Showing posts from October, 2012

Full reserve banking: the largest bank bailout in history

I've now read three different proposals for full reserve banking - respectively from the IMF, Lawrence Kotlikoff and Positive Money. Each is slightly different, but they all share the following essential characteristics:

100% backing for deposits with cash and/or government debt. The IMF proposes cash backing for ALL deposits, including wholesale ones. Kotlikoff and Positive Money propose cash backing for sight deposits (current/checking accounts) only. Serious restriction on the nature and scope of bank lendingAll money issued by the central bank only. The proposals differ as to whether the money supply should be directly managed for macroeconomic benefit or whether there should continue to be indirect control via interest rate policy.  I've both written about and had extensive debates with Positive Money about their proposals, and I recently wrote about the IMF proposal. Kotlikoff's proposal is similar to both of these, in that it fundamentally changes the nature of banki…

The IMF proposes the death of banking

The IMF has produced a paper which purports to demonstrate the virtues of full reserve banking. More correctly, it dusts down an old idea from the 1930s (which was not implemented) known as the Chicago plan, applies some fancy maths to it because these days everything has to be proven to work through DSGE modelling, then presents it as the panacea to all our financial ills.

This paper conflates two quite different things, namely full reserve banking and debt jubilee, which causes a fair degree of confusion and I feel it would have been sensible to have separated them.  It was also very evident that the authors were far more comfortable with economic modelling than they were with accounting and financial flows, despite their claim that one of them had actually done loan accounting for a bank. The accounting models in particular are in my view seriously flawed, and insufficient consideration has been given to the impact of the suggested changes on financial flows and the role of banks. …

Excerpt from "Chicago Plan revisited" - IMF Benes & Kumhof

Excerpt from Introduction to "Chicago Plan Revisited", a paper on full reserve banking by the IMF economists Benes & Kumhof.  Full paper is here

At this point in the paper it may not be straightforward for the average reader to comprehend the nature of the balance sheet changes implied by the Chicago Plan. A complete analysis requires a thorough prior discussion of both the model and of its calibration, and is therefore only possible much later in the paper. But we feel that at least a preliminary presentation of the main changes is essential to aid in the comprehension of what follows. In Figures 1 and 2 we therefore present the changes in bank and government balance sheets that occur in the single transition period of our simulated model. The figures ignore subsequent changes as the economy approaches a new steady state, but those are small compared to the initial changes. In both figures quantities reported are in percent of GDP. Compared to Figure 3, which shows the …

Reflections on fear

I've been writing a lot about fear recently, because it seems to me that much of what is happening in the world at the moment is driven by fear.

There is nothing new about this. Fear has been a primary driver of human activity for a very, very long time. In fact I would say that humans are innately a fear-driven species.

I know this seems odd, because we think of ourselves as successful, the dominant species on Planet Earth with no natural predators left. And indeed we are - now. But we have not always been so.

We think of ourselves as predators. And indeed, humans in groups are the most dangerous predators ever to walk the face of the earth. But at an individual level, humans are not particularly good predators: we are small, weak, slow and poorly armed. Nor do individual humans need to be large-scale predators. We are omnivores, not true carnivores: we are capable of gaining sustenance from an extraordinarily large range of foods, including - but most definitely not limited to -…

The OBR and dysfunctional banks

This is a fascinating chart from the Office of Budget Responsibility's Forecast Evaluation Report for October 2012: 

(click here for larger version)
Like all charts, it tells a story. And the story it tells raises serious questions about the conduct of monetary policy and the behaviour of banks.
Before the financial crisis, the weighted average interest rate across all lending and borrowing was slightly below the policy rate set by the Bank of England, and the credit spread was downwards into negative territory. In other words, commercial interest rates for both savers and borrowers were generally lower than the policy rate. The result, as we now know, was a credit bubble and inflation in asset prices, as people and businesses were tempted by low rates to take on debt for asset purchase, particularly property. 
This chart contradicts the suggestion that some have made that the bubble was caused by the Bank of England's policy rate being too low. In fact the rate was at the top…

Fear-driven economics

On Monday, I attended a fascinating debate on the Economics of Deficit Reduction at the House of Commons (audio link in this post). Essentially the debate was about the pros and cons of fiscal austerity versus stimulus. On the "stimulus" side were Prof. Paul Krugman and Jonathan Portes of NIESR: on the "austerity" side were Bridget Rosewell of Volterra Consulting and Stephen King, Chief Economist of HSBC.

