is, private banks tend to create and lend out more money in a boom: just when extra stimulus is not needed. Then come a recession, they do the opposite, i.e. call in loans and destroy money / liquidity:  again, exactly what is not needed. I.e. private banks act in a “pro cyclical” manner. Thus central banks have to act in a counter cyclical manner so as to deal with the latter chaos.

I’m not objecting here to private money creation where the relevant risks are openly declared. E.g. if I pay someone for something with an IOU scribbled on the back of an envelope (a very poor form of money, of course) the risks are obvious to the person concerned. Moreover, that form of money is unlikely to ever become all that popular because of its obvious drawbacks.

It’s state support for “MT dodgy money” which is wrong – and states (aka taxpayers) do in fact support “MT dodgy money” via deposit insurance and bank bail outs.

Put another way, states create money in two quite different ways. First there is bog standard base money creation by central banks (e.g. to enable them to do QE). Second, they create money in that they support private money creation. And that is a clear case of duplication of effort.

I’m looking forward to hearing a justification for that duplication of effort from supporters of the existing bank system. But I don’t seriously expect to hear anything intelligent or coherent.

There is a more detailed version of the above article (about four times the length). If it seems to take a long time to down load, don't be put off: it takes about 30 seconds with my PC and internet connection.








Sunday, 9 May 2021

Artificial interest rate adjustments do not make sense.

 


 

 

Abstract.  There is no evidence that recessions are caused by a failure of interest rates to fall, thus dealing with recessions via artificial cuts in interest rates makes as much sense as dealing with the failure of a car to accelerate properly because of a faulty carburettor by strapping a jet engine onto the roof of the car, rather than by fixing the carburettor.

___________

 It is widely accepted in economics that interest rate cuts are a good way of dealing with recessions, and conversely that an interest rate hike is a good way of damping down excess demand and inflation.

Only slight problem there is that those interest rate adjustments (engineered by central banks) are entirely ARTIFICIAL, and it is widely accepted in economics that while changes to the price of anything brought about by market forces are normally justified, artificial adjustments are not.

Worse still, there is no evidence that recessions are caused by market failure in the sense of interest rates failing to fall, come a recession. Put another way, the market in loans is very much a free market: there are tens of thousands of potential borrowers out there and hundreds of banks and similar, all offering loans. That’s the sort of set up where it is difficult to set up monopolies and cartels: i.e. it’s a set up where the free market works.

To summarise, to implement an artificial cut in interest rates so as to deal with a recession, when the cause of the recession is quite clearly not a failure of interest rates to fall is like dealing with the failure of a car to accelerate properly due to a faulty carburettor by strapping a jet engine to the roof of the car rather than deal with the faulty carburettor.
 

So what is the cause of recessions?

Well it’s pretty obvious: it’s a failure to spend, or if you like, inadequate aggregate demand, maybe caused by lack of consumer or business confidence. Ergo the solution is  . . . . wait for it . . . . more spending: public spending and or private sector spending. And that can be brought about by a larger deficit, i.e. by fiscal measures rather than interest rate adjustments.

Of course, supporters of interest rate adjustments claim that fiscal changes cannot be brought about quickly. Well the first answer to that is that interest rate changes do not have their full effect for a year according to a Bank of England study. Secondly, the UK implemented two changes to the VAT sales tax very quickly in the wake of the 2007/8 bank crisis.

And how difficult would it be for the UK government to tell every hospital, doctors’ surgery, school, university and local authority in the country that they can up their spending by X% over the next 12 months, and that a cheque will be in the post? I mean would it really take a genius to do that?



Saturday, 8 May 2021

Getting simple ideas across is a herculean task, as MMTers have discovered.


 

Getting simple ideas into the head of even relatively intelligent folk is like getting through a thick concrete wall with a jack hammer. A classic example is the never ending claims that MMT would result in excessive deficits and excess inflation. A recent example of that claim appears in an Adam Smith Institute article written by Tim Worstall, who I actually have plenty of respect for. But like I said, getting simple ideas across, is a herculean task. (Article title: “It Would Appear that Larry Summers was Right”).

The answer to the above “excessive deficit” claim is (pretty obviously) that it all depends on who is in charge of the printing press (as I pointed out in a comment after the article). And MMTers do not do themselves any favours by being thoroughly vague on that question.

Anyway, if POLITICIANS are in charge of the printing press, then the dangers are obvious. On the other hand if the size of the deficit is decided by some sort of independent committee of economists (maybe at the central bank and maybe not) then the dangers are much less.

And incidentally, the fact that such a committee decides the SIZE OF the deficit does not, repeat not, repeat not mean the NATURE OF the deficit needs to be decided by such a committee: i.e. questions like whether more tax or more public spending are needed is clearly  a POLITICAL question: i.e. it’s a question which should always remain with politicians. Same goes for the decison as to what extra public spending goes on: education, health, etc.

