Monday, 29 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 lending
  • All 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 banking, but structurally different in its extensive use of mutual funds and securitization of lending. It is also wider-ranging than the other two, covering not only shadow banking but insurance.  

The nature of banking is by no means a simple matter, and none of these proposals is easy to understand. Consequently much of the public commentary revolves around the economic problems and moral concerns in our present system. There is little discussion of the likely economic problems with a full reserve system, or of the moral concerns that it raises. In fact all three are, perhaps unsurprisingly, complacent about their proposals and apparently blind to their flaws. Here are a few gems:

- The IMF produced a DSGE model that painted a very rosy picture of an economy under full reserve banking. The model itself was lovely, but the calibration made a great many assumptions for which they produced little justification and some of which in my view were actually wrong: there were weird interest rate assumptions, and very optimistic ideas about inflation (since the proposal included writing off most private debt). I suppose the idea was to blind everyone with advanced maths. But I'm not that easily fooled.  DSGE models are only as good as the accuracy of their assumptions. As we used to say about computer systems, garbage in = garbage out.  

- Kotlikoff designed a system which includes its own version of what in the UK is known as the Tote. He claims that this is "perfectly safe betting". Crikey. Regarding betting as "safe" is the cause of much damaging addiction to gambling. And no-one who has ever bet on the outcome of a horse race would regard any form of betting as "safe". Quite apart from anything else, the opportunities to game the system are legendary. The use of a totalisator does make betting safer for the average numpty, but to describe it as "perfectly safe" is laughable. I suppose betting on horses is not quite so much of a tradition in America as it is in the UK, so Kotlikoff maybe doesn't know much about it. But in what way is replacing a casino with a betting shop an improvement?

- Positive Money propose that the Bank of England's Monetary Policy Committee (MPC) should control the money supply so that inflation remains stable. Quite apart from the political implications of this (MPC members are political appointees - why on earth does Positive Money think they would be incorruptible?), there is a serious information problem. The Office of Budget Responsibility's October evaluation report admitted that they got their growth forecasts wrong by a full 5 percentage points. Under Positive Money's proposals, the money supply for the economy would be directly determined by such forecasts. Had their system been in force, we would now be suffering serious monetary restriction, not because "banks aren't lending" but because the MPC had not produced enough money to support growth. In what way is this an improvement over the present system?

My greater concerns over full reserve banking, however, are its cost and its safety. Let me explain.

Both the IMF and Positive Money consider how the transition to a full reserve system might work - the IMF in some detail. But there is only one way full reserve can be introduced, and that is by means of the biggest bank bailout in history. 

At present, bank funding for payments works on a just-in-time basis, with banks running daylight overdrafts at the central bank and clearing them by the end of the day from a mixture of sources: banks do not have enough funds at any one time to allow all sight deposits to be drawn at once.  The possibility of banks simply not being able to obtain the funds to allow deposits to be drawn is covered to a limited extent by deposit insurance, but like all insurance schemes, deposit insurance is not intended to cover a situation in which all deposits were withdrawn from all banks at the same time. It is intended to deal with individual bank failures. 

Under full reserve banking, all banks would have to hold enough funds to allow all sight deposits to be drawn at once. To achieve this, central banks would have to produce a simply ginormous amount of new money: the IMF estimates that for the US, it would be 184% of GDP. 

Positive Money would no doubt say that as their proposal involves moving transaction accounts from private bank to central bank books, no new money needs to be created. I disagree. In order to move the transaction accounts, the central bank would have to create new reserves to the value of the total balances in those accounts. This is simply a consequence of double entry accounting: it is not possible simply to eliminate deposit balances from private bank balance sheets without also writing off the debt assets that currently back them. So either the central bank must produce new money, or there must be a debt jubilee. (The IMF noticed this and opted for the debt jubilee, but their accounting was wrong and they didn't consider the inflation consequences of such a massive debt write-off).

Some would argue that a one-off bank bailout on this scale is a small price to pay for safety in the future. Which brings me to my second issue. Would it really be safe?

Whether a full reserve banking system is "safe" for depositors depends on the trustworthiness of politicians and political appointees. The value of the currency is only as good as the willingness of government to support its value. Which is why inflation targeting is so crucial to economic management. I've said before that government debt and fiat currency are equivalent: assuming that under full reserve banking most money wouldn't be interest bearing as it is at the moment, the inflation rate is, domestically, the currency equivalent of the yield on government debt (externally, the exchange rate is the equivalent of the price). And just as economic and political difficulties can push up the yields on government debt, so they can push up the inflation rate, too, and/or debase the exchange value of the currency. We would be putting a great deal of faith in our politicians not to pursue policies that erode the value of the currency - especially as they, or their appointees, would be directly responsible for producing it. The UK and the US both have substantial trade deficits: debasing the currency is very, very tempting macroeconomic policy for politicians wanting to improve exports. And both the UK and the US have high public debt: inflation is very, very tempting as a way of reducing the debt burden without unpopular spending cuts. I suspect that before very long there would be political pressure to provide further protection to depositors by anchoring the currency to a physical asset such as gold, thus preventing too much money being produced. Welcome to the gold standard, 21st-century edition. 

Kotlikoff suggests that government debt would be an alternative "safe" backing for deposits. But government debt is as subject to variation in value as the currency. Safety for depositors would be dependent on the willingness of government to support the value of its debt - and that would mean not allowing the debt to grow. Even cyclical deficits would represent a risk to depositors. There would therefore be political pressure to run balanced budgets or surpluses AT ALL TIMES, even in economic downturns. Welcome to the UK of the 1920s 2020s.

So safety for depositors would depend on the willingness of government to give priority to the interests of depositors over everyone else. And this brings me to my fundamental moral issue with full reserve banking. Why should the interests of people who have money trump those of people who have not? Why should those who, through no fault of their own, have become dependent on state benefits in order to live, have their standard of living cut to the bone to protect people who have far more? To maintain a full reserve banking system, we would end up locking ourselves into an economic straitjacket which would seriously disadvantage the poorest in our society (both fiscal austerity and the gold standard are bad news for the poor in economic downturns). How on earth is this progress?

Even the transition to full reserve banking to my mind raises moral issues. If the US can afford to produce $4tn of new money (or debt) to protect depositors, why can't it afford to produce $4tn of new money (or debt) to relieve poverty and create a decent healthcare system?  If the UK can afford to produce enough new money to back all current accounts pound-for-pound, why can't it afford to produce enough new money to improve its creaking infrastructure? 

To me, full reserve banking looks like a very regressive idea. I suspect those who support it think that it would end economic downturns, and therefore the restrictions on economic policy that I note above wouldn't matter. That was certainly the implication of the IMF's analysis. But that sends a shiver down my spine. When did we last hear that we had "ended boom & bust"? We cannot say for sure that there would never be another economic crisis, never another recession that needed fiscal stimulus and extraordinary macroeconomic measures. Banks are not the only cause of economic problems. It would be madness to lock ourselves into an economic system that prevented us from responding appropriately to, say, a major oil price shock. But full reserve banking would force us to do that.

As far as I can see, full reserve banking is politically and morally disastrous. Either we would hurt the poor through harmful economic policies, or we would deceive depositors into believing their money is safe when it isn't. I don't know which is worse. 










145 comments:

  1. People looking for non-fractional-reserve banking, often the same people looking for a "gold standard", are simply looking to have the value of their savings protected by government mandate.

    They wish to make a risk-free bet that they can buy the same or more real things with their saved credits later.

    They cannot accept that credits can and should expire worthless, like the voting slips swept up from the floor of the Tote at the end of every day.

    The present system requires for its continuance that the savers believe they can all get their chosen real goods later, if they hold on to the credits rather than buying something with them today.

    The supply of financial credits is already far in excess of what could realistically be delivered from the real economy, at current prices.

    The only solution to this problem is, apparently, to create additional financial credits. And hope that the Money Fairy keeps prices constant.

    Good luck!

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  3. Francis,

    I always welcome your criticisms of full reserve, as they test the robustness of my own “pro-full reserve” ideas.

    Re Kotlikoff’s claim that full reserve equals “safe betting”, I cannot find that phrase in the Kotlikoff paper you link to above. Anyway, as you rightly say, lending, banking, etc can never be entirely safe. But the point he would have been making there, I’m 99% sure, is that under full reserve, banks as such are almost entirely safe. That’s because when loans or investments go bad, it’s depositors who take the hit.

    Under the heading “Positive Money”, you claim that Monetary Policy Committee members are political appointees and are “corruptible”. Well if that’s a problem, it’s a problem for the EXISTING SYSTEM just as much as it would be for the system proposed by Positive Money. Thus your criticism just doesn’t hold water: i.e. your point is not a reason to prefer the existing system to Positive Money’s or vice-versa.

    Re your next point, namely that Office of Budgetary Responsibility forecasts have proved inaccurate, same point applies: that’s just as much a problem for the existing system as it would be for a PM system.

    Next, re the “ginormous” amounts of new money that would be required on introducing full reserve (according to the IMF authors) and the “debt jubilee” that that entails, I agree that this all a load of codswallop. The IMF authors went right off the rails there. I pointed this out on my own blog in August:

    http://ralphanomics.blogspot.co.uk/2012/08/imf-authors-get-full-reserve-wrong.html

    On their p.64 they show “short term and mortgage loans” disappearing altogether on introducing full reserve. Crackers!!!!

    Next, you address the question as to “Whether a full reserve banking system is "safe" for depositors….”. Well it’s not! At least it's not safe for depositors who want to earn interest by having their money loaned on or invested by their bank. Indeed (as pointed out above) full reserve transfers risk from taxpayers onto depositors, and quite right. If I invest in a small business or in corporation X, Y or Z on the stock exchange and it all goes belly up I lose money. But if I put money in the bank, which in turn lends to small businesses or to corporation X, Y or Z and it all goes belly up, the taxpayer rescues me. I don’t see the logic in that, do you? It’s simply artificial taxpayer support for depositors or banking in general.

    Next, you point to the dangers of the currency being debased. Why is that any more of a risk under full reserve than under the existing system? You don’t explain.

    Next, in the paragraph starting “Kotlikoff suggests….” you claim that government debt is not an entirely safe haven for depositor’s money. Agreed. Where depositors want their money to be instant access and safe, that money should not be invested in ANYTHING. In contrast, where depositors want to take a gamble, as per Kotlikoff, they can choose from a variety of securities or “mutual funds”. They can choose mutual funds that concentrate on government debt if they like, or at the other extreme, they can go for dodgy South American gold mines, if that’s what turns them on.

    Next you claim “And this brings me to my fundamental moral issue with full reserve banking. Why should the interests of people who have money trump those of people who have not?” Couldn’t agree more. But you’re out by 180 degrees in claiming that it’s full reserve that has the latter defect: its FRACTIONAL RESERVE that has that defect!!!

    Under fractional reserve, its taxpayers who stand behind and subsidise depositors (via the occasional trillion dollar bail out, and the ongoing TBTF subsidy). In contrast, under full reserve, there is no reason for any significant deposit insurance (i.e. taxpayer funded subsidy for banking). Positive Money and Richard Werner make this point on pages 5, 7 & 14 of their submission to Vickers. See:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf


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    1. Ralph,

      Kotlikoff's claim that parimutuel betting is "perfectly safe" is in the Vox article that I also linked to, not in the paper.

      Not for the first time, you've completely missed the point. If there is no real improvement to be gained from changing to full reserve, THERE IS NO POINT IN DOING IT.

      You don't seem to understand that 100% cash backing for deposits IS deposit insurance. All you are doing is expanding the insurance funding pool to cover 100% of sight deposits from the present risk-determined amount (I'm not sure what the FSCS bank levy is at the moment but it is FAR less than 100% of all current accounts). The implicit subsidy simply becomes an explicit one.