The definitions of both "austerity" and "stimulus" were somewhat unclear. As far as I could tell none of the four were remotely in favour of the severe austerity measures being imposed on some members of the European Union. Furthermore, none of the four were in favour of extensive cuts to capital investment such as the current Coalition government and its Labour predecessor have already undertaken (and more are planned). In fact Rosewell, supposedly anti-stimulus, actually said she was in favour of increased government borrowing for capital in…

Fix the bureaucracy, for heaven's sake!

The Trussell Trust says there has been a sizeable increase in applications for assistance from its foodbanks. This has been reported in both the Guardian and on the BBC's website. But they aren't saying quite the same thing.

According to the BBC, which appears to have interviewed someone from the Trussell Trust, the reasons for the increased use of foodbanks are rising food and utility bills, job loss and less disposable income, and greater awareness of foodbanks. Hmm. These last two look suspicious to me. Money required for essential food isn't "disposable income", really - but if you know that there is a foodbank that will provide you with food if you're so skint you can't feed your kids, you just might maintain or increase your spending on less important things, mightn't you? Or am I being too cynical?

But what is much more interesting is the Guardian's report. This identifies two main causes for the increased use of foodbanks:
the dire state of …

Seven economists and a surreal debate

Over the last few days, there has been a great debate in the economics blogosphere over whether public debt is or is not a burden on future generations. The idea that high public debt is a burden on the as-yet-unborn is a popular theme with right-wing politicians and is used to justify deficit-cutting measures that may be counterproductive. So this was a really important debate and I have been watching it with great interest.

But oh, what a debacle. They couldn't agree what they meant by "fiscal cohort", except that it wasn't quite the same as "generation". And each of them seemed to have a different idea about how debt transferred down the generations actually would be paid off. Roughly, they divided themselves into two groups plus fence-sitters:

- those (Baker, Krugman) who argue that as the debt transferred down the generations is owned by members of those generations, paying that debt off through higher taxation simply moves money around among people al…

A question of reality

In my recent post on the difficulty I have with mathematics, some of the comments appeared to suggest that mathematical objects that could not possibly exist in nature - such as perfect circles - nevertheless had objective "reality". This to me raises a fundamental question: can things that have no physical existence, but exist only in the mind (or in a computer representation of the human mind), be "real"?

This is not wholly a metaphysical question. I think it lies at the heart of the ongoing debate about the relevance of finance and economics to the world economy.

To me, economics is fundamentally a means of describing and predicting the transactions between real people for the real goods and services that they produce using the real resources of the earth. It is not about mathematical proofs, though economists do seem to spend a lot of their time developing these (not always with much relevance to the physical world). Nor is it, really, about money. But it seem…

Youth unemployment and abuse of statistics

Recent reports have highlighted the plight of young people in Greece and Spain, where youth unemployment is over 50%. 

(click here for larger version)

Or not. According to Jacob Funk Kirkegaard, writing in VOX, these figures aren't right. Oh dear no, not at all. In fact youth unemployment in Greece and Spain is not much worse than in the US, and when you look at the Eurozone as a whole, the US is actually worse. So it's not Greece and Spain that have problems with youth unemployment, is it? It's the good ol' US of A.

How has Kirkegaard achieved this remarkable redefinition?

Firstly, he has changed the definition of "unemployed" to mean only those who are unemployed and not in education or training - so-called "NEETs":

(click here for larger version)

Exclusion of young people in education or training makes a considerable difference to the figures, doesn't it? The question is whether it is a justified exclusion. As Kirkegaard notes, Stephen Hill of …