Governor of the Bank of England does not get MMT.

What’s going on in the brain of Andrew Bailey is exactly the sort of thinking that MMT has been battling with over the years.

According to a Bloomberg article entitled “BOE’s Bailey Signals Dramatic Shift….”, Bailey wants to roll back QE because that would “give officials more firepower in future crises”.

Well now, strikes me the amount of QE needed right now is whatever minimises unemployment without exacerbating inflation too much. So Bailey would seem to be saying we should endure excess unemployment right now in 2020, so that we have enough ammunition to deal with future recessions.

That sounds to me like complete nonsense: the amount QE, or more generally the amount of stimulus needed in any year is the amount needed (as suggested just above) to minimise unemployment in any given year.

Moreover, there’s a long way to go before the entire national debt is QE’d, so it’s far from clear that we are short of ammo.

But would there be something wrong with QEing the entire national debt? Well far from it! Milton Friedman and MMTers have for a long time advocated that whether we’re in a recession or not, interest yielding government debt does not make much sense. Thus QEing the entire debt, far from being a problem, would arguably be beneficial.

Of course Andrew Bailey is right in a narrow sense. That is, if one rules out negative interest rates, and fiscal deficits funded by new money provided by the central bank, then one could argue that some central banks are currently near out of ammunition.

But that’s a bit like a soldier claiming he is near out of ammo when he has run out of ammo for his 3mm calibre machine gun, when there’s a 4mm and 5mm calibre machine gun plus plenty of ammo for them  plus several rocket propelled grenades right next to him!

In other words as MMT says, there is essentially no limit to the amount of stimulus a central bank, assisted or not assisted by its government, can implement – a point also made by Keynes. 

The catastrophic stupidity of journalists.

Journalists are one of the least trusted professions: pretty much right at the bottom of the “trust league”, at least according to this evidence. And that’s for the very good reason that they are mostly bullshitters, loudmouths, charlatans, windbags, ignoramuses etc etc.

This can be very nicely illustrated by the nonsense coming from journalists, particularly leftie journalists, on the subject of immigration.

One of the main objections to mass immigration, if not the THE MAIN OBJECTION, is the fact that when migrants from country A migrate to country B, they can fundamentally alter the culture and way of life in B. That has happened over and over throughout history, and indeed it is no more than common sense that that can be the effect of immigration, particularly mass immigration.

Thus when large numbers of people move from relatively backwards cultures, e.g. African and Muslim countries to Europe, that is likely to drag Europe back into the past. I.e. the more Africans and Muslims in Europe, the more Europe may come to resemble the Islamic part of Nigeria, a place where not one in a thousand Western journalists choose to go and live in. (If you’re as thick as a journalist you won’t see the irony and hypocrisy there, but hopefully you’ve got more brain than a journalist.)

Indeed, the number of Europeans who want Muslim migration to Europe to be stopped is DOUBLE the number who want it to continue. And that of course means that far from Donald Trump being an “extremist” in this context, he would seem to be simply going along with the wishes of the people (something that will bring tears to the eyes of leftie journalists).
 
Moreover, there is plenty of evidence that Islam is indeed dragging Europe, or the West in general, back to the dark ages. For example Muslim leaders at the UN have for years tried to get resolutions passed which ban criticism of religion, Islam in particular. And Scotland’s Muslim justice minister, Humza Yousaf, is doing his best to curtail criticism of religion.

Female genital mutilation is now effectively legal in the UK. That is, there has been just ONE successful prosecution of a “mutilator” in the last thirty years. Given that the UK’s National Health Service logs thousands of cases a year, it should be obvious, even to journalists, that there is a 99.99% chance of getting away with FGM.

Plus there are any number of videos on the internet put there by Imams telling Muslims how to beat their wives.

I could go on about the ways in which Islam is degrading European civilisation, but that’s not my central point here. My central point is that journalists (leftie ones in particular) are so abysmally stupid that they apparently don’t understand the latter “degrading” point. At least I have never come across a SINGLE ARTICLE in the UK’s main highbrow left of centre newspaper, the Guardian, that addresses that issue. (Instead of “highbrow”, I should really have said “pseudo-intellectual”, but never mind.)

And right of centre journalists are almost equally clueless.

To repeat, I am not trying to argue that the above “degrading” point is valid. I am simply saying that leftie journalists are so abysmally stupid that they don’t even understand the point.

Given that every tabloid reader and every member of the UK’s “far right” parties seems to understand it, the conclusion is that journalists, leftie journalists in particular, are UTTER AND COMPLETE MORONS.