      You have not thought through how depositors who want a return on their savings would react to the loss of the deposit insurance they now enjoy. Politically that is dynamite, so in the event of a major bank failure they would probably still be bailed out. You may care to recall that according to the NAO, in the rescue of Northern Rock Government guaranteed deposits well in excess of the (then) £50K FSCS limit, including wholesale and corporate deposits. In other words, nothing would change.

      Full reserve banking, as I explained in the post, protects depositors at the expense of everyone else. And because of the very large sums of money involved, there would be an even greater incentive from both depositors AND GOVERNMENT to protect the currency (or the debt, if that is what is being used to back deposits) from devaluation.

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    2. Frances, interesting discussion between yourself and Positive Money. Why should the tax payer protect all bank deposits up to £50K, when this in itself can encourage banks to indulge in risky behaviour, because they know their risks are underwritten ? Investment accounts as proposed by Positve Money would attract a much higher rate of interest than at present, to reflect the risk involved, and the fact that this money is not tax payer protected. The bank would also have to be more prudent, and cautious with their lending. There is something grossly wrong with the present system when the amount of money in the economy has increased by 100 times over 50 years, and house prices by 80 times. New money should match an increase in assets, business and people, when it plainly has not. Much of the increase in money supply can be put down to relaxation of banks reserve requirements over the years, the US coming off the gold standard in 1971, and the de-regulation of the City in the mid 1980s. I notice with interest that you used to work in the banking system, so what would be your proposed solution to improve things, because we cannot carry on the way we are with a few minor tweaks ? I feel banks should be genuine intermediaries between investors and borrowers, using existing money, not have the ability to create new debt money. The only way the current system can grow is by getting more people, business, and governments into more debt.

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    3. Tried to post above using my name - Simon

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    4. As I noted in the post, and in my reply to JKH on my IMF post, all full reserve proposals actually rely on significant regulation and restriction of lending to achieve their economic effects. Full reserve banking itself in my view doesn't change anything - it's the control of lending that does. Therefore my take is that we should be looking at much tighter regulation of lending and of financial products generally.

      For example, I've argued elsewhere that if financial products cannot be understood by regulators, they should not be traded. We need a regulatory licensing system for financial products similar to that for medical supplies and drugs, and the licenses should specify the parameters within which the product may be sold - for example, maximum LTV on mortgage loans.

      I don't think that restricting the amount of money available for lending, which is what both PM's and Kotlikoff's proposals would do, would end misallocation of capital. On the contrary, it would give an incentive to banks to concentrate lending on either the lowest risks (when risk-off) or the highest risks (when risk-on). This practice amplifies booms and busts, as it is pro-cyclical, so is not desirable. We need to encourage lending towards the mid-range of risk and discourage pro-cyclical lending at the extremes.

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    5. The key here is do we allow private banks to continue to create more debt money, which allows them to profit from the net interest, or should the government / Bank of England create all new money ? The decision about how money is lent is a different question. Obviously most of the money created between 1997 and 2007 by the banks went into a private and commercial property boom, with house prices rising by 300%, £200 billion of new money created by the banks in 2007 just in that year. I realised we had a problem when someone on modest means told me had borrowed 8 times his salary from Northern Rock to buy a house in 2007. That was a huge misallocation of capital, just plain, bad lending. My friend on benefits and with no job or assets, managed to get into £50,000 worth of debt, again very poor lending decsions by the banks. It is madness for the government to borrow money to fund it's expenditure, when this could be created free of interest. I do agree, however that governments should live within their means, and new, publically created money would match new assets and infrastructure. The ideal is to gradually replace the existing debt money with debt free money. Banks can still lend, occasionally badly, but only use existing money, not create their own. Simon.

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    6. Actually in 2007, the banks created more like £560 billion, not £200 billion as previously stated, which is the increase in the money supply. Simon.

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    7. I agree that this is a political debate that needs to happen. Personally I am unconvinced that political control of the money supply is an improvement on (effectively) no overall control by anybody, which is actually the present situation. The lending restrictions I identified in my previous comment would also have the effect of limiting money supply growth.

      The idea that government money creation being "interest free" isn't correct. Did you read my comments in the post about the equivalence between inflation and the yield on government debt - and between the exchange value of the currency and the price of government debt? I am personally of the opinion that there is "intrinsically" no cost difference between debt financing and equity (money) financing, so which a government chooses is purely a matter of political preference.

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    8. “Thus your criticism just doesn’t hold water: i.e. your point is not a reason to prefer the existing system to Positive Money’s or vice-versa.”

      Actually it does. The only viable system is one where this reality is accepted and incorporated so that it does not damage the system.

      Any system that does not accept this truth, manage it and do so prominently is bound to fail due to said corruption.

      TF

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    9. If the government goes mad with the printing presses, we will get inflation for sure, and inflation is the same as paying tax, or interest on debt. People would then abandon the currency for something they perceive to be stronger, like gold. The amount created has to be free from political influence, and match real stuff in the economy. The recent property bubble became self-fulfilling, as banks believed that property prices "would always rise", which they would do as they were creating the money. This was the 3rd property boom since the early 1970s. However the system always collapses into a bust when we run out of good debtors, or government and people can take on no more debt. The system is unstable, gradually transfers more wealth into the hands of the banking fraternity, and is inherently manic depressive with huge cost to society. One person's house price increase is another person's huge mortgage burden, or rent increase, and I say that as someone owning a house with no mortgage on it. The 40 year bull run in property has to come to an end sometime, maybe now as we face an ageing society, expensive fuel supplies, and a massive debt overhang. We can create money to infinity, either by issuing more debt, or printing it, but neither solves the underlying problems. The Conservative party receives half their funding from the City, and Blair and Mandelson went on to work for banks, so the current arrangement is hardly free from "political influence", with the banks having huge lobbying power to fix the financial system to their advantage. With a few notable exceptions, I believe many of our politicians have been bought by the banking system, and work for their interests, not ours. I imagine Wall Street will be providing plenty of finance to both the Republicans and Democrats, to give the impression that the American people have a genuine "choice" in the election next week. Simon.

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    10. Frances, I’ll take your points in turn.

      I’ve now looked up Kotlikoff’s “safe” point. He was not referring to the full reserve system as a whole, which is rather what your article suggests. He was referring ONLY to current accounts (or checking accounts as they are called in the U.S.). And money deposited in such accounts under his proposals would be invested in government stock or other ultra-safe stuff. The institutions which currently do this in the U.S. are money market funds, and they’ve proved to be very safe. Nevertheless, one failed or “broke the buck” in the recent crisis. So they are not 100% safe as you rightly suggest. So I think we are agreed that K’s ideas on checking accounts are flawed.

      Your second paragraph says, “Not for the first time, you've completely missed the point. If there is no real improvement to be gained from changing to full reserve..” That is a very silly and patronising statement. I could answer it by saying “Not for the first time, you've completely missed the point. If there are big improvements to be gained from changing to full reserve…..” But I don’t want to sink to that level.

      You claim in your third paragraph that “The implicit subsidy simply becomes an explicit one.” Really? I’m fascinated. Exactly what form does this “explicit” subsidy take? The 100% backing of sight deposits with central bank money is ENTIRELY COSTLESS because it costs nothing in REAL TERMS to produce central bank money from thin air. As Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.”

      Your fourth paragraph claims “You have not thought through ….. the “political dynamite” point.” Actually I’m well aware of that point and have referred to it stuff I’ve written. I quite agree that the desire by Mr & Mrs Not-Too-Bright -Average to have their cake and eat it is a strong one: that is, they want to enjoy the benefits of having their money invested, while the taxpayer takes care of the downside risk. Everyone wants government to supply them with free goodies. But that’s a flaw in the brain of the average voter, not a flaw in full reserve.

      It’s certainly possible that that political point would make full reserve difficult or impossible to implement. However, as economists we should be arguing for what we think is right, shouldn’t we? If I were living in Ancient Rome I hope I’d campaign against having lions eat Christians in the Colloseum, even though it would probably be politically impossible to stop it. What about you?

      Your last paragraph makes the bizarre claim that “Full reserve banking, as I explained in the post, protects depositors at the expense of everyone else.” As you yourself eloquently explained in your previous paragraph, it’s under the EXISTING SYSTEM (i.e. fractional reserve) that depositors are protected (by so called deposit insurance – actually by taxpayers). In contrast, under full reserve, depositors who want interest and choose to have their money lent on by their bank get NO PROTECTION. As for depositors want 100% safety and instant access, yes, they get protection – just as under the existing system. Though (contrary to what Kotlikoff said) and as I think we are agreed,their money should not be invested, thus such money is virtually 100% safe, thus the actual extent of the protection and thus bank subsidy is negligible)


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    11. Ralph,

      The "gem" I picked up from Kotlikoff was nothing to do with checking accounts. From the Vox article:

      "...LPB uses parimutuel mutual funds to allocate aggregate risk. Its fully collateralised betting provides a completely safe way to provide credit default swaps, options, and other derivatives."

      In other words, totally safe gambling. As I said.

      As I have now said numerous times, it is up to YOU to make the case that full reserve is both a better system than fractional reserve AND worth the costs of transition. If you cannot do this then there is no point in changing. Simply saying that fractional reserve is just as bad does not make your case. I'm sorry if you think this is "silly and patronising": I was a project manager for many years and we would throw out project proposals that could not demonstrate real benefits: simply describing the flaws in the present system was not enough to justify a project. As things stand, as a project manager I would throw this one out. You haven't made the case.

      Friedman made a great deal of statements about money that are in my view wide of the mark. You are, remember, talking about the man who believed that base money control was an effective economic management tool in a fractional reserve system. The fact is that we do not know the "cost" of QE on the scale required to buy up all current accounts - but I doubt if it is zero, as you suggest.

      There is nothing "bizarre" about my statement that full reserve banking protects depositors at the expense of everyone else. It does. Yes, you limit that protection to current accounts - but it is paid for by expanding the balance sheet of the central bank and increasing its risk (because people can and do default on current accounts). In the end the central bank is backed by the taxpayers of this country, so there is NO DIFFERENCE between central bank backing for deposits and deposit insurance - except the cost. We are already in uncharted territory regarding central bank balance sheet expansion, and we simply don't know what the risks are. You are making very dangerous assumptions.

      Your comparison of deposit insurance for interest-bearing deposits with lions eating Christians is frankly ridiculous. But given that people don't have to put their money in banks, what do you think they would do with money that they are happy to have tied up and uninsured? They would put it in funds that give a higher rate of return - and believe me there would be lots more of those if there were no deposit insurance on time deposits. You really need to think through the micro-economic effects of that change: you are making bank lending dependent on something that is likely to diminish or disappear entirely, namely time deposits in banks.

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  4. The idea that "ending boom and bust" is possible is the most dangerous idea in economic history. Instead we should try to shoot for policies that are robust to boom and bust instead of trying to end it. This is essentially what Keynes was shooting for, although his recommendations ended up being abused by neoclassical counter-revolutionaries who improperly understood them. And, indeed, the idea is included in the Bible under the idea of "building your house on the solid rock". Storms happen. Earthquakes happen. Booms and busts happen. Unpredictable, uncontrollable. But building robust structures can limit damage.

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  5. I wanted to point out a few misconceptions about the Positive Money (PM) ideas in the piece above.

    Positive Money does not suggest backing bank deposits with cash (or central bank reserves) at all. It actually proposes that deposits are removed from commercial bank’s balance sheets and placed onto the central bank’s balance sheet, so that in effect when one is looking at their bank account they are actually looking at a deposit held at the Bank of England.

