Simon Jenkins says give money to people, not banksters.

I agree.

Simon Jenkins has had several articles arguing the above point – e.g. see here, here, and most recently, here.

The economy exists to provide ordinary people with what they want, both in the form of what people choose to buy for their own consumption and in the form of the publically provided serves they vote for at election time. And it is bizarre that it is necessary to remind even left of centre folk of the latter simple point.

In other words you can understand right of centre politicians stuffing the pockets of their bankster friends. But even the political left goes along with the daft idea that the economy can only recover via handing out money to the relatively well off: holders of government debt (QE). Plus the political left accepts the idea that public money must be used to encourage banks to lend to businesses rather than simply using the money to boost consumer spending (which of course would improve businesses’ turnover and hence enable businesses to borrow where appropriate).

There is only one potential problem with dishing out money to households namely that it could be difficult to withdraw when the need arises. However the latter point is very debatable.

First, the UK government adjusted VAT down and up a couple of times in the last few years. We didn’t have riots when VAT rose: in fact the silence was deafening.

Second, it’s not difficult to cut public spending. That, in contrast, does tend to give rise to objections. However as long as such cuts are in line with the manifesto of the political party in power, no one has any right to object.

Third, another way of withdrawing money from households in the UK is to raise National Insurance contributions. NI contributions are very similar to the payroll taxes that exist in other countries and which HAVE BEEN adjusted during the current recession.

Fourth, to the extent that it is difficult to withdraw money from the private sector via the above means, a government or central bank can always damp down excessive private sector exuberance via raise interest rate increases. Of course that’s a concession to exactly the sort of measure that Simon Jenkins objects to. But that concession does not invalidate the PRINCIPLE set out above, namely that the BEST WAY to adjust stimulus is via ordinary households. In short, the aim should always be to adjust stimulus that way, with QE, “funding for lending”, or interest rate adjustments being used only in an emergency or as back up.

Isabella Kaminska is all over the place on full reserve banking.

This article of hers claims in relation to full reserve,  “The problem . .  . is that we are basically reducing banks to venture capitalists. That’s fine. But if depositors are going to bear all the risk, it makes sense their upside exposure should not be capped to a specific return.”

Well hang on: if depositors bear all risks, then banks are not acting as “venture capitalists” as that term in normally understood are they? (I assume the term “venture capitalist” means an entity that bears risk.)

Secondly, the advocates of full reserve (certainly Positive Money and Laurence Kotlikoff) do not advocate that “upside exposure should be capped”.

Next, she says, “A much better system would be something of a sukuk system where the investors returns are linked to his effective ownership of the asset and thus its cash flow.”  Well that’s exactly what Positive Money and Laurence Kotlikoff do advocate!!!

Seems the advocates of  full reserve have done vastly more home work than Isabella Kaminska gives them credit for.

Given the large number of mistakes that Kaminska manages to cram into above 70 words near the start of her article, I can’t summon up the will to read any further.

Another Rogoff mistake.

Another flaw in Rogoff’s work was to include EZ countries in his study.

If an EZ country becomes uncompetitive and gets too far into debt, it can only escape via several years of austerity, i.e. poor economic growth. And that of course tends to support the Rogoff claim that high debt results in poor economic growth.

In contrast, for a country which issues its own currency there is no need for any significant austerity: that country can regain competitiveness by simply devaluing. There is of course SOME AUSTERITY involved in devaluation: the costs of the relevant country’s imports rise. But the degree of austerity is far less.

AS IT HAPPENS, the above mistake probably didn’t influence Rogoff’s results because his study did not cover the period during which EZ periphery countries’ debts skyrocketed (although private debts WERE HIGH).

Nevertheless, in Rogoff type studies it’s a bit of a nonsense to mix up monetarily sovereign countries with EZ countries.

Mosler and MMT in the Guardian today.

Nice to see Warren Mosler and “Modern Money Theory” mentioned in an article by David Graeber in today’s Guardian.

The article backs Mosler’s plan to have the Irish government (and perhaps other periphery countries) issue bonds which would include a proviso that in the event of default, the bonds could be used to pay Irish taxes. And that would lead according to Graeber to Irish citizens experiencing “quick relief from cuts”.

Well the first problem is that if a government feels like cheating on its creditors by refusing to give them Euros in exchange for their bonds, why would it HONOUR its agreement with creditors in the form of giving creditors what amounts Euros in the form of using bonds to pay taxes with? It’s a bit like the US government  refusing to pay holders of maturing Treasuries any US dollars, while offering to pay them in Canadian dollars, Yen, or any other currency they liked. In effect, the US government would not have defaulted.