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And for a final bit of journalistic incompetence, this is a bit of a giggle. I’ve just noticed that Bloomberg has two subscription offers. One is $1.99 a month, which works out at about $24 a year. Alternatively you can go for a full year’s subscription, which will cost you $290 – over ten times as much!

I suspect the average five year old would know which one to go for, if they wanted to read Bloomberg articles…:-)

Mary Mellor and Positive Money.

Abstract.     Mary Mellor is a former professor of sociology at Northumbria University who has written three books on money and banking plus numerous articles. Despite that welter of words and detail, she comes to no clear conclusion as to the way forward for the bank system other than to say we need to “democratise” it. While simple folk are doubtless impressed by the word “democratize” it’s near meaningless unless it is spelt out in plenty of detail exactly what is meant by the word, something Mary Mellor fails to do.

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In 2012, Positive Money (which for the last ten years has been the main UK organisation campaigning for a ban on privately issued money)  was presumably under the impression that Mary Mellor was singing from the same hymn sheet as PM, because PM published an article promoting a series of lectures by her. She certainly made much of the deficiencies of the existing bank system, which of course is not hard to do. Plus she criticised “debt encumbered” money (i.e. privately issued money) as opposed to “debt free” money (state issued money). So she certainly appeared to be singing from the same hymn sheet. And indeed I thought till quite recently that she advocated a ban on private money creation, i.e. full reserve banking / Sovereign Money. I should have looked at the small print more closely.

Her book “Debt and Democracy”, published in 2016 makes just one reference to PM, and that was just as part of a list of books she set out, which included Ben Dyson and Andrew Jacksons book “Modernising Money”. I.e. that book contains no specific backing for Positive Money. (Ben Dyson founded PM.)

You’d think that if she was keen on debt free money she would have made a few more references to the main UK organisation that opposes “debt encumbered” money, i.e. Positive Money, wouldn’t you? Moreover, there is no reference in “Debt and Democracy” to three Nobel laureate supporters of Sovereign Money / full reserve banking. That’s Milton Friedman, Maurice Allais and Merton Miller. Nor is there any reference to the fact that one of greatest economists of all time, David Hume, opposed private money creation.

Thus while Mary Mellor spews out a very large number of words on this subject, it’s questionable how much she really knows about it.
 
Then last year, she had an article published by “Ponderwall” entitled “Neoliberalism has tricked us into believing a fairytale about where money comes from.”

Well now the more naïve members of the political left always lap up page after page of material which inveighs against “neoliberalism”, capitalism, wicked evil banksters, etc etc. Dozens of articles of that sort appear every day. In contrast, as soon as you set out some realistic way of reforming the bank system, their eyes glaze over. It’s emotion the above lefties want, not logic, facts, reason or any of that boring stuff.

And there are numerous writers who make a good living from pandering to the latter desire for emotional thrills.

So is Mary Mellor’s material in the latter “pandering” category, is there anything logical and realistic in her proposals? Well I’m afraid to say I think her material falls to rather a large extent in the former “pandering” category.

In the concluding two paragraphs of her Ponderwall she certainly does not say that debt based money should be banned. To quote:

“But it is also important to recognise that the sovereign power to create money is not a solution in itself. Both the state and bank capacity to create money have advantages and disadvantages. Both can be abused. The reckless lending of the banking sector, for example, led to the near meltdown of the American and European monetary and financial system. On the other hand, where countries do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and mismanagement.”

“The answer must be to subject both forms of monetary creation – bank and state – to democratic accountability. Far from being a technical, commercial instrument, money can be seen as a social and political construct that has immense radical potential. Our ability to harness this is hampered if we do not understand what money is and how it works. Money must become our servant, rather than our master.”

So what exactly does this “democratic accountability” consist of? She doesn’t say. To repeat, “Democratic accountability” is a great, sexy, soothing phrase which fools simple folk.

In any case, both central banks and private banks are already subject to “democratic accountability” to a significant extent. As to central banks, while some of them have a degree of independence, when push really comes to shove, they are controlled by politicians. E.g. the Bank of England consulted the then UK finance minister before embarking on QE.

As for private banks, they are totally incapable of lending unless a myriad of borrowers, small and large, apply for loans. Thus the NATURE of loans is decided by that myriad of borrowers. That seems fairly democratic to me.  Plus as regards the total amount of lending and money creation they do, that is very much under the control of the central bank via interest rate adjustments, and central banks are, as mentioned above, subject to a significant degree of “democratic accountability” (depending on how independent they are).

And I do like Mellor’s sentence which runs “On the other hand, where countries do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and mismanagement.”