    Because of this misunderstanding you get other things wrong also. For example, you state:

    “… there is only one way full reserve can be introduced, and that is by means of the biggest bank bailout in history …Under full reserve banking, all banks would have to hold enough funds to allow all sight deposits to be drawn at once. To achieve this, central banks would have to produce a simply ginormous amount of new money … Positive Money would no doubt say that as their proposal involves moving transaction accounts from private bank to central bank books, no new money needs to be created. I disagree. In order to move the transaction accounts, the central bank would have to create new reserves to the value of the total balances in those accounts. This is simply a consequence of double entry accounting: it is not possible simply to eliminate deposit balances from private bank balance sheets without also writing off the debt assets that currently back them. So either the central bank must produce new money, or there must be a debt jubilee”

    There are two points here. First, you claim that the central bank would have to create a ginormous amount of new money. Well yes, the central bank would create money equal to the quantity of sight deposits in circulation. However, this new money would directly replace the money that was destroyed as a result of removing sight deposits from bank’s balance sheets. As a result there is no net effect on the money supply.

    Second, as you point out removing a liability represents a windfall for the banks, as liabilities has been removed from their balance sheets without removing any assets. However, this is not a debt jubilee, because the removed deposits are replaced by a liability to the Bank of England, to be repaid as the bank’s assets mature.

    You also question how allowing the MPC to control the money supply would be an improvement on the current situation, making the point that we would have to trust the politicians and there appointees to make the right decision. But this is exactly what the MPC currently attempts to do in the current system (by attempting to influence banks’ lending activities by changing the interest rate on reserves). However, because of the ineffectiveness of the interest rate as a policy tool in controlling lending, we actually have a situation where it is the senior staff at banks that determine the money supply by deciding the banks’ lending policy.

    Do bankers have the incentives to create the correct money supply? If they lend they profit from the interest they charge on loans, if they don’t lend then they do not. What’s more, the fact that our money exists as a liability of banks (as well as several other factors) means that banks cannot be allowed to fail. It’s hardly surprising then that bankers lend as much as they possibly can – its heads they win, tails the taxpayer bails them out.

    These one sided sets of incentives has unsurprisingly led the banks to create as much money as they possibly can - the money supply has actually increased by around 10% a year over the last 30 years. Between 2002 and 2008, the banks created so much money through there reckless lending that they more than doubled the entire money supply, from £1 to £2 trillion. Most of this money went directly into the property market, pushing the price of homes out of reach of many people. The increase in property prices directly benefited the rich and hurt the poor, as people had to devote more and more of their incomes to mortgage repayments.

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    1. Andrew, your accounting is wrong. Initially I thought, like you, that PM's proposal avoided the money supply increase, but when you work through the accounting it becomes evident that you can only avoid the money supply increase by means of a debt jubilee. That's why the IMF included a debt jubilee in their proposal, I suspect. You would simply be replacing one liability (private bank deposits) with another (central bank deposit). The effect would be that the money supply would double - the increase being the new base money created on the central bank's balance sheet. I'm quite happy to show you the accounting.

      You are also wrong that debt jubilee would represent a "windfall" for the banks. Catastrophic writedown of assets would normally mean bankruptcy, but as most deposits would also be removed the result would simply be banks with much, much smaller balance sheets. That could be a good thing, but it is not a "windfall".

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    2. sorry, I don't mean "the money supply would double" - I mean that the money supply would increase by the value of the deposits taken on to the central bank's balance sheet. My bad.

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    3. Hi Francis,

      I have also worked through the accounting, as I said initially PM doesn’t advocate backing deposits with cash (as you mention), and I think this is the reason for our difference of opinion.

      The PM accounting occurs as follows:

      All sight deposits are removed from bank balance sheets – the (broad) money supply falls by this amount.

      This leaves banks with a large increase in equity (the temporary windfall I was referring to).

      Obviously we can’t have that - so the removed deposit liability is replaced with a liability to the central bank, to be repaid as the bank’s assets mature – thus the windfall disappears as soon as it appears.

      At this point the commercial bank has simply replaced one liability (customer deposits) with another (it liability to the central bank), but the (broad) money supply has fallen, because this liability is not money that can be used in payments but a debt to the central bank.

      The central bank then creates an amount of (base) money on its own balance sheet equal to the amount of (broad) money lost by the removal of sight deposits from commercial banks’ balance sheets.

      So overall the total money supply does not change at all. All that has happened is that broad money has been converted to base money. The reason you think the money supply increases is because you wrongly believe the PM reform requires deposits to be backed by cash (or reserves), but this is not the case.

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    4. Andrew,

      You can't treat the central bank deposit as "not-money" if private banks are going to pay it down by remitting real money they have received in repayment of the loans balancing that central bank deposit. So no, your accounting is still wrong. Broad money does not fall. Both base and broad money increase by the total amount of the sight deposits migrated to the central bank balance sheet.

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    5. Oh, and where exactly did I say "PM requires deposits to be backed by cash (reserves)"? It is the IMF's and Kotlikoff's proposals that require this. I know that PM's proposal is different in this respect, but the transition accounting is not different. All three require a large increase in base money that (initially in the IMF's case) is NOT balanced by a corresponding drop in broad money.

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    6. Francis,
      You ask “where exactly did I say "PM requires deposits to be backed by cash (reserves)"?

      You said it in the first bullet point in your post:

      “Kotlikoff and Positive Money propose cash backing for sight deposits (current/checking accounts) only.”

      I can tell you don’t understand the PM system because you seem to be under the impression that there will still be two types of money after the reforms:

      “Both base and broad money increase by the total amount of the sight deposits migrated to the central bank balance sheet”

      If sight deposits move to the central bank’s balance sheet, how exactly does broad money increase? And how can broad money increase when there won’t be any broad money anymore?
      Broad money will be zero after the PM reforms – there will only be one type of money, which both banks and individuals will use in exactly the same way.

      And by the way, because the IMF Chicago Plan and PM proposals are different, the transition accounting is also different. Why would the transitional phase between the current system and the IMF plan and the current system and the PM plan (and therefore the accounting) be the same when the two systems (i.e. the two destinations) are completely different?

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    7. Dear, oh dear. Accounting fail.

      1) PM system places sight deposits on the CB balance sheet as CB liabiltiies. To do this it has to create new base money - which is CASH. Therefore under PM's proposals, sight deposits ARE backed with cash.

      2) Migrating sight deposits to the CB bank balance sheets would not end broad money. Where are the PM proposals for ending M4 creation by shadow banks?

      3) I've already acknowledged that my explanation of M1 was wrong. See my note to Graham.

      4) No, you aren't wriggling out of the issues with your accounting that way. The accounting for the transitional phase is essentially the same in each case - a large taxpayers' liability is created to back sight deposits. Whether that liability sits on CB or private bank balance sheets is the only difference.

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    8. FC: "under PM's proposals, sight deposits ARE backed with cash."

      NO. Under PM's proposals, SIGHT DEPOSITS ARE CASH. Sovereign money isn't BACKED by anything. That's the whole point. What's not to understand about this?

      FC: "Where are the PM proposals for ending M4 creation by shadow banks?"

      Check out http://www.bankofengland.co.uk/statistics/Pages/iadb/notesiadb/m4.aspx

      DEFINITIONS

      M4 comprises:
      The M4 private sector's (i.e. the UK private sector other than monetary financial institutions (MFIs)) holdings of:

      sterling notes and coin;
      sterling deposits, including certificates of deposit;
      commercial paper, bonds, FRNs and other instruments of up to and including five years' original maturity issued by UK MFIs;
      claims on UK MFIs arising from repos (from December 1995);
      estimated holdings of sterling bank bills;

      and

      35% of the sterling inter-MFI difference (added to OFC deposits, within wholesale M4). For further details please see the September 2011 Monetary and Financial Statistics article ‘Estimation and allocation methods within money and credit data’. Prior to September 2011, 95% of the domestic sterling interbank (now inter-MFI) difference was allocated to OFC deposits, the remaining 5% being allocated to transits. This followed a review of its causes (see page 101 of the June 1992 Economic Trends).

      Read it again. REPO CLAIMS ON MFIs. That's Monetary Financial Institutions. That's banks and building societies. While the shadow banking system does exchange repo liabilities between themselves they are NOT INCLUDED in M4. THEY DON'T CREATE MONEY.

      FC: "No, you aren't wriggling out of the issues with your accounting that way ... - a large taxpayers' liability is created to back sight deposits"

      Sigh. See above.

      A sovereign monetary authority needn't give a monetary hoot about the liabilities of its debtors. It should pursue them through the courts, of course, just as a sovereign fiscal authority should pursue its tax defaulters through the courts, in order to sustain credibility in its policies, but an unrecovered default simply means that there may be more money in circulation than is warranted by the current supply of goods, and a sovereign monetary authority copes with that by moderating the issue of new money.



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    9. Graham,

      1) If you prefer to define your system as "sight deposits ARE cash", that's fine with me. There is no practical difference between saying "deposits are 100% backed with cash" and saying "deposits are cash". It's the same thing, really.

      Sovereign money is backed by the productive assets of the issuing country - not "nothing". It also leverages those assets, which is why producing more of it without an increase in production can cause inflation. Not that I am suggesting that would inevitably happen, just that it is a risk.

      2) I used the term "shadow banking". You've interpreted that as "repo". The two are by no means the same.

      On shadow bank money creation, see this from Harvard Business School: http://people.hbs.edu/asunderam/money_20121015.pdf

      and this from Adair Turner:

      http://www.fsa.gov.uk/static/pubs/speeches/0419-at.pdf

      p.19/20 "But banks and shadow banking systems are deeply involved in the creation of credit and money (or money 19equivalents) and credit and money creation have important macrosystemic and macroeconomic effects."

      p. 31 ff section on "Excessive maturity transformation and near money creation" regarding the SHADOW banking system. Read the next section on mark-to-market accounting and haircuts, too, because that is a critical part of the money creation process.

      Of course, if you know better than Turner, then perhaps you, not Turner, should be the leading contender to be the next BoE Governor.

      3) Interesting to note that you have now moved on from "there is no risk of default" to "default doesn't matter".....

      It really depends whether you think an insolvent central bank matters. So far we have not had one, because the Bank of England steadfastly refuses to take credit risk. Your proposal changes that: I'm not entirely clear how you would handle unauthorised overdraft requests (would you simply fail all over-limit payment requests instead?), but there is no doubt that the transfer of sight deposits to the central bank's balance sheet would also transfer the credit risk of the debt assets currently backing those deposits, unless there is substantial debt write-off.

      Suppose there were a major crash in house prices and a lot of borrowers defaulted on their mortgages. (This is of course what happened in the US, and has NOT so far happened in the UK - but many people think it is not only possible but likely). Even though I assume the central bank would be preferred creditor, such widespread debt default under your system might create an imbalance between liabilities (sight deposits and money in circulation) and assets on the central bank balance sheet. As customers' sight deposits could not be reduced, money in circulation would have to be reduced instead. This would be a huge economic tightening coming immediately after a catastrophic financial crash, which would be economically disastrous. The only way of avoiding this would be for the government to provide additional assets in the form of taxpayers' liabilities (probably gilts).

      Therefore, moving sight deposits to the central bank creates a contingent taxpayers' liability.

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    10. I assume the central bank would be preferred creditor, such widespread debt default under your system might create an imbalance between liabilities (sight deposits and money in circulation) and assets on the central bank balance sheet. As customers' sight deposits could not be reduced, money in circulation would have to be reduced instead.

      Not necessarily. Not all assets on the CB balance sheet are loans denominated in their own currency.

      They could enter the market and work to revalue the market price of these reserve assets, not credit instruments denominated in their own currency unit, and thereby achieve balance without needing to reduce the liability side of their balance sheet.

      AKA devaluation.

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    11. Yes, you're right, they could debase the currency instead. That would avoid economic tightening, but it would raise inflation, since the UK is an import-dependent country. Rising inflation hurts the very people this measure is designed to protect, namely depositors, since inflation erodes the purchasing power of their money. Which brings me back to the point I made in the post - depositors generally do not want the currency debased and inflation to rise. They would rather have fiscal austerity to preserve the value of their money,even at the expense of other sectors of the economy.

      Quite a dilemma, isn't it?

