Omarova is Biden's choice for “Comptroller of the Currency”, which more or less equals chief bank regulator in plain English far as I can see. She is relatively pro strict bank regulation, while Selgin has pro free market views on banks which make the GOP look almost socialist. A clash of views is almost inevitable.
The paragraphs below deal with Selgin's criticisms.
Selgin's main mistake, which actually renders most of his other criticisms irrelevant starts in his second paragraph. He says, “According to your own description of it, your plan would ideally see public Fed Accounts "fully replace—rather than uneasily coexist with—private bank deposits." Consequently it would "likely cause a massive contraction in bank lending" to businesses and individuals. Most if not all of the lending now done by banks would instead be done by the Fed, either directly or through Fed purchases of securities issued by a National Investment Authority.”
Well the first answer to that is that under the Omarova plan, which has close similarities to full reserve banking, there'd be nothing to stop banks funding loans via equity rather than deposits. Indeed billions of dollars of lending is already done that way in that mutual funds attract money from savers and lend out the money concerned – mainly to cities and corporations that issue bonds.
Moreover, there is not a big difference between the rate of interest charged on loans funded via deposits and loans funded via equity: witness the wide variation in the debt/equity ratio of different corporations: corporate treasurers evidently cannot see a big difference in the cost of funding a corporation via equity and in contrast via loans to a corporation which will ostensibly be paid back at some stage, dollar for dollar – that's bonds.
Moreover, it might seem that stakes in mutual funds which specialise in lending would be seen as a poor deal by former depositors: reason being that on the face of it, a deposit earns the depositor a return, with the depositor undertaking no risk in order to earn that return, whereas stakes in mutual funds involve risk.
Well the answer to that is that depositors under the existing system pay a price for being excused risk: their banks are charged for deposit insuance, a cost for banks which is inevitably passed on to depositors in the form of less interest. In contrast, those buying stakes in mutual funds actually CARRY risk themselves, and are so to speak rewarded for carrying that risk. Thus any idea that former depositors would refuse en masse to buy stakes in mutual funds as an alternative to depositors is nonsense.
Next, where a depositors expect a bank to lend on depositors' money, those depositors are quite clearly into COMMERCE – just as much as where they deposit money with a stock broker, pension fund or mutual fund for the same purpose.
Now in the case of banks, what on Earth is the state doing assisting that commercial activity in any way? That's state assistance for commerce, which is distortionary and which reduces GDP.
Thus if Selgin's complaints about banks' not being able to lend so much is valid, then my answer is: so s*dding what? i.e. they are already lending too much and their activities should be curtailed. (According to Mervyn King's work “Bagehot to Basel”, the UK's bank industry expanded a whapping TEN FOLD relative to GdP in the fifty years prior to his work. See under his heading “The practice of banking” near the start.
In short, there'd be no need whatever for the Fed to lend to private sector borrowers, as Selgin claims.
Re the above mentioned points that Selgin makes which are rendered irrelevant by his “Boo hoo – there'd be less bank lending”, I have not explained exactly WHY those subsequent points are rendered irrelevant: I have simply ignored them, as I assume readers (at least the clued up ones) can work out for themselves the REASONS for the latter irrelevance themselves.
Do banks create money or intermediate between lenders and borrowers?
Re Selgin's fifth para (which starts "The public's scarce savings?”, I actually agree with Selgin here. He makes the point that banks as well as creating money out of thin air and lending it out, ALSO act as intermediaries between savers and borrowers.
There has, as he rightly said been some argument over this point in recent years, with some taking the “money creation” point too far and claiming that banks do not intermediation at all.
As a 2014 Bank of England article intimates in its first sentence, private banks both create money and intermediate between lenders and borrowers.
Douglass and Diamond.
Next, Selgin criticises the D&D claim that fractional reserve banking is inherently risky because it involves funding a bank largely or to a significant extent via deposits.
That's in Selgin's para starting “It's true that many people....”.
The risk there is that a deposit is a promise by a bank to repay a depositor's money dollar for dollar, AT THE SAME TIME AS lending out that money. The blindingly obvious problem there is that every bank at some stage in its history makes a series of silly loans, at which point it plain simple WONT BE ABLE to repay depositors!!! Think Spanish and Irish bank during the bank crisis which started in 2007, for example.
Indeed, it is plain simple ILLEGAL for several types of organisation, both in the US and UK and doubtless elsewhere to engage in the latter confidence trick: e.g. mutual funds in the US and their equivalent in the UK, Unit Trusts are not allowed to tell savers their money is safe if in fact it is being loaned out (to anyone except government).
Why the blatant inconsistency? Well I suggest the explanation is simple: banks have mastered the art of bribing, cajoling and perverting politicans to an extent that other organisations have not. As Senator Dick Durbin said “And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own place."
And finally, the above criticism of Selgin's ideas are not to suggest Omarova's are totally correct: I have not been thru them in detail yet. But one thing is certain: Selgin needs to do a serious re-think of his ideas in this area.
Another conclusion is that senior economists are still as clueless on banks as they always have been. In the 19th century there was a popular joke which was that only two people in the country understood the bank system: a Rothschild and a junior clerk working at the Bank of England.