Prosecuting banksters.

Eric Holder, US Attorney General didn’t want to prosecute bankster / fraudsters because of the effect he thought it might have on the economy.

Er . . .  it’s not the job of a legal official to pass judgement on the economy: it’s their job to prosecute criminals, amongst other things.

As the “effect on the economy” argument, clamping down on illegal drug dealing or the illegal manufacture and sale of firearms damages the economy, all else equal: it results in less employment in the drug and firearm trade. But that can be made good by standard stimulatory measures. Net result: no effect on the economy. 

Next thing someone will have to explain to the Attorney General how to clean his teeth after breakfast in the morning.

Positive Money’s Money Creation Committee solves a dilemma.

As Tejvan Pettinger righly points out in an article entitled “Budget Deficit Targets”, the main advantage of budget deficit reduction targets is that they help stop politicians behaving irresponsibly. (He lists various forms of irresponsibility under his heading “Benefits of budget deficit targets”). And for the benefit of any readers not sure what types of irresponsibility I’m referring to, a classic one is borrowing so as to fund public spending rather than collecting taxes to fund such expenditure. The latter wheeze (as David Hume pointed out over 200 years ago) helps incumbent politicians ingratiate themselves with voters.

But as Pettinger also correctly points out, the main disadvantage of strict targets is that they can result in tax increases / spending cuts at a time that may not appropriate for the economy. A dilemma.

Well there’s a simple solution to that dilemma: take all decisions on stimulus out of the hands of politicians while leaving LEGITIMATE POLITICAL decisions in the hands of the electorate and politicians – that’s “political decisions” like what proportion of GDP should be allocated to public spending and how that should be split between education, defence, etc.

And that’s exactly what Positive Money’s Money Creation Committee achieves.

Moreover, taking all decisions on stimulus out of the hands of politicians actually just enhances or extends the advantages that are gained from giving the central bank a measure of independence (which amounts to removing from politicians some of their say over stimulus). That is, bond markets always lend at a lower rate to a country with a relatively independent central bank than to one with a central bank substantially under the control of politicians.

When the Bank of England gained independence in 1997, there was an instant fall in the rate at which the UK could borrow, plus the pound immediately rose relative to the Dollar and Euro which meant an instant standard of living increase for Brits.

Cutting the deficit is an absurd objective.

If aggregate demand declines for whatever reason (e.g. less spending by households or a drop in demand for exports) then the deficit should be increased else unemployment rises. And excess unemployment makes no sense. Ergo the deficit needs to be varied, and indeed will occasionally turn into a surplus given higher than usual consumer and business confidence.

Thus to have a target for deficit reduction in a given number of years’ time is absurd because no one knows what households will do or what will happen to exports and other variables in the future.

So what objectives DO MAKE sense?

Well inflation is already accepted as an objective, and quite right. There are arguments for zero inflation, but 2% is a more widely accepted target. If inflation is above target, the deficit needs to be cut (unless the inflation is cost push). If inflation is below target, the deficit needs to rise. But note that the deficit  ITSELF is not an objective in the latter scenario.

Interest on the debt.

Another valid target is interest paid on the debt. As numerous MMTers have pointed out a government that issues its own currency can pay any rate of interest on its debt it likes. An argument for a zero real or “zero after adjustment for inflation” rate is that the relevant country at that rate can get interest free loans from foreigners. An argument for a NEGATIVE real rate is that the relevant country or government can actually PROFIT FROM its creditors. In the latter scenario, the relevant country is simply acting as a bank: supplying safe and fairly liquid assets to those who want same and charging for the service. That makes sense.

It can also be well argued that the NOMINAL interest rate on the debt should be permanently held at zero. In effect that means the only liability the government / central bank machine issues is base money: base money and so called debt that yields no interest are the same thing. E.g. $100 bills yield no interest. Milton Friedman argued the case for a permanent zero rate, I think rightly.

However, AIMING FOR a permanent zero rate and actually ACHIEVING it are not the same thing. That is, if the objective is a permanent zero nominal rate, that can in theory be achieved simply by varying the amount of base money created and spent into the economy (as advocated by Positive Money). However, letting the central bank borrow base money back from the private sector so as to damp down a boom might not be a bad supplementary tool.

As to a positive REAL rate on the debt, there are no good arguments for that. What’s the point in government borrowing money and paying any significant interest when it can print the stuff? That’s pointless. Moreover, a positive real rate increases inequalities. Reason is that interest is paid for by the average taxpayer, and ends up in the pockets of the rich.