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    12. But isn't the real problem today deleveraging and deflation.

      http://www.youtube.com/watch?v=EK_LN3XEcnw

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    13. CPI inflation has been well above target in the UK ever since sterling dropped 25% in 2009 after the base rate cut. Some of this is due to tax rises, and some is due to the rising cost of essential imports such as fuel and foodstuffs. Inflation is falling now as the effect of the tax rises unwinds, but it still isn't below the BoE's official target. Like you, I think the underlying problem IS deleveraging, but external factors including the debasement of the currency have created inflation where there should naturally have been deflation.

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    14. Yes, the Central Banks are trying to fight against the tide of deleveraging. I see the BoE are currently acknowledging that QE is insufficient to escape this force.

      I think the average person in the street doesn't look at the CPI, they look at the 50% off stickers in the shop windows and the relatively small increases in things like their energy bills and their weekly food shop - and their perception is it's pretty much a wash (that is, if they are one of the very few thinking about it at all...).

      At some point in time, discretionary goods prices can't deflate any longer. They have to bottom out at something over production cost. That is when all people will see is the rising cost of consumer staples, with nothing ostensibly offsetting it. Then they will take more notice of inflation and act accordingly. Assuming they by then have anything left in the kitty and at the end of each month to act with.

      Meanwhile, back at the kitty, financial assets will probably still have plenty of air left to let out of the tyres before the rims hit the road. But will all those cut-throat traders sit still in their seats?

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    15. No-one I know thinks it's a wash. They are worried about rising prices in relation to their real incomes, which are falling for a variety of reasons.

      The investment banking industry is suffering a massive contraction and thousands are losing their jobs. So no, those traders aren't sitting still. They're trying to find jobs.

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    16. It's a pity the reason your friends are looking for jobs outside of finance is that the rest of the economy is no longer expanding and demanding their innovative financial products. :-(

      Yes, currency inflation is clearly what is going to be for dinner. And breakfast. And lunch. In a fiat currency world, deflation doesn't stand a chance.

      Thank heavens for fiat currency!

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    17. I don't think any of my friends are traders, or even ex-traders.

      Inflation and deflation stand exactly the same chance in a fiat currency system. The only thing stopping deflation is politics.

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    18. YES!

      That is exactly where the Deflationistas get it wrong in their models.

      They don't model political will.

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    19. Where there's a will, there's inflation.

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  6. But that’s not all of course, because this reckless lending was the major cause of the financial crisis. This led to a major bank bailout, which led to a large increase in government debt and the transfer of money from the public sector (money which could have been spent on our creaking infrastructure). In the subsequent recession millions of people have been thrown out of work in the UK and around the world. Indeed, according to some UN estimates the financial crisis pushed up to 100 million people back into poverty.

    This is the fundamental moral issue with the current banking system. As you state:

    “Why should the interests of people who have money trump those of people who have not? Why should those who, through no fault of their own, have become dependent on state benefits in order to live, have their standard of living cut to the bone to protect people who have far more?”

    Why indeed?

    Finally you state:

    “It would be madness to lock ourselves into an economic system that prevented us from responding appropriately to, say, a major oil price shock. But full reserve banking would force us to do that.”

    In the current system we are unable to stop bank’s lending in booms, which inevitable leads to too much debt and financial crisis. Then, in order to pay down our debts the current system requires a shrinking of the money supply, which lowers purchasing power in the economy and reduces demand, which leads to economic stagnation and unemployment (and asset price falls and the rest). The central bank has of course tried to offset this reduction in the money supply through interest rate policy and QE with little consequence. As a result we are now entering our fifth year of economic stagnation. It is my contention that it is the current system that is both the cause of crises and prevents us from responding appropriately to them when they do occur.

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    Replies
    1. Explaining what went wrong with fractional reserve banking is not an argument in favour of full reserve banking. Nor is saying "but it's just the same now". You need to explain how your proposal IMPROVES the present situation, not how it maintains it. Please address the issues I raise in relation to FULL reserve banking (your proposal).


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    2. “Explaining what went wrong with fractional reserve banking is not an argument in favour of full reserve banking. “

      Pointing out the flaws in the current banking system is an argument for an alternative banking system if the new system does not suffer from those flaws.

      I am not trying to prove that full reserve banking has no problems, merely that the problems it suffers from are smaller than the problems of the current system, and its benefits are bigger than the current system. I am comparing what we have to an alternative, not the PM proposal to some perfect system.

      As far as I can tell the issues you raised are these (paraphrased):

      Problem 1: The MPC, because they are political appointees, would be incentivised to debase the currency.

      This is no different from today; the MPC can encourage banks to debase the money supply by altering interest rates. In the reformed system this would not be a problem as long as the correct checks and balances are in place (independence, transparency, accountability etc).

      Problem 2: There is an information problem – how do we know how much money to create – what if we get it wrong?

      How do bank know how much money to create in the current system? They don’t. As I mentioned previously all their incentives lead them to create too much money (causing the boom), which must eventually lead to too much debt and a bust (where they create too little money). Currently, all the BoEs policies are geared towards getting banks to start lending again in order to increase the money supply – but even after 5 years we can get them to do it. The current system never creates the right amount of money for the economy, only the right amount of money for the banks.

      Compare this to the PM system. The MPC meets once a month to determine the quantity of new money to inject. Unlike in the current system the MPC has the incentives (the inflation target) and the tool (direct control over the money supply) to get the level inflation to target. Even if they get their forecasts wrong by 5% (as in your example) and they create too little money, this would only be a small amount over the course of a month, and the subsequent fall in the price level will act as an indicator for them to inject a bit more money in next month.

      Problem 3: The money supply would increase the money supply massively/require a massive bank bailout

      My previous reply to you showed why this is not the case.

      Problem 4: Full reserve baking would result in fiscal austerity.

      I believe you made this statement in reference to Kotlikoff’s proposals. PM’s proposals do not require the money to be backed with debt, and as such austerity will not be required. In fact austerity will be less likely, as with the government gaining the full seigniorage value of each pound it creates (unlike now), it has a new source of income, and is so able to spend more or cut taxes. So austerity is less likely under a full reserve system than the current one.

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    3. Problem 5: The transition raises moral issues, as if the Gov “can afford to produce $4tn of new money (or debt) to protect depositors, why can't it afford to produce $4tn of new money (or debt) to relieve poverty and create a decent healthcare system”

      If money creation raises moral issues, then QE must also be a moral issue, as must the previous 250 years of private money creation by banks. Why do we allow a private entity to benefit from money creation and charge us for it, when it essentially the money supply could be provided at zero cost by the state? Why do we allow our money supply to be create and lent into existence as interest bearing debt, largely to inflate asset bubbles that leave us all worse off? Why is the privatisation of such a public function as the creation of money right and proper? These are the real moral issues, not correcting a system that has gone wrong.

      Besides, all that money creation requires is for someone to write numbers into a computer – no real resources are given up by making this change. Furthermore, as I pointed out because an equal amount of (broad) money is destroyed, the level of purchasing power, and therefore the number of claims on goods is identical to before, and so the price level is unaffected.

      Problem 6: Depositors are protected to the cost of everyone else.

      Again, this seems to be more of an issue with the other systems, but in fact the PM proposals aligns risk and reward – those who wish to lend their money to others may do so and they will receive a reward for it – interest. However, they also have to accept the risk of losing some money if the banks investments fail. Meanwhile those who don’t wish to take any risk with their money can have it kept completely safe. This is democratic banking.

      Compare this to the system today, where everyone receives interest on their savings (however small) but takes absolutely no risk (due to deposit insurance). As Mervyn King puts it, “many treat loans to banks as if they were riskless. In isolation, this would be akin to a belief in alchemy – risk-free deposits can never be supported by long-term risky investments in isolation. To work, financial alchemy requires the implicit support of the tax payer…. For a society to base its financial system on alchemy is a poor advertisement for its rationality.”

      Problem 7: You conclude by claiming “It would be madness to lock ourselves into an economic system that prevented us from responding appropriately to, say, a major oil price shock. But full reserve banking would force us to do that.”

      As I have already pointed out, the PM proposals increase flexibility because they give the MPC direct control over the money supply (rather than indirect control with instruments that don’t really work –i.e. the interest rate), and create an additional source of revenue for gov.

      Compare this to today – the current economy actually requires more money (to increase demand to remove us from recession) and less debt (as we are in a crisis caused by too much debt), but the only way we can get more money is if we go further into debt. We are in a crisis caused by too much debt yet all we can do is try to get banks’ lending again (putting us further into debt!)

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    4. Finally, you asked what are the benefits of the PM reforms, well here are a few:

      1.No more credit driven business cycles with all the negative effects such as financial crisis and mass unemployment, austerity etc.

      2.Banks become just like any other business and can be allowed to fail at no cost to the taxpayer or impact on the money supply.

      3. Risk and reward are aligned, those that want to take risk can, those that don’t don’t have to.

      4. No asset bubbles in necessities, such as housing, due to bans lending activities.

      5. A debt free source of money, allowing debt to be paid down in aggregate without shrinking the money supply

      6. As above, a decoupling of money from debt, so that we can increase the money supply whilst paying down debt – currently we need more money and less debt, but due to the nature of the current system this is not possible.

      7. A new source of revenue for government, meaning taxes can be lowered or spending can be higher.

      8. Interest rates will be market determined, reflecting the true cost of capital.

      There are of course more benefits than those outlined here, many of which can be found on the PM website.

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    5. Problem 1 - you have not addressed the issue. If your proposal is no improvement on the present system there is no reason for change.

      Problem 2 - no, that won't do. 5% is not a small error. And you are wrong that banks "decide" the amount of money to produce. They don't, as I have explained numerous times elsewhere. Currently the money supply responds to market forces. Those market forces are indirectly influenced by such matters as interest rate policy and lending standards, but no-one is directly "deciding" the money supply at all. The question is not therefore who "decides" the money supply but whether we move from a money supply which responds to market forces which should themselves be subject to regulation (but I agree historically have not been), to a money supply which is determined by political appointees on the basis of inadequate and incorrect information. Please justify your view that the second is an improvement on the first.

      Problem 3 - And I have explained why you are wrong.

      Problem 4 - Yes, fiscal austerity would relate to a debt-backed system. Did you read my comments about the equivalent straitjacket for a cash-based system - which yours is, though you won't admit it?

      Problem 5 - once again you resort to "the present system does this" as your argument, and once again I must point out that THAT DOES NOT SUPPORT YOUR CASE. And I have already explained why your view that broad money would fall at transition is wrong.

      Problem 6 - is a bigger issue with the IMF proposal. Yours and Kotlikoff's are about the same in this respect. There is an issue here which you are not addressing: what is the morality of protecting sight deposits from default loss, if that means that taxpayers have to bear those losses instead - which whether you like it or not would be the case under your proposal? What is the morality of protecting depositors (ALL of them) from loss of value through inflation, if that means that the economy cannot respond appropriately to economic shock and people lose their jobs?

      Problem 7 - you propose inflation targeting. That is an economic straitjacket which protects savers at the expense of everyone else. See interfluidity on the subject of the iniquity of inflation targeting:

      http://www.interfluidity.com/v2/3359.html

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    6. Re your list of benefits of PM.

      1. Disagree. The business cycle is not solely caused by credit. Severe restriction of lending would encourage banks to lend at the extremes on a pro-cyclical basis - high risks in good times and low risks in bad times. Booms & busts could actually get worse, not better.

      2. This could happen now. We don't need full reserve banking to end bailouts.

      3. We don't need full reserve banking to achieve this, either. Just end free banking on current accounts, make deposit insurance voluntary and pay higher interest rates to people who opt not to insure.

      4. Disagree. Asset bubbles could actually be encouraged by risk-averse lending in a restricted funding environment. See my comment in 1 above.

