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.

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