Next, Mosler and Graeber (like numerous economists) have not grasped the basic problem in the EZ, which is disparities in competitiveness as between periphery and core. The whole point of imposing austerity on the periphery is to get periphery costs down and enable them to regain competitiveness. Of course it’s a thoroughly ham-fisted way doing the job, and it involves huge social costs. But that’s common currencies for you.

Put that another way, if periphery countries are reflated via “Mosler bonds” or in any other way, that will just raise inflation in the periphery relative to the core, which just delays the date at which they finally regain competitiveness, during which time they go further into debt. And their creditors may just not be willing to lend.

Full reserve is better than the bank levy.

The UK has a bank levy. It is imposed on banks with assets of more than £20bn of debts, the idea being to encourage banks to shrink, i.e. reduce the too big to fail problem (TBTF). Plus the levy is charged on debts other than retail deposits, so as to discourage risky forms of funding: the forms which dried up during the recent crisis.

Those two benefits, reducing the TBTF problem and reducing risks, are also achieved by full reserve banking. So which solution is better?

Well first, reducing the size of the biggest banks does not solve the problem in that when one large bank goes bust it’s likely that other large banks are in trouble as well because all large banks operate in similar ways. E.g. most of them were making silly loans prior to the recent crisis.

In contrast, a bank just cannot go bust under full reserve: any losses are born by depositors who have chosen to have their money put at risk, that is, loaned on. Under full reserve, a bank can certainly shrink, or even shrink to nothing over a period of time, but it cannot suddenly go bust. Or as George Selgin put it “For a balance sheet without debt liabilities, insolvency is ruled out…” (p.30 of his book “Theory of Free Banking” – available online.).

Moreover, that solves the TBTF problem. That is, under full reserve, a bank CAN GROW to the size of current TBTF banks, but since a “too big to fail” bank under full reserve cannot fail, that solves the problem.

But that is NOT TO SAY that full reserve deals with the “anti competitive” practices that can arise when too few employers have too big a market share. So stopping any one bank taking more than some given proportion of the market might still be desirable under full reserve.

The levy still involves disruption.

Next, if there is a serious banking problem say every 20 years, the amount collected by government via the levy may well be enough to rescue banks in trouble. But that process is still disruptive. That is, come a bank crisis, the government / central bank machine can easily print billions to rescue banks, but that is inflationary, which means taxes have to be raised and/or public spending cut. (It might seem that the government / central bank machine does not have to “print” any new money to rescue banks if it has already collected enough money via the levy. The answer to that is that the whole concept of “money in the hands of the money issuer” is essentially meaningless. That is, a currency issuer can credit a trillion trillion to itself anytime: a meaningless exercise. So whether you want to regard the money spent by a government on bank rescues as “new money” or “money collected via the levy” doesn’t make any difference.)

In contrast to the above disruption, under full reserve, bank failure is more gradual. That is, as it becomes apparent that loans made by banks are not worth their paper or nominal value, the value of depositors’ stake in the relevant bank drifts downwards. And that is very different from fractional reserve, where a bank tries desperately to pretend that all is well until one day the word gets out that the bank is about to run out of cash, and a run ensues.

It could be argued against the above inflation point that banks tend to fail in recessions, and hence that no tax increase will be needed to counteract the inflationary effect of money  printed to bail out banks. However there is still a diversion there of large amounts of money from normal public spending items to funding bank bail outs. Put another way, given a recession and ABSENT bank failures, government can simply up public spending (and/or cut taxes) with the result that household spending and amounts spent on law enforcement, education, etc remain more or less constant.

In contrast, and given a recession PLUS bank failures, government would not be able to keep public spending (and/or taxes) at the same relatively constant level.

Risky types of funding.

This problem is also solved by full reserve. Under full reserve, anyone depositing money at a bank or lending money to a bank has to specify whether they want their money to be put at risk (i.e. loaned on by the bank) or kept 100% safe (e.g. lodged at the central bank). If the former, then the lender / depositor carries the risk inherent in “lending money on”. So there is no risk for the bank there. Alternatively, if the money is 100% safe, then it cannot be lost. There is no risk for the bank there either. Though why anyone would want to lend to a bank knowing they’d get the sort of zero or near zero interest that comes from lodging money in a 100% safe manner is a mystery: they probably just wouldn’t lend to the bank.