      5. Debt free, yes - but not free of cost. See my comments in the post.

      6. It is possible even in the present system. We are choosing not to do it, that's all.

      7. You are referring to seigniorage receipts, I assume? Yes, there would be some benefit from increased central bank money creation. But you do need to consider the likely costs. I would guess that interest rates would have to be substantially higher than they are now, and top-end taxes might have to be higher too.

      8. Disagree. Interest rates would have to remain part of the toolkit of the central bank, not least to defend the currency. Increasing the money supply substantially - which you would do over time, even if you manage to avoid the hike at transition - is likely to require permanently higher interest rates to maintain the value of the currency and prevent high inflation due to currency debasement. Inflation is not solely caused by money supply, whatever Friedman may say. (You lot at PM are a set of arch-monetarists, aren't you, really?).





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    7. "The MPC meets once a month to determine the quantity of new money to inject."

      This says it all.

      Not whether the amount of currency in circulation needs to be adjusted based on present demand, but by how much it will be expanded.

      You look at M and ignore V, like almost everybody else.

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    8. You: “Problem 1 - you have not addressed the issue. If your proposal is no improvement on the present system there is no reason for change.”

      Me: your point was that full reserve banking was bad because of this, I simply pointed out that both systems are the same.

      You: “you are wrong that banks "decide" the amount of money to produce. They don't, as I have explained numerous times elsewhere. Currently the money supply responds to market forces. Those market forces are indirectly influenced by such matters as interest rate policy and lending standards, but no-one is directly "deciding" the money supply at all.”

      Are you really trying to claim that banks are responding to demand now? Why then would we have politicians and the central bank desperately trying to get banks lending again? And businessess that are desperatly trying to borrow but cannot do it on decent terms?

      In reality banks do not supply what the economy needs at all, they supply the right quantity to maximise their own profits – which is normally as much as they can. We then get a correction due to the debt overload, and banks then lend as little as they can. Claiming that too much followed by too little is what the economy requires is incorrect, and completely contrary historical evidence.

      Furthermore, you seem to be claiming that the quantity of lending is demand led, subject to some regulatory restrictions. However, anyone who has ever been denied a loan knows this is not true – banks in fact ration credit. Why? The demand for credit is so high that the market clearing rate of interest would be so high as to create adverse selection and moral hazard problems. Why? Very high rates of interest attract different types of borrower and change the types of projects that can be successful (i.e. only risky ones). As a result banks make less profit if they supply the market clearing amount of credit - as you claim. To maximise profits banks must ration credit to keep the market clearing rate down. So banks do ration credit and therefore decide the money supply. Stiglitz has covered this issue in great depth.

      You: “The question is not therefore who "decides" the money supply but whether we move from a money supply which responds to market forces which should themselves be subject to regulation (but I agree historically have not been), to a money supply which is determined by political appointees on the basis of inadequate and incorrect information. Please justify your view that the second is an improvement on the first.”

      As above, banks do decide the money supply. Thus the market does not determine the quantity of money supplied, it is the banks themselves. Besides, what is the market here? Its five huge corporations.

      THe PM system is better becuase the MPC would have the incentive to create the quantity of money that benefits the economy as a whole, unlike the current system in which banks create a quanity of credit which only benefits them.

      Problem 3 - And I have explained why you are wrong.

      And I have responded above and explained again why you are wrong ;)

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    9. Problem 4 - Yes, fiscal austerity would relate to a debt-backed system. Did you read my comments about the equivalent straitjacket for a cash-based system - which yours is, though you won't admit it?

      Again, you are claiming PM is a cash backed system, which is completely wrong. Once again, there no ‘backing’ for money in PMs proposals, all money exists on the central bank balance sheet and nowhere else – banks do not have deposits.

      Why would PMs system create a straightjacket? Why wouldn’t the gov be able to spend in downturns? It has gained an additional source of revenue after all. It also has the ability to spend money directly into the economy –why would this be a straightjacket? Consider the situation we find ourselves in today under a PM system – all the QE money that has gone on bonds could have been spent into the economy creating jobs, infrastructure, providing doctors etc. Or it could have cut taxes. This is not a straightjacket this is completely the opposite.

      Problem 5 - once again you resort to "the present system does this" as your argument, and once again I must point out that THAT DOES NOT SUPPORT YOUR CASE. And I have already explained why your view that broad money would fall at transition is wrong.

      You are arguing that money creation raises moral issues and using this point as a criticism of PMs proposals. I am merely pointing out that you are in fact right, money creation does raise moral issues – however, you cant have it both ways – if money creation is a moral issue when Govs do it then it is also a moral issue when banks do it, and as such you cannot use this as a criticism of PM.

      As to your point about broad money after the transition not falling, I refer you to all my other posts (and it seems some other people on here) who have pointed out you don’t get the PM system and therefore are getting the accounting wrong.

      Problem 6 - is a bigger issue with the IMF proposal. Yours and Kotlikoff's are about the same in this respect. There is an issue here which you are not addressing: what is the morality of protecting sight deposits from default loss, if that means that taxpayers have to bear those losses instead - which whether you like it or not would be the case under your proposal? What is the morality of protecting depositors (ALL of them) from loss of value through inflation, if that means that the economy cannot respond appropriately to economic shock and people lose their jobs?

      In the current system we already protect all depositors through deposit insurance. The cost of actually paying out on deposit insurance is so great that in practice all but the very smallest of banks can’t be allowed to fail. So the current system is exactly the same. I know you are going to tell me that pointing out that the systems are the same is not an argument for PMs system. In fact I am merely showing your arguments as to why PMs system are bad are spurious.

      If you believe in Capitalism, then you should believe that banks should be just like any other business and allowed to fail, something the PM proposal allows.

      I have another question, why is it morally justified for people to receive the reward (interest on bank deposits) for investing in risky assets (though banks) but not take any risk (and in fact shift the risk off onto everyone else - the taxpayer)?

      Problem 7 - you propose inflation targeting. That is an economic straitjacket which protects savers at the expense of everyone else.

      I proposed flexible inflation targeting, just as is the case now, with inflation allowed to run higher if the economic conditions require it.

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    10. Me: No more credit driven business cycles with all the negative effects such as financial crisis and mass unemployment, austerity etc.
      You: Disagree. The business cycle is not solely caused by credit. Severe restriction of lending would encourage banks to lend at the extremes on a pro-cyclical basis - high risks in good times and low risks in bad times. Booms & busts could actually get worse, not better.
      Me: I said no more credit driven business cycles, not no more business cycles. I think the business cycle is largely driven by the credit cycle, steve keen has obviously done a huge amount of work on this which has brought him to the same conclusion.

      Me: 2.Banks become just like any other business and can be allowed to fail at no cost to the taxpayer or impact on the money supply.

      You: This could happen now. We don't need full reserve banking to end bailouts.
      Me: Really? Please let someone at the Bank of England know, as they apparently haven’t been able to figure this one out.

      Me: 3. Risk and reward are aligned, those that want to take risk can, those that don’t don’t have to.
      You: We don't need full reserve banking to achieve this, either. Just end free banking on current accounts, make deposit insurance voluntary and pay higher interest rates to people who opt not to insure.

      Me: And we are back to the bank runs of the 1930’s, debt deflation and all the other problems that go with it.

      Me: 4. No asset bubbles in necessities, such as housing, due to bans lending activities.
      You: Disagree. Asset bubbles could actually be encouraged by risk-averse lending in a restricted funding environment. See my comment in 1 above.

      Me: With no ability to increase the money supply when making loans, purchasing power in the economy does not increase, restricting the increase in asset prices. This is all in Minsky’s Werner’s, Steve Keen etc work.



      Me: 5. A debt free source of money, allowing debt to be paid down in aggregate without shrinking the money supply

      You: 5. Debt free, yes - but not free of cost. See my comments in the post.

      Me: Well we disagree on costs as I have already mentioned.

      Delete

    11. Me: 6. As above, a decoupling of money from debt, so that we can increase the money supply whilst paying down debt – currently we need more money and less debt, but due to the nature of the current system this is not possible.

      You: 6. It is possible even in the present system. We are choosing not to do it, that's all.
      Me: How? QE? This massively distorts asset prices.The way the current system normally works requires for there to be more money there must be more debt.

      Me: 7. A new source of revenue for government, meaning taxes can be lowered or spending can be higher.

      You: 7. You are referring to seigniorage receipts, I assume? Yes, there would be some benefit from increased central bank money creation. But you do need to consider the likely costs. I would guess that interest rates would have to be substantially higher than they are now, and top-end taxes might have to be higher too.
      Me: Why? If the system is more stable, and interest rates reflect liquidity preference (as in Keynes GT) then interest rates should be lower. Even if they are higher, they would reflect the true cost of capital.

      Me: 8. Interest rates will be market determined, reflecting the true cost of capital
      You: 8. Disagree. Interest rates would have to remain part of the toolkit of the central bank, not least to defend the currency. Increasing the money supply substantially - which you would do over time, even if you manage to avoid the hike at transition - is likely to require permanently higher interest rates to maintain the value of the currency and prevent high inflation due to currency debasement. Inflation is not solely caused by money supply, whatever Friedman may say. (You lot at PM are a set of arch-monetarists, aren't you, really?).
      Me: Let me get this straight, you think a reform group that is worried about credit creation by banks follows a Milton Friedman with all his emphasis on the base money supply? Seriously?!
      Why would the currency be debased? Why wouldn’t it become a safe haven currency, such as in Switzerland. After all, it would be the only place in the world where banks deposits were held at the central bank and not on a bank’s balance sheet. And as for interest rates, they would float and would not need to be kept high. Do low interest rates now = currency debasement? Is the broad money supply not shrinking?

      Delete
    12. Andrew,

      1. The UK is not a closed economy. The business cycle here is largely driven by world economic factors, not by UK banking. The financial crisis was not a UK-driven crisis, remember - it was the backlash from a much bigger crisis in the US. Economically, we are a small player at risk from global storms. Changing our own financial system would make little difference.

      2. I refer you to the Vickers report, the whole aim of which is to allow banks to fail safely without taxpayer involvement.

      3. Er, making deposit insurance voluntary is effectively what PM is proposing. At-risk deposits under your proposal would not be protected from debt default - in fact you don't even propose a voluntary scheme of deposit insurance for these. I appreciate that insurance would effectively be mandatory on all sight deposits, which would reduce the risk, but even time deposits can be subject to bank runs. Banks cannot refuse to accept notice of deposit withdrawal.

      Debt deflation is a problem of deleveraging, not deposit withdrawal.

      4. Andrew, you must think micro, not macro. The purchasing power as a whole in the economy may not increase, but that doesn't mean there couldn't be asset bubbles. Asset bubbles drain spending from other areas. You can't ignore the distortion of risk that would be caused by severe restriction of funding with no other regulation of lending.

      5. No point in discussing this further. I think your belief that money creation is cost-free is naive and ignores external factors. In ignoring currency impact you effectively assume that the UK is a closed economy.

      6. It is not necessary to change our monetary system in order for the Bank of England to spend directly into the economy. It could do so now, without buying assets, if it chose. It chooses not to do so. That is in my view primarily a political decision rather than an economic one.

      7. You have not demonstrated that the system would be more stable. The IMF's analysis did, but as I've explained in the post I consider it flawed. More importantly, though, you ignore external factors. Base interest rates would in my view have to remain under central bank control to protect sterling.

      8. PM's ideas are very similar to Friedman's, as I've explained elsewhere. The difference is that you realise that monetarism can't work in a fractional reserve system, whereas Friedman thought it could. So you want to change the system to one where monetarist central control of base money supply will work.

      You really aren't thinking through the external issues at all - not surprisingly, because PM completely ignores the external sector in its proposals and effectively treats the UK as a closed economy. Please explain to me why foreign deposits should have 100% backing from the UK taxpayer? Personally I think of all your ideas this is the worst. How dare you put my taxes at risk to protect foreign depositors? You should be looking to END protection of foreign depositors, not increase it!