So . . . if the real rate on the debt / base money looks like rising too far, the relevant country needs to cut that rate, and that’s easily done by printing base money, buying back debt or ceasing to roll it over, and that amounts to QE. And as to any inflationary consequences, that can be dealt with by raised taxes and/or reduced public spending. But note that there needn’t be any effect on numbers employed as long as the latter deflationary effect exactly cancels out the inflationary effect of printing more base money (easy in theory, but obviously less easy in practice).

The latter mixture of inflationary and deflationary effects MAY CUT the deficit. In fact it will do, if the inflationary effect of the above QE is significant.

But that deficit reduction effect is COMPLETELY IRRELEVANT.  It’s by the bye. It is not in itself an objective. It’s a number that comes out in the wash. To repeat, making deficit reduction ITSELF an objective makes no sense.

Alan Moreira and Alexi Savov try to defend shadow banking.

In this Vox article entitled “Shadow banking and the economy” the authors’ first point in favour of shadow banking is that it creates “money like liquid securities”. As they put it, “shadow banking adds value by creating money-like liquid securities from risky illiquid assets. While this process is inherently unstable, simply shutting it down risks damaging liquidity provision to the real economy.”

Well the first flaw in that argument is that it’s NOT JUST shadow banks that perform the above function: ALL BANKS create money – at or least under the existing / fractional reserve banking system they do. Under full reserve, COMMERCIAL BANKS don’t create money.

Second, we do not need shadow banks, or indeed commercial banks in general, in order to supply us with “money-like” stuff (aka “money”). The government / central bank machine (gcbm) can supply ANY AMOUNT of money ANYTIME. That is, it can create and spend base money into the economy (net of taxes collected) whenever an economy looks like it’s short of liquidity and unemployment in consequence is on the rise. Indeed there has been an UNPRECEDENTED increase the proportion of our money supply coming from central banks over the last three years or so thanks to QE.

Just to clarify, the statement that gcbm can “create and spend money net of taxes collected” means that gcbm can supply the economy  PURELY by increased spending, OR BY cutting taxes while leaving government spending constant, or some mixture of the two.

Now who is best at supplying us with money? Is a collection of “shadowy” organisations which trick households into taking out NINJA mortgages, and NINJA car loans, and which cause the world economy to almost collapse? Or is it gcbm which at least has its heart in the right place, even it is less than 100% competent? (And central bank staff are doubtless the first to admit that their forecasts are less than 100% accurate.) There’s no choice is there?

And just to add insult to injury, even if we do have shadow and other banks supply us with money, gcbm STILL HAS TO do a HUGE AMOUNT of money creation / destruction when the commercial banks mess things up. You’ve doubtless hear of Quantitative Easing, the biggest central bank money creation episode since WWII.

And just to add even more insult to injury, the fact of having gcbm supply us with all the money we need does not stop commercial banks granting NINJA mortgages or granting other risky loans. In favour of allowing risky loans there is the fact that if risky loans had never been allowed over the last 300 years, the industrial revolution would never have taken place. On the other hand it could be argued that government should tighten up on NINJA mortgages and loan sharks preying on the less well off. That’s a grey area.

The important point is that stopping commercial or shadow banks creating money does not of itself stop them offering any specific type of loan, like NINJA mortgages.

Spot the flaw in this argument relating to bank capital.

The illustrations below come from a Bloomberg article by Peter McCoy. I like the illustrations, but the argument behind them is actually flawed, though the flaw is not serious. Or rather, rectifying the flaw actually SUPPORTS McCoy’s argument rather than detracts from it.

The flaw is thus.

If banks are made to hold more capital, the TOTAL AMOUNT that individuals, households etc need to invest in capital in ALL INDUSTRIES for the country as a whole must rise (all else equal). That means the RETURN that households will demand for holding or investing in capital will rise. Thus banks will have to charge more for loans.

However, contrary to the claims of bankster / criminals, that will not reduce GDP: in fact it will INCREASE it. Reason is that when banks have a low capital ratio they are more likely to fail, thus they are implicitly relying on taxpayer funded subsidies or guarantees. And subsidies distort markets and reduce GDP. Thus a rise in capital requirements, while it will reduce loans and debts, will actually increase GDP.

Bank capital ratios in the 1800s when taxpayer funded bail outs for banks were unheard of were often around 50%: way above current levels. That 50% is some indication of what the genuine free market ratio would be.

But of course Wall Street bankster / criminals don’t want genuine capitalism or free markets. Their praise for capitalism is one HUGE LOAD OF HYPOCRISY. What they really want is socialism for the rich, while the poor are exposed to capitalism red in tooth and claw.

H/t to Anad Atmati.