The latter method of separating responsibility for the SIZE of a deficit and the NATURE of a deficit is a truly BRILLIANT and simple idea. Unfortunately (to repeat) getting it into the heads of even the relatively intelligent is a herculean task: I’ve found it necessary to make that “separation” point at least a hundred times in sundry articles. Moreover, a significant proportion of academia has no respect for original and simple ideas: what many academics really like is the opposite: complicated and irrelevant ideas, because that’s what keeps them employed.

Far as I know, credit for the latter original and simple idea must go the Ben Dyson (founder of Positive Money), Josh Ryan-Collins and a few others.  

Another example of a supposedly intelligent individual who appears to be incapable of understanding the above “separation” point is AnnPettifor. In contrast, one former chairman of the Fed and one former vice chairman have obviously grasped the idea (Ben Bernanke and Stanley Fisher).



 

 

Wednesday, 5 May 2021

Yawn provoking waffle from the NIESR on fiscal policy.

 





The UK’s National Institute of Economic and Social Research has just published a very long report on fiscal policy. It’s entitled “Designing a New Fiscal Framework” and it’s around 40,000 words.

If Sir Humphrey Appleby deliberately tried to produce pages of meaningful sounding but essentially meaningless waffle, he couldn’t have done better. The contrast to the simple, clear ideas on fiscal policy advocated by MMT is stark, as I’ll show below.

The NIESR’S basic idea if it can be summarised in a sentence is that existing government committees should do more work in relation to fiscal policy and more committees should be set up: music to the ears of Sir Humphrey. To be exact the NIESR’S main conclusions or suggestions come in the form of five so called “building blocks” which are set out in bold and read as follows (p.20 onwards). If you feel yourself nodding off after the first or second, feel free to skip nos 3,4 and 5.

1 The Chancellor should set out a structured timetable for fiscal events and deliver a Budget speech focused on the state of the economy and on the government’s socioeconomic objectives that is more extensively debated and scrutinised by Parliament and by a fiscal council.

2 The OBR, or a separate fiscal council, should publish pre-fiscal event reports with key issues to which the Budget and the Autumn Statement should respond.

3. Given the uncertainty regarding the economic cycles, the Chancellor should provide more guidance as to how fiscal policy would respond if certain risks materialised and the OBR should produce economic forecasts and scenarios to inform government thinking about fundamental fiscal choices in different states of the world.

4. HM Treasury should create a new body of independent experts for ex ante advice and ex post evaluation of the key fiscal choices.

5. Fiscal strategy has to be joined up across the UK and all its constituent parts, with particular attention paid to distributional effects, productivity, well-being and ecological sustainability.

As distinct from the parts of this report written by NIESR staff and in particular by Jagjit Chadhar director of the NIESR, there are several chapters written by outsiders (e.g. Alistair Darling, former UK finance minister). Those chapters are about specific aspects of fiscal policy, and I am not passing comment on those here: though some of them seem interesting.
 

 

MMT.

In contrast, the basic principles underlying fiscal and monetary policy as advocated by MMT (or at least my interpretation of them) are as follows. But be warned, this actually contains some INTERESTING ideas. You may die of shock if you’re of a Humphrey Appleby disposition.

1. The deficit needs to be whatever keeps employment as high as is possible without causing inflation to exceed the inflation target.

2. The size of the debt / stock of base money that results from deficits does not matter: all that matters, to repeat, is ensuring that unemployment is as low as is consistent with acceptable inflation.

3. As MMTers have explained over and over, a country which issues its own currency has complete control over the rate of interest it pays on its debt.

4. As to whether the deficit should accumulate as zero interest yielding base money or base money which yields interest (e.g. government debt), there is basically no point in paying interest on base money or in having a national debt, as pointed out by Milton Friedman. Thought that’s not to rule out interest rate hikes in  emergencies (as also pointed out by Milton Friedman).

An obvious possible exception to the latter policy of aiming for zero interest on base money and the debt occurs where such debt funds public investments. However, the government debt in the UK is not specifically allocated to funding public investment at the moment, so for the UK (and indeed some other countries) that point is of no relevance at the moment.  

5. One reason for aiming for a zero rate of interest on the debt is that such interest simply rewards money hoarders, with those interest payments being funded by taxpayers in general, including the less well off.

6. There is not much difference between the latter MMT policy and the policy advocated by Simon Wren-Lewis (former Oxford economics prof). The main difference is that he advocates having the rate of interest on the debt hover between zero and just above zero.