      Do I really have to explain interest rate parity in a floating exchange rate regime to you? We would have to keep interest rates up to prevent debasement of the currency - as we produced more we would charge more for using it, both domestically and internationally, to prevent the increased supply debasing the currency and stoking inflation through import price rises. I have explained this a number of times already, but you are still ignoring it.

      Low interest rates do = currency debasement, even now. Sterling dropped by over 25% when the base rate was cut to 0.5% in 2009.

      Delete
    13. That was my reply to your second two comments. The following is my reply to your first two.

      Problem 1: my point stands. Simply saying "the present system does that too" does not make any case for change.

      Problem 2: erm, "market forces" and "demand" are not the same thing. "Market forces" include supply - which in this case is the banks' willingness to lend. So yes, I am saying the money supply responds to market forces at the moment. But we have a supply-side problem in money production and distribution,and there is some evidence that we also have a demand problem.

      You seem incapable of distinguishing between micro and macro effects. Individually, banks do manage the creation of credit in the interests of their own profitability. As I've said, this is a supply-side problem which economists have largely ignored and which I agree needs addressing. In aggregate, though, banks DO NOT control the money supply.

      Problem 3 - You are right about money supply (but only because it's a fudge), but wrong about bailout. Please see my following remarks about taxpayers' money and the risk to the solvency of the central bank if deposits are taken on to the central bank's balance sheet.

      Problem 4 - you are missing the point. Of course government "could" spend in a downturn - but depositors would not want them to, as indeed they don't want them to now either. Please, please go and learn something about the effect on depositors of producing more currency. It's exactly the same as producing more government debt - it erodes the value of their investment.

      I'm also getting slightly tired of being told I "don't understand" the PM system. Yes, I do. It is you who does not understand that placing deposits on the books of the central bank does not come cost-free. The fact is that the central bank is backed by taxpayers, and moving sight deposits to the central bank balance sheet without writing off the associated debt assets would place the central bank at risk of serious losses in the event of debt default, which would have to be made good by taxpayers. Can't you see that the potential loss to taxpayers is EXACTLY THE SAME whether the deposits are on bank balance sheets or the central bank's balance sheet?

      Problem 5 - What is it about "saying the present system does it too is NOT AN ARGUMENT FOR CHANGE" that you don't get? The moral issue is the same under both systems. Therefore there is NO ADVANTAGE in changing from one to the other as far as this particular issue is concerned.

      I've already acknowledged in my reply to Graham that broad money would fall. However, this would be due to a statistical fudge, frankly. As I noted in that comment, our measures of money are very flawed.

      Delete
    14. Problem 6 - no, the present system is NOT the same. Insurance does not protect all depositors - the insurance limit is £85,000. And insurance, by its very nature, does not cover 100% of all potential claimants. The present insurance is actually paid for by banks out of their income. You would move to a situation where all sight deposits were effectively fully backed by taxpayers' money. This isn't about whether or not private banks are allowed to fail. It's about whether depositors' money is more important than taxpayers' money. I don't think it is.

      For the record, I have always personally been in favour of banks being allowed to fail - and I have written extensively about this over the last two years. Nor do I think it right that risk investments should be protected by taxpayers. I think it is very wrong that depositors expect their money to be made safe at the expense of taxpayers many of whom have far less money.

      Problem 7 - We do not have "flexible" inflation targeting. There are two reasons why inflation has been allowed to run higher than target in the last few years: 1) the BoE's crappy forecasting 2) the BoE's view that inflation was caused by external factors and by tax rises, and the underlying money supply trend was deflationary.

      Delete
    15. I will not publish any more comments from PM supporters on this post. PM has dominated the comments thread almost to the exclusion of everyone else, and I feel that comments from people with less of an axe to grind are not getting the visibility that they deserve.

      Delete
    16. FC: "I will not publish any more comments from PM supporters on this post. PM has dominated the comments thread almost to the exclusion of everyone else, and I feel that comments from people with less of an axe to grind are not getting the visibility that they deserve."

      Hmm ...

      This post responded to three proposals for money reform, from IMF (Chicago Plan), Laurence Kotlikoff, and Positive Money. Nobody from the IMF, nor supporters nor opponents of the Chicago plan responded to your post, Laurence Kotlikoff failed to respond, neither did any supporters of or opponents of his proposals, but supporters of the Positive Money proposals DID respond in considerable detail to challenge your critique, so now they are to be banned because they are crowding out all of the other non-existent respondents.

      I feel you are a fraud.

      I feel you are not interested in engaging in constructive debate. I feel you are only interested in promoting your own opinions.

      Delete
    17. Graham,

      I have debated extensively with Positive Money both on this post and on Positive Money's own site, both on this occasion and previously. To say I am "not interested in constructive debate" is ridiculous. I am closing debate with Positive Money on this post because, as I said, others are trying to make remarks that are not being seen (including by you, apparently) because of very long and at times aggressive commentary from you and your colleagues. That is why I am not prepared to publish any more comments from you. I would close remarks on this post completely were it not for the fact that I AM interested in hearing from others.

      The point of any blog is to promote one's own opinions. That is exactly what Positive Money is doing on its own site. I have also given you a considerable platform here. But I don't have to agree with you, and if you abuse the privilege I have given you to promote your views here, I will no longer publish your remarks. I've shown considerable patience and I have admitted when I am wrong - which is more than you have ever done. You respond by describing me as a "fraud". It seems you feel you have the right not only to dismiss my ideas but to be rude to me. You bring your organisation into disrepute by behaving like that.

      This debate with Positive Money is now ended.

      Delete
  7. Francis, my response to your arguments can be found here:

    http://www.positivemoney.org.uk/2012/10/full-reserve-banking-does-not-mean-a-bank-bailout/

    ReplyDelete
    Replies
    1. You make the same mistake as Ralph. Saying "but the present system does this too" is not an argument in favour of full reserve banking.

      I have commented on your post. I suggest you actually address the points I raise, rather than just blaming fractional reserve for everything.

      Delete
    2. Then you should have written that "Full reserve banking would make no changes to the existing problems". Instead, you've presented your argument as though the current system is hunky dory and full reserve banking would cause poverty and economic decline. It's slightly disingenuous.

      Delete
    3. No, Ben. I am critiquing your proposal, not defending the present situation. It is up to you to make the case that full reserve banking would improve things. You haven't done so.

      Delete
  8. Please read Ben Dyson's response here: http://www.positivemoney.org.uk/2012/10/full-reserve-banking-does-not-mean-a-bank-bailout/

    ReplyDelete
  9. I agree with Ralph's comment above where he mentions investing in equity is risky and why isn't banking any different (It is like a diversified private equity fund) Bank deposits should not be backed by the government. You should pay a fee for service for zero rated accounts (You pay cheque and internet banking, cash withdrawal etc) If you get a higher rate, it is implied that the bank is speculating with your money and investing in businesses that may go belly up. It could also imply your bank may take speculative market bets that may fail. Risk reward!

    Likewise, banks should not be bailed out. If depositors want to participate in a bank run, it is up to the Bank Board and Senior Managers to act prudently to prevent such rumuours. Bank runs keep banks on their toes!

    Buddy Rojek

    ReplyDelete
  10. If you cannot see there is a qualitative difference between credit money and base money, I have a rather nice bridge that I think you may be interested in for a bargain price?

    ReplyDelete
  11. The problem with money (credit/debt) is that one person's asset (the credit) is another person's as-yet-undeliverable liability (the debt).

    Savings held in the same medium that is used for lending is the inescapable issue.

    If you ring-fence some portion of the money supply and prevent it being lent (full reserve, Monetary Base), there is still another part of the broad money supply that fluctuates in supply and demand. The exchange value of all instances of this "money" rises and falls as one; they are all fungible.

    Currency is by-design intended for borrowing and for settling trades. Hold on to it at your peril. Full-reserved or otherwise.

    ReplyDelete
  12. Hi Frances

    I have read the first of these papers. I am not enough of a sucker for punishment to read two more.

    Interestingly I agree with your assessment of the IMF paper, though we might perhaps disagree about what the mistaken assumptions are and what they should be.

    I disliked your moral argumentation.

    That said, I thought it was a good piece of analysis, if a bit short on supporting arguments for some statements. Those can be presented at need though, so are not that big of an omission (to me personally).

    Nice to see we agree on some things. :)

    TF

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    Replies
    1. MF, you ALWAYS dislike my "moral argumentation", so no surprise there!

      As you say, nice to know we agree occasionally.

      Delete
  13. The strongest defender of full reserve banking I have read is Rothbard and his even more astute student Professor Huerta de Soto.

    He has an alternative plan laid out in "Money, Bank Credit and Economic Cycles" - chapter 9 i believe. Its similiar to the Chicago Plan but in very crucial ways different.

    Most of your comments dont even touch his arguments.

    ReplyDelete
    Replies
    1. De Soto is a windbag. He devotes the first THREE CHAPTERS of his book to inane arguments about whether fractional reserve breaks legal principles or not. All completely irrelevant, and for the following reason. If something (e.g. fractional reserve) is illegal, but is on balance beneficial, it’s the law that should be changed, not fractional reserve that should be outlawed.

      To illustrate, I often “steal” other people’s goods – I take stuff from skips. Strictly speaking that is illegal. However, it results in stuff being recycled, so on balance probably brings benefits. And if that’s the case, that doesn’t prove that “stealing” from skips should be outlawed: it proves that the law on stealing from skips should be amended.

      I.e. the CRUCIAL argument is whether fractional is better than full reserve. Legal niceties are irrelevant.

      Delete
    2. Mostly agree, Ralph, except for the last sentence. You have it the wrong way round. As the present system is a fractional reserve one, the CRUCIAL argument is whether full reserve is better than fractional reserve. If it is not, there is no point in changing the system.

      Delete
    3. These are not arguments.

      Calling someone a "windbag" because you dont like someones arguments in parts of his book, is just pathetic.

      You obviously have some kind of insane communist, relativist view of law and property rights. Who is this commissar deciding what is beneficial and who is to be weighted most heavily Ralph Musgrave ?

      Stop smoking Richard Posners crackpipe, and read up on the socialist calculation debate.

      Secondly, there is absolutely no proof that fractional reserves are beneficial. You guys desperately need to reread Adam Smith, who formulated what you FRB-fanatics believe is the argument for how FRB stimulates "the needs of trade" etc.

      Delete
    4. Never mind, I now realize that your somekind of post-keynesian, Chartalist and thereby I do not really care what you believe.

      You obviously(given your beliefs) have brain damage.

      Delete
  14. Whilst by and large the blog above is excellent, the author's reflexive preference for believing that democracy must necessarily produce outcomes that are invariably superior to outcomes that did not result from masses of people voting on the thing in question...is concerning, not least of all because Hitler was a Democrat. Hiding behind the idea that nothing is legitimate unless it is democratic quickly - and often unknowingly - invites otherwise learned individuals to actual believe that something cannot be legitimate unless it is democratic.

    ReplyDelete
    Replies
    1. So you're not a supporter of democracy, then?

      Delete
    2. I think that your freedom to choose whether to be a part of a democracy, or not, is more important than any imaginable form of organisation. In other words, nobody should have their freedom violated because somebody else wishes to force them into a particular type of organisation (even if it is democratic). To simply assume that people are not capable of picking leaders to whom they then afford authority unless they have done so through some mass form of mob rule is just to deny basic, everyday common sense.

      Delete
    3. I should also add that, in light of your intelligence, returning a response to my statement that equates to only allowing me to pick one of (your) two options (democracy or no democracy) really does do a disservice to your usually very nuanced way of looking at the world.

      Delete
    4. This post is about the relative values of two different financial systems, not about the merits or otherwise of democracy. I'm taking as "given" that we have a democratic system of government.