So is she saying that where countries do in fact have a “developed banking sector”, debt based money should be banned? She isn't clear on that.

Plus I completely fail to see why the fact of having a developed banking sector would stop “massive corruption and mismanagement” by government and central bank. Governments can always lean sufficiently hard on central banks to induce central banks to print ludicrous amounts of money so that politicians can spend it with a view to making themselves popular. The UK’s Tory Party finance minister, Anthony Barber, was guilty in the early 1970s of that when he initiated the so called “Barber boom” which was followed (surprise surprise) by the worst bout of inflation for a hundred years – not that I’m saying “Barber’s boom” was the ONLY cause of the subsequent inflation.

In contrast to Mary Mellor’s vague  non-solutions to banking problems, Positive Money’s is a beauty to behold. It is ultra simple: have just the state, i.e. government and central bank issue money. That’s as simple as E=MC2. Plus the latter solution is backed by several Noble laureate economists. I don’t know of any Nobel laureates who back the “democratic accountability” solution.

Incidentally Positive Money itself employs that ghastly word “democratise” unfortunately. But at least Positive Money does much more than simply bandy fashionable words around.

My conclusion is that Positive Money and everyone else can take Mary Mellor’s views with a pinch of salt. 

Two flaws in fractional reserve banking (Part II).

I set out one flaw in fractional reserve banking on this blog yesterday.

That flaw (to recap and summarise) is that fractional reserve is inherently risky because banks’ liabilities are fixed in value (inflation apart), while their liabilities can fall dramatically in value when they make silly loans – at which point they are likely to be bust.

To solve that problem, taxpayers have to back banks with deposit insurance and billion dollar bail outs. But that equals preferential treatment for banks relative to other lenders, which is an obvious mis-allocation of resources.

Let’s now consider the second flaw. This is actually extremely simple, yet for some reason it is largely ignored by opponents of fractional reserve.

It is simply the point that depositing money at a bank with a view to earning interest is a commercial transaction just as much as is depositing money at a stockbroker with a view to earning a return is commercial, thanks to whatever the stockbroker invests the depositor’s money in. 

Plus even, where those who deposit at a bank get no interest, but nevertheless have the cost of their bank account defrayed by interest earned by their bank, they are still effectively earning interest: i.e. they are still into commerce. And it is widely accepted in economics (and indeed by anyone with some common sense) that it is not the job of taxpayers to support commerce, except where there are very good reasons for that support.

And that all points to the wisdom of full reserve banking, which is the alternative to fractional reserve. That is, under full reserve, anyone who wants a return on their money, thanks to the fact that their bank is lending out money as well as accepting deposits is free to try to get such a return, but the policy of government towards those people is: “You’re into commerce, so you’re on your own. In contrast, if you simply want some money kept in a totally safe manner, i.e. not tainted by the risks involved in the entity that accepts your deposits also lending out money, that’s fine: well do that for you. But you won’t get any interest.”

And finally (and to repeat) the above two flaws are set out in more detail in a paper which is available here and here. The former is easier to read in that scrolling thru the paper is easier.

Two flaws in fractional reserve banking.

The first flaw is as follows - I’ll explain the second in a day or two. Incidentally this article, and part two of this mini-series are in larger than normal font because I think this is an important point, and I want to make it especially easy to read, because I doubt that even 1% of economists understand it. 

Fractional reserve banking is risky if not actually fraudulent. The risk stems from the fact that under fractional reserve (FR), banks’ liabilities are fixed in value because they’ve promised depositors that depositors will get $X back for every $X deposited (maybe plus interest and maybe less bank charges).

In contrast, banks’ assets can fall dramatically in value if it turns out (as indeed it does, regular as clockwork) that a bank has made silly loans. At that point the bank is bust, or at least may be.

And therein lies the reason for saying FR has for most of its history been fraudulent: to promise someone, or even to suggest to them, that they’ll get their money back, when they may not, is fraud. Indeed, when any of the many other lenders apart from banks make that promise, what they’re doing is classed as illegal, if not fraud. By “other lenders” I mean stockbrokers, mutual funds, unit trusts. At least it’s true to say that FR has been fraudulent for the hundreds of years it has existed, up to relatively recent introduction of deposit insurance.

But the latter fraud point is not the central issue here, so I’ll move on.

The above risky nature of FR banking means that if depositors’ money is really going to be safe, banks have to be backed by taxpayers: in the form of taxpayer backed deposit insurance and billion dollar bailouts for banks when things go wrong.