Tuesday, 4 May 2021

 

 


This is Jack Dorsey, founder of Twitter. Jack Dorsey backs wife beating, female genital mutilation, killing authors and cartoonists, mistreating apostates, abducting school children in Nigeria, trashing Buddha statues, Halal animal cruelty, hate preachers, beheading etc etc.

Or to be more accurate, if you criticise Islam for the above barbaric practices on Twitter, you’re likely to be banned. I got a one week ban for making the incontrovertibly true statement that Muslims were responsible for 9/11, and have now been banned permanently. Of course the latter depraved "pro barbarity" views are hardly unusual in woke circles.

Perhaps even more hilarious / depraved (take your pick) is that the super intelligent algorithm that Facebook uses to weed out images that involve nudity and sex is incapable of distinguishing between people who have relatively few clothes on and people who are actually in the nude and engaged in sex.

I got a one week ban for a cartoon which showed four men dressed just in bathing trunks and quite clearly not engaged in sex. And Russian Television got a ban for showing scantily clad and emaciated Jews in Nazi concentration camps on the grounds that the image contravened FB’s “community standards” on nudity and sex.

The very idea that starving people in concentration camps had the energy for sex is depraved.


 

Wednesday, 21 April 2021

George Selgin tries to argue that fractional reserve banking is not fraudulent.


 



That’s in his work entitled “Should we let Banks Create Money?” published by the Independent Review.

The basic reason for claiming the existing bank system (fractional reserve) is fraudulent, as Selgin rightly says, is that where bank depositors are not covered by deposit insurance (DI), any claim by or suggestion made by a bank to the effect that deposits are safe is fraud and for the simple reason that deposits are quite clearly NOT SAFE: witness the hundreds of bank failures thru history. Depositors were not covered by DI prior to the introduction of DI (early 1930s in the US). And today, deposits over some stipulated amount (100k Euros in the EU) are not covered.

In the case of deposits over and above the latter stipulated amount, it is probably fair to say that no fraud is involved because the fact that those excess amounts are not covered by DI is well advertised. But the situation prior to the introduction of DI is another matter.

In the case of the pre 1930s set up, Selgin’s answer to the above fraud charge that is that depositors have always been aware that their money is not entirely safe for the simple reason that depositors normally get interest, at least on term accounts, if not on current accounts (“checking accounts” in US parlance). I.e. how, Selgin asks, do depositors think banks are able to pay interest on deposits if they don’t lend out money at the same time as accepting deposits? And as everyone knows, loaned out money is never entirely safe.

Well the simple answer to that is that a significant proportion of depositors are just not sophisticated enough to ask the latter question. Thus to a significant extent, pre-1930s deposits were a confidence trick aimed at fooling the innocent.

Moreover, if depositors, as Selgin claims, regard their deposits as being much like equity, i.e. you can lose half your money anytime, then why was deposit insurance ever introduced?

The answer is simple: the general view was that a significant proportion of depositors though their deposits were in fact safe and/or that deposits OUGHT TO be safe. By “general view” I mean the view of politicians and millions of depositors.

Incidentally, in addition to the pre 1930s set up, there is always the possibility of that pre 1930s set up being re-introduced (i.e. the possibility of DI being scrapped) since numerous economists are not happy with DI (including, Selgin himself - see here. Thus the discussion here of the fraudulent element in fractional reserve while of obvious relevance to the pre-1930s set up, is also of potential relevance today or in the near future.)

 

Non-bank lenders.

Another point which supports the claim that a significant degree of deception or fraud is involved in fractional reserve has to do with non-bank lenders like mutual funds, unit trusts and pension funds. The latter three types of organisations (and doubtless some others) are forced by law (at least in the UK) to make it very clear in bold print and those placing money with those organisations can lose as well as make money.
 
Now if banks are to compete on a level playing field basis with other lending organisations like the above mentioned three, then the wording in the publicity put out by all those organisation should be similar. But any idea that banks prior to the introduction of DI advertised the LACK OF SAFETY of depositors’ money is a joke. No bank would attract deposits if it advertised the lack of safety of its deposits given that other banks kept quiet about the lack of safety of their deposits.

This is clearly a very grey and murky area. It is thus an area where banks will try to get away with any deception that they can.  While Selgin is clearly right to say that sophisticated depositors are not defrauded, that is clearly not the case for less sophisticated depositors.

To summarise, fractional reserve banking, prior to the introduction of DI quite clearly involved an element of fraud, though one can argue forever over the exactly extent of the fraud.

And as for the idea that the fraudulent element in fractional reserve is somehow OK once DI is introduced, that is a very questionable argument. If government were to legalise theft while introducing a government run insurance scheme for everyone which compensated them when anything was stolen from them, that would not be a brilliant argument for legalising theft.