      I'm well aware that democracy has its flaws and have written about the Tyranny of Democracy myself. But it's not the point of this post. Please confine yourself to the subject if you wish to discuss further.

      Delete
    5. I think the politics of people and finance are mixed up, perhaps unavoidably, so I don't see it as being an entirely irrelevant point. I leave it at this. You, evidently, are an intellectual. So think of this question in terms of the academy. Is the number of times a paper is cited through footnotes necessarily (or even most of the time) are good sign of that paper's importance? Does popularity automatically equal best, in other words? One need not think to hard to remember that only a few years ago some such papers suggested the world was flat and Earth the centre of the Universe.

      Delete
  15. Why not leave banks to fail? Any new banks that emerge can start to have full reserves in gold or silver?

    ReplyDelete
    Replies
    1. Have you thought of the cost to taxpayers of providing banks with bullion reserves? Gold and silver have to be bought on the international bullion markets - unless your country is fortunate enough to have mines that it can nationalise.

      Delete
  16. Where did the depositor's deposit come from?

    Received when someone else spent money.

    Where did their money come from?

    Chances are better than even that it was borrowed into existence by someone at the end of the chain.

    And yet when the borrowed credit money exits the debtor's account and is credited to a depositor's account… it is now different.

    “Full reserve banking, as I explained in the post, protects depositors at the expense of everyone else.” Quite.

    ReplyDelete
    Replies
    1. At present, the chances are 100% certain that it was borrowed into existence by someone at the end of the chain, because that's how our credit money system works.

      However, to be fair to PM, they wish to change this. Under their proposals, the money would be spent into existence by government at the end of the chain. Would this change your view?

      Delete
    2. Yes 100% chance unless it was an asset bought by the Central Bank with fresh Quantitatively Eased base money.

      Which is almost indistinguishable from the government doing the same.

      Delete
  17. Frances, you might like to look at my father's web site too, www.legalforgery.com He has spent over 40 years looking at the money supply and banking, and became interested in the subject after the great inflation we had in the 1970s. He has similar views to Positive Money, and proposes using a system of Registered Money as the solution to the problem. Try not to get into a long discourse with him, as he may not have my youthful vigour, although he has extensive knowledge. There is a great illustration on the web site of a horse and carriage rushing to save Backhouses bank in the 1800s, a very early version of Northern Rock.
    I am hopeful that even if Positive Money's proposals are not adopted, at the very least we will see more competition in the banking sector, with more use of credit unions, things like fundingcircle and even good old "Bank on Dave" in Burnley. I think the government is very keen to stop a bank being "too big to fail", and to prevent the tax payer having to bail out the banking system. I see these as only sticking plaster solutions however, and they do not address the real issues. God help the European tax payer, if they have to stand behind the ECB while it buys a large chunk of the toxic debt from the Club Med banks. That sort of thing brings the whole banking sector into disrepute. I think auditors and regulators here have a lot of questions to answer too, for effectively letting banks like HBOS and Northern Rock trade whilst insolvent.

    Simon

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    Replies
    1. Hi Simon

      thanks for this. I think one of the huge issues I have with proponents of full reserve banking is their asymmetric concern for depositors over borrowers and indeed over ordinary people trying to make ends meet in a deflationary economy.

      The debt jubilee that Positive Money does NOT propose (but the IMF does) would by itself protect depositors nearly as effectively as full reserve banking, because it would replace the risky debt with government assets, and it would also act as a significant economic stimulus, which heaven knows the country needs - and that would also help to protect savers. I've said elsewhere that I am in favour of a partial debt jubilee. I would much rather see public money spent on this, which would relieve debtors, protect depositors and stimulate the economy, than on a full reserve banking system that protects depositors, does nothing to relieve debtors and could be actually deflationary for the economy (I haven't gone into the macroeconomics here but deflation or at least stagnation over the longer-term seems likely because of the serious restriction of lending that is implicit in these proposals).

      The fact is that full reserve banking without debt jubilee would be asymmetric bailout of depositors, leaving debtors still carrying heavy debt burdens and an economy still weighed down by huge amounts of private debt. In what way is that a good use of public funds?

      Delete
  18. We are in a relatively deflationary environment because of the huge recent credit expansion by the banking system. The ordinary Joe does not feel this way though, when his living standards are eroded by rising food and energy bills. Not all of this inflation can be laid at the door of the banking system. I am certainly not in favour of the government / tax payer taking over the bad debts of the banks, either here or in Europe. Some debts need to be written off, and we need to gradually replace the debt money with debt free money, so the burden on debtors and the tax payer is eased, and depositors are protected. The Positive Money web site gives a good description of how this could be done. The situation is dire in places like Greece and Spain, and the solution for them and their governments is not to take on yet more debt from the ECB or elsewhere, and impose excessive austerity. The only game in town for them at the moment is to get more economic growth so they can pay back their debts, which is just not happening. The responsibility for bad lending and borrowing lies squarely with the parties involved. In the same way, I don't expect the tax payer to come to my rescue if my horse failed to win at the races today, or my friend failed to pay back a loan. The banking system needs to build enough reserves or have an insurance scheme so they can cover their bad debts. It is not the responsibility of the UK tax payer if Anglo Irish, a subsidiary of RBS, decided to go large on lending for Irish property a few years ago, or investing in Greek gilts. It is down to RBS to write this bad debt off. Unfortunately the current situation is that governments have been spending and borrowing beyond their means, and banks have been lending beyond their means. Both governments and banks now expect the tax payer to bail them out.

    Simon

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    Replies
    1. Simon,

      I think you need to understand a few basic financial facts.

      - Banks do not have enough equity or junior debt to enable debts to be written off solely by bankrupting them.
      - If you write off debt (assets) in excess of available equity you must also write off the deposits (liabilities) that balance them
      - If you do not want to write off the liabilities (i.e. force depositors to lose their money), then you must replace the debts with something else
      - Ergo, in order to write off debt without depositors losing their money, government must take over private debt.

      I'm sorry if you don't like this, but that is the way the financial system works at the moment. You can't simply wave a magic wand and write off debts cost-free. Either government produces the money to pay off the debts, or depositors lose their money.

      Positive Money is currently ducking the issue by leaving debts untouched on bank balance sheets and replacing deposits with government liabilities. But that doesn't address the debt mountain, does it? And more importantly, it simply replaces depositors' risk with taxpayers' risk. If those debts are not paid, taxpayers lose their money. Which is why I say the move to full reserve banking is a massive bailout.

      Delete
    2. It may be the way it works at the moment, but the likely scenario in the future is that banks will have to spend a long time repairing their balance sheets, writing off some debts, and using re-payment of interest on good debt to cancel out some of the bad debt. A bank with a good reputation can gain further equity finance, or a small, bad bank can be taken over by a bigger, more robust bank, although I am in favour of smaller rather than bigger banks as these are less likely to need a large amount of help from the tax payer. The shrinking of the big banks' balance sheets will be a step in the right direction, and enable all banks to stand on their own feet. So far, the banks have not been wholly honest in revealing all their bad loans. I don't see why the tax payer has to be involved at all, unless the bank is in a very wretched state.
      I have interviewed several retired bank managers with my work over the last year or two, and all of them are disgusted and horrified by the way the big banks have behaved, especially with their regard to taking excessive risk in recent times. They knew their customers, and mortgages for example would be limited to say 3 times salary, ie a sensible multiple of income. We are where we are, the main thing is to get a fairer, more stable system going forward, and I don't think the present way of doing things meets those needs.

      "Positive Money is currently ducking the issue by leaving debts untouched on bank balance sheets and replacing deposits with government liabilities. But that doesn't address the debt mountain, does it? And more importantly, it simply replaces depositors' risk with taxpayers' risk.. "..

      I am not certain that this is Positive Moneys position, you would need to clarify with Ben or Andrew on this. As I said in my previous post, the introduction of debt free money would gradually help to reduce the debt mountain, anyway, without risk to the taxpayer.

      I better go out and do some work Frances, it has been a good discussion with you, and it is good to hear views from another perspective, especially from someone who has been involved in the banking industry.

      Simon

      Delete
    3. SImon,

      Under PM's model the taxpayer IS involved. After transition, private debts would be backed with public money. I'm sorry, but that is the situation. Redefining the central bank credit as "not money" won't do if the banks are going to pay down that credit by remitting real money received in repayment of private loans.

      See my second reply to Graham Hodgson regarding the implications for the taxpayer of a catastrophic private debt default - which I think might be quite likely if people knew that deposits weren't at risk. It is not possible to write off bad debts (assets) without also writing off something on the liability side of the balance sheet - that is an accounting identity and cannot change. Currently the writeoff sequence is shareholders' funds (including retained earnings, i.e. accumulated profits), junior bondholders, senior bondholders and depositors. I'm not sure where the central bank would feature in this lot: I suppose it would come last, after at-risk depositors, but in a major default it would still lose money. (One of my enduring criticisms of Positive Money is that they ignore private debt....)

      You talk about reducing the debt mountain by introducing debt-free money. That would only apply to government debt, and as I noted in the post, all you would really be doing is replacing one sort of money with another (or one sort of debt with another, or debt with equity, depending on how you like to look at it). You wouldn't actually reduce anything. And you wouldn't do anything about the bigger problem in this economy, which is private debt. Yes, you might prevent it growing - though it isn't growing much at the moment anyway. But you wouldn't reduce it. It would still be a drag on growth.

      Delete
    4. I don't agree with this analysis, I am sure it is entirely possible to replace debt money with debt free money (cash is not debt and has no interest attached to it), but without going into technical details, I will leave it at that, and we will have to agree to disagree. I do not wish to go into the technical details of Positve Money's proposals, or accounting entries for private banks, the central bank, or individual account holders, because they know better than me how that could work. All I know is that debt free money is possible, and it certainly was when cash formed a much larger part of the economy than it does today.

      Simon

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    5. Simon,

      Cash can be regarded as a callable zero-term bond (debt) or as a share in the productive assets of the economy (equity). Notes and coins don't carry interest, so are zero-coupon, but the Bank of England pays interest on excess reserves and private banks also pay interest on deposits they create. Therefore 97% of the money created in our economy is interest-bearing. I've explained in the post the equivalence between currency value and value of government debt. Of course, if you know better, please do explain it to me.

      We have never had "debt-free money". Not in the whole history of mankind - I'd suggest you read David Graeber's "Debt: the first 5,000 years" for an explanation of how our debt money system came to be. And full reserve banking has never existed for any significant period, either. If we were to introduce it, it would be a major economic experiment. The last century is littered with the corpses of people who have suffered the consequences of economic experiments. I am not wildly enthusiastic about another one.

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    6. Physical cash when it is created does not carry interest. If that was all the money in the economy, then we would have created debt free money. The fact that a bank pays me interest on my phsical cash holdings in the old days at the bank, or todays electronic money is a different matter altogether. They are paying me interest because they have the use of my money, to lend on, or invest. If my account or part of the money in it was just a safe deposit box, then I would pay a fee to the bank to look after it. The relevant part is that 97% of money is created as a loan bearing interest, not cash. I am not against debt, just against banks creating money as debt. Debt is very useful when growing a business for example, where the growth in the business can easily repay capital and interest. It is not so good when used to inflate house prices. I have some knowledge of how our debt based money system came into existence, and how the banks came to be the main issuers of our currency. Banks should lend existing money, which is what most people believe they do as per "Bank on Dave" in Burnley, not create their own, but we have explored that in previous posts.

      Simon

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    7. Simon, I'm touched by your desire to turn the clock back to the days when cash was king, but really that is not realistic. The FACT is that at the moment 97% of our money is interest bearing. How that came to be the case is really not the point.

      I did say I assumed that under full reserve banking, money would not be interest bearing, but that doesn't mean it would be free. Look again at my comments regarding the equivalence between currency and government debt. That equivalence would still hold in a full reserve system.

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    8. I shall retire gracefully now Frances, because I am playing away from home on your blog, and you will have a lot of posts to read.