But the above mentioned “other lenders” enjoy no such luxury. “Other lenders” in addition to the above mentioned mutual funds / unit trusts and stockbrokers, include peer to peer lenders and trade credit lenders (that’s firms which allow their customers an extended period of time before paying for goods delivered). And as for the total amount loaned by those “other lenders” the total exceeds the amount loaned by banks.

Ergo FR as presently set up, involves privileged treatment for a particular type of lender: banks. Put another way, it involves a non level playing field as between banks and other lenders. And as is widely accepted in economics (and indeed by anyone with some common sense), non level playing fields equal a misallocation of resources.

Put another way, GDP is not maximised where a playing field is not level, unless there is a very good reason for the field not being level. (Or if you don’t like the idea of GDP being maximised because of environmental concerns, let’s say “output per hour is not maximised” (in the hopes that people use the extra output to work fewer hours)).

As for the excuses offered for the latter privileged treatment of banks, probably the most popular is that if banks’ liabilities are indeed totally fixed in value (inflation apart) then those liabilities become a form of money, which all else equal increases the money supply, which is stimulatory.

Well the problem there is that central banks can create any amount of money they anytime and at zero cost simply by pressing buttons on computer keyboards.  Indeed given that private banks are utterly and completely hopeless at issuing the right amount of money at the right time because their money creation activities are pro-cyclical rather than anti-cyclical, central banks absolutely have to issue money so as to compensate for the latter incompetence.

The conclusion is that fractional reserve banking is badly flawed. Or put another way, the excuses for having private banks create money do not stand inspection, which is exactly what dozens of economists have been saying for decades, and indeed centuries. See here for a small selection of those economists.

There is a fuller explanation of the above point here.

Richard Murphy discovers that Ann Pettifor talks BS.

I’d like to congratulate Murphy on that discovery. But I must point out that I tumbled to the fact that Pettifor is a charlatan YEARS ago. E.g. see here and here and here.

Ann Pettifor should of course be congratulated on her promotion of the green new deal. But when it comes to strict economics, she’s all over the shop.

And that’s the shortest article on this blog of mine for a long time…:-)

How much does Sir John Vickers know about banking?

I’ve just stumbled across a discussion paper written in 2012 by John Vickers. He was chairman of the UK’s “Independent Commission on Banking”, which was the official UK government enquiry into what to do about banks in the wake of the 2007/8 bank crisis. Title of John Vickers’s paper is “Some Economics of Banking Reform”.

Starting on his page 15, he makes three criticisms of Narrow Banking. He starts (to quote): “First, as the crisis has underlined, even government bonds are not necessarily safe liquid assets.”

Whaaaaat? So has the UK government reneged on its debt any time in the last century? Not that I know of! And same goes for numerous other relatively well run countries: the US, Canada, etc.

Of course there are the Zimbabwes and Argentinas of this world, and anyone living there should be free and indeed is free to stock up on other assets. E.g. the US dollar circulated widely in Zimbabwe when Mugabe ran the country.

But John Vickers doesn’t bother distinguishing between the UK, the country he is supposed to be concerned with, and the Zimbabwes and Argentinas.

Conclusion: John Vickers claim that government bonds might not be safe is a joke.


Vickers’s second alleged “problem”.

This runs, to quote, as follows. “Second, despite large government debts, there might not be enough government bonds to back retail deposits, especially of short-to medium-term maturity.”

Well the simple answer to that is that if depositors thought they were short of deposits under narrow banking, they’d try to save money so as to acquire their desired stock, and that would show up as Keynes’s “paradox of thrift” unemployment. Hence the state (i.e. government and central bank) would simply create and spend more base money into the private sector, thus supplying all and sundry with the stock of base money they wanted. Problem solved!

Indeed, that “short of state supplied paper assets” phenomenon occurs under the EXISTING system.

I have of course assumed just above there that it is base money at the central bank which backs retail deposits rather than government debt. But as Warren Mosler explained, there is precious little difference between the two. That is, government debt is simply base money that has been deposited with government for a period and on which interest is earned.

Indeed, the relative size of the stock of base money and government debt is entirely within the control of the state (government and central bank). That is, if the state offers a more generous rate of interest on government debt, clearly the private sector will convert some of its stock of money to government bonds.

But the decision as to what that relative size should be has precious little to do with the above points about the TOTAL size of the two stocks and the paradox of thrift point. (MMTers actually sometimes refer to the sum of those two stocks as “Private Sector Net Financial Assets”.



Vickers’s third alleged problem.

This starts: “Third, narrow banking could lead to a very inefficient misallocation of resources.  Natural holders of government bonds such as pension funds would find them in short supply, while credit in the economy was deprived of a prime funding source –deposits.”

Well that point has already been answered above: to repeat, if the private sector, or specific sections of the private sector are short of base money / government debt, they will save so as to acquire their desired stock. That would raise unemployment, which would induce the state to supply more of those state issued paper assets.

So . . . . problem solved! John Vickers’s “problem” vanishes into thin air.

There is, it could be argued, one remaining problem, namely that in a very low interest rate environment, pension funds are short of what they really want, namely government bonds which yield a decent rate of interest. Well the answer to that is: “tough”. None of us who have a credit balance at our high street banks are getting as much interest as we did twenty years ago. But what of it? Does that mean the sky falls in? And do those who have stashed away a large pile of money (pensioners or not) have any sort of God given right to a generous rate of interest on that money? No it doesn’t.

And the final part of Vickers’s above alleged “problem” is that “ credit in the economy” is “deprived of a prime funding source –deposits.”

Well unfortunately the fact that one source of X, Y or Z declines does not prove other sources won’t jump in to fill the gap or at least largely fill it. Borrowers have NUMEROUS sources of credit: 1, trade credit, 2 peer to peer lenders, 3, unit trusts and mutual funds lend in that they buy bonds issued by corporations, cities etc, 4, pension funds do the same. I could go on. And the total amount loaned via the latter lenders rivals the amount loaned by banks.

Second, under narrow banking, bank loans do not dry up: it’s just that those who fund loans carry the risks, unlike under the present system where risks are carried by taxpayers (via taxpayer backed deposit insurance and billion dollar bailouts for banks in trouble).

But the latter privileges for banks, as should be obvious, amounts to a subsidy of banks, as I explain in more detail here. And subsidies for particular firms, or sets of firms, results in those firms competing on a non level playing field basis with other firms. And it is widely accepted in economics that subsidies / non level playing fields do not result in GDP being maximised.

https://mpra.ub.uni-muenchen.de/99989/1/MPRA_paper_99989.pdf


Ooh la la. We all love “synergies” don’t we?

Vickers’s final sentence of his third objection reads “Narrow banking would also lose the natural synergy that exists between deposit-taking and the provision of overdraft facilities.”

Well unfortunately the simple fact of a synergy existing does not justify the synergy. Doubtless I could l find “synergies” in the world of illegal drug dealing, murder, crime in general, dealing in firearms and so on. I rather doubt the mere existence of any synergies there would JUSTIFY the synergies.

 
Vickers’s fourth point.

This is that, to quote, “Fourth, deposit-taking and payments systems are not the only banking services for which continuous provision is essential; the same is true of some credit supply, which would happen outside the narrow bank.”

Well true. But there's no chance of “credit supply” disappearing just because we move to narrow banking. As just explained above, there are numerous sources of credit other than banks.

It is however true that if one source of credit (or anything else) gets more difficult, then the market price for the item concerned will rise – in this case, interest rates would probably be higher under narrow banking than under the existing bank system.

But what of it? Interest rates are now at a record fifty year low, and the consequences of that record low are not entirely beneficial. As a Bank of England study shows (and as is indeed no more than common sense) the decline in interest rates over the last two decades is one of the major causes of the rise in house prices: that is, given a fall in interest rates, borrowers will pretty obviously run out and borrow more with a view to buying a bigger house.

In addition, a fall in interest rates tends to cause a rise in GENERAL indebtedness, and if there’s one thing the great and good like wittering on about, it’s the alleged horror of the latter general rise in debt.

So this all raises a big question: what is the OPTIMUM rate of interest, or will narrow banking rather than the existing bank system tend to give us an optimum or GDP maximising rate of interest?

Well a simple answer to that is that the default assumption in economics is that free markets maxmise GDP, except where it can be shown that markets do not work well.

In the case of the narrow banking versus existing bank system argument, under the existing system, banks get preferential treatment relative to the other above mentioned lenders (peer to peer lenders, trade credit lenders etc) in that banks are backed by taxpayers (billion dollar bail outs etc). And that is not a genuine free market. It is not a level playing field as between banks and other lenders and that non level playing field does not maximise GDP.

The conclusion is therefore that, despite the rise in interest rates that narrow banking might bring, the rise in interest rates would be a rise to something nearer a genuine free market rate of interest. Ergo narrow banking would result in a higher GDP and output per hour than the existing bank system. And for more on that point, see this MPRA article entitled “The Crucial Flaw in the Bank System.”


Conclusion.

It would seem that Sir John Vickers is rather a long way short of being clued up on banks.