      Simon

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  19. This is a useful and informative analysis, but I wish of course to challenge some points which I feel are misrepresentations or misunderstandings.

    From your post:

    FC: "The Office of Budget Responsibility's October evaluation report admitted that they got their growth forecasts wrong by a full 5 percentage points. Under Positive Money's proposals, the money supply for the economy would be directly determined by such forecasts."

    Positive Money does not stipulate what should be the economic determinants for adjusting the money stock. That is to be an issue for government direction. The presumption is that it would be inflation, not GDP growth, that was targeted.

    FC: " ... it is not possible simply to eliminate deposit balances from private bank balance sheets without also writing off the debt assets that currently back them."

    No, you can alternatively replace the deposit liabilities removed from private banks balance sheets with an equal (interest free) liability to the central bank which is paid off using the repayments of principal from pre-existing loans, as Positive Money proposes.

    FC: "Whether a full reserve banking system is "safe" for depositors depends on the trustworthiness of politicians and political appointees. The value of the currency is only as good as the willingness of government to support its value."

    Safety has nothing to do with value. It means access at par, substantially on demand. A bank balance of £100 should always be exchangeable for goods priced at exactly £100, not goods "worth" £100. Nobody can ever, ever, control the price of one good relative to another so the "value" of money can never be guaranteed. Under the current system, parity cannot be guaranteed because deposit insurance imposes an upper limit on the assured cash value of a bank account. Maintaining parity between bank balances and nominal prices is not incompatible with inflation targeting.

    FC: "If the UK can afford to produce enough new money to back all current accounts pound-for-pound, why can't it afford to produce enough new money to improve its creaking infrastructure?"

    The question is, of course, intended to be rhetorical. But banks effortlessly quadrupled the UK money supply in the 18 years prior to 2010, providing an additional £1.5 trillion for first use by borrowers. If the government had been granted first use of some of it, debt free, then perhaps we wouldn't be struggling now under a creaking infrastructure.

    continued ...

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  20. ... continued

    From your subsequent responses:

    FC: " ... expanding the balance sheet of the central bank and increasing its risk (because people can and do default on current accounts)."

    I presume you mean people default on their overdrawn current accounts. Under the Positive Money proposals, overdrafts would be loans with investors and their banks taking the risk, not the central bank.

    FC: "I mean that the money supply would increase by the value of the deposits taken on to the central bank's balance sheet."

    You are forgetting the fact that liabilities between commercial banks and the central bank are excluded from the money supply. Anyway, post reform, the funds at the central bank would be the only money.

    FC: "The debt jubilee that Positive Money does NOT propose (but the IMF does) would by itself protect depositors nearly as effectively as full reserve banking, because it would replace the risky debt with government assets, and it would also act as a significant economic stimulus, which heaven knows the country needs - and that would also help to protect savers. I've said elsewhere that I am in favour of a partial debt jubilee."

    There's nothing in the Positive Money proposals which would rule out a debt jubilee in addition. Existing debts remain assets of the commercial banks from which they service their transition liabilities to the central bank. A jubilee could replace citizens' debt with government debt as you propose, or write off banks' liabilities to the central bank in line with written off citizens' debts.

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    1. That is to be an issue for government direction.

      Always a winning formula!



      No, you can alternatively replace the debt assets removed from private banks balance sheets with an equal (interest free - oh really? Consequence-free new money - how wonderful!) liability to the central bank which is paid off using the repayments of principal from pre-existing loans, as the ECB has been doing (apart from that nonsense about anyone, especially the fat kid running the sweet shop, getting consequence-free new money...).

      Fixed your post?



      The value of the currency is only as good as the willingness of savers to support its value.

      Fixed your post?




      Nobody can ever, ever, control the price of one good relative to another so the "value" of money can never be guaranteed. [...] Maintaining parity between bank balances and nominal prices is not incompatible with inflation targeting.

      OMG YESSS!!! What you said!

      So let's do this thing - let's multiply the monetary base and watch prices remain within our target sweetspot! This is gonna be awe-inspiring to watch!



      Anyway, post reform, the funds at the central bank would be the only money.

      Oh. Better turn in all these notes and coins then I guess. Get used to paying for chewing gum with my debit card. The guy in the paper shop is gonna love eating all my card transaction fees. Or will it be all in the price for me?

      Better get my kids card accounts too, so they can still spend their pocketmoney on stupid stuff.

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    2. This contribution adds very little to the debate

      Simon

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    3. very poor lending decsions by the banks

      Or... very poor decisions by savers, to place their savings in securitized debt, packaged by the banks from all the 'who cares?' debts they originated towards the end of the epic credit bubble?

      If you want to blame the banks for all of our problems today, that's fine. As long as you don't mind being wrong.

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    4. Oakay,

      I see where you're coming from. Couple of points:

      - I did point out both in the post and in comments that central bank money is neither interest-free nor without cost.
      - No, it is not savers that support the value of fiat money. It is government.
      - There have been a lot of discussions recently about moving to a cashless society, and your concerns about this are valid. But PM are not proposing a cashless society. "Funds at the central bank" should read "central bank liabilities", which include notes & coins in circulation.

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    5. If savers decide there is too much money to go around and it's not holding it's real exchange value, I think we will discover the government are powerless to prop it up.

      People hoarding money, or money substitutes like recycling their cash into bonds, is how all the rampant monetary inflation in the last few decades that Simon mentioned earlier, hasn't shown up in the general price level yet.

      Heaven help us if the likes of China, Japan, etc, cease to mop up all the trade deficits we are so keen on sustaining in the West.

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    6. See, you ignore debt too. Savers do not control everything. Debtors deleveraging also prevents inflation.

      Our trade deficits are their trade surpluses. China, Japan etc. are quite keen on keeping those.

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    7. Frances

      The point made was yes, those are trade surpluses, but at present they spend them on buying dollars.

      What if they spend those trade surpluses on something else instead ie. they get tired of accepting continually devaluing future promises?

      TF

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    8. It all depends on what they want to use the trade surplus for, doesn't it? Why would they want dollars? Come on, you know the answer to that. The risk is loss of the US$ reserve status. Let's not get into that, PLEASE!!

      Delete
    9. Really, they are sent dollars to settle the deficit. Then the trade partner sends them right back to be recirculated into the originating economy once more, in return for a promise of more dollars later. The surplus-holder nations don't have dollars. They have promises of dollars to come.

      Because the trade partner sent the dollars back, more did not need to be created to offset the leakage from the local currency zone into another zone. The imported goods were effectively free for now... to be paid for later, with currency inflation to make good on the promised payments.

      And when the promises come due? Do they roll them over and over, or don't they? If they don't and they finally demand their promised dollars, where do they come from?

      Nail-biting stuff!

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    10. Sure, we can ignore the elephant in the room if you like. Most do, so it is the socially practicable thing to do I suppose. :)

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    11. Yes.

      The risk is loss of the US$ reserve status.

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    12. MF, that's a bit unfair. You know I don't ignore that. I just don't want to discuss it on this post, that's all. It's not what it's about.

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    13. Sorry. My response was tongue in cheek. Wasn't meant to be critical.

      I really don't mind.

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  21. Graham,

    Several points in reply.

    - It does not matter what form of forecasting is used to determine the money supply. The point is that ALL economic forecasting is inaccurate and prone to serious error, especially where there are economic shocks (not all economic shocks are caused by finance).

    - I'm not surprised that Positive Money assumes inflation targeting, since their whole aim is to protect savers. Personally I think NGDP targeting would be better, because it would allow inflation to flex to accommodate growth. Inflation control that is so tight it prevents growth is yet another bailout of savers at the expense of everyone else.

    - You have misunderstood my remark about writing off debt assets. There are two alternatives: EITHER deposits simply "vanish" from private bank accounts, and so do an equivalent amount of debt assets (which is a debt jubilee), OR deposits are replaced with an equivalent central bank deposit and debt assets remain as they were. You are suggesting the second. Many people have assumed that by "moving" deposits from private banks to central bank PM means the first.

    - On safety: I absolutely disagree with you. Safety has EVERYTHING to do with value. It does not matter how well my deposit is protected from debt default, if it is eroded by out-of-control inflation I lose my money just as surely as if I had lent it to a failed business venture or gambled it away on the horses. That is why, generally, people and organisations that want to protect savers are strong on inflation control, often prefer hard currency, and don't want government spending any money. I explained all that in the post.

    - On infrastructure: discussing what has ALREADY happened is not the point. PM is proposing to put even more taxpayers' money at risk in order to provide 100% safety for sight deposits. That money could alternatively be invested in the economy to benefit everyone.

    - Defaults on current accounts. Is PM planning to end unauthorised overdrafts and daylight overdrafts, then? Bounce all payments that exceed the limit, even if they are cleared by the end of the day? And most overdraft accounts move from positive to negative balances and back again. Are PM proposing to force people EITHER to have positive or negative balances? I don't think PM has thought this through very well.

    One thing that is becoming very clear to me is just how much restriction PM's proposals would place on customers, and how much poorer a service they would receive than they get at the moment.

    - "Liabilities between commercial banks and the central bank are excluded from the money supply". Er, no they aren't. M1 includes bank reserves (M0), which are a liability of the central bank with respect to commercial banks, AND customer deposits currently held on private bank balance sheets. Under PM's proposal M0 would increase massively because of the expansion of reserves, but M1 would not reduce unless the measure were changed to exclude the central bank deposit replacing private bank deposits.

    - Positive Money has not so far proposed a debt jubilee. Of the three proposals I reviewed, only the IMF does so.

    The IMF's accounting left a huge imbalance between money "in circulation" and central bank liabilities. It would be interesting to work through an accounting model that introduced the IMF's debt jubilee into Positive Money's model of migration of current accounts to the central bank. I think that might solve the IMF's accounting problem.



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    1. And there is one further point that you really should take into consideration. The more I look at this the more certain I am that a migration to full reserve banking MUST involve debt jubilee. That is because if private debts remain intact on banks' balance sheets, but private deposits are replaced with a central bank deposit, the central bank is at risk of huge losses in the event of major debt default and bank bankruptcy. May I remind you that it is the taxpayers of the country that back the central bank: for this reason the IMF does not distinguish in its models between central bank and government. If you migrated deposits without writing off debts, you would replace depositors' risk with taxpayers' risk. Taxpayers would face potential losses far in excess of GDP. And unlike depositors, who could withdraw their funds and thereby force bank bankruptcy, taxpayers would be unable to escape. It would be by far the biggest bailout in history. Given what the economic consequences of a much smaller bailout have been (and still are), just think what effect a catastrophic private debt default under PM's model would have. No wonder the IMF included debt jubilee. The alternative is monstrous.

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    2. If you migrated deposits without writing off debts, you would replace depositors' risk with taxpayers' risk.

      Not to mention, doubling that part of the money supply. 1x base money + 1x debt due.

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    3. Anonymous,

      Yes, I've already noted that.

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    4. Frances,

      Re your point in your post the IMF author’s mathematical models and garbage in garbage out, George Selgin would doubtless agree with you. He said, “all too many so-called economists today are mere technicians who care only for the latest mathematical and statistical gimmicks, and give not a jot for genuine economics.” See: http://www.freebanking.org/2012/09/13/advice-to-young-austrians/

      You claim that debt jubilees are central to implementing full reserve because “if private debts remain intact on banks' balance sheets, but private deposits are replaced with a central bank deposit, the central bank is at risk of huge losses…” The flaw in that point is that private debts DON’T REMAIN on bank’s balance sheets: it’s depositors who have agreed to have their money loaned on who bear the risk.

      Delete
    5. Ralph,

      Not just Selgin, but many other people too have criticised macroeconomists' reliance on theoretical models and lack of consideration for real-world data.

      Regarding private debts: what you say isn't right, I'm afraid. Remember that I am talking about EXISTING debt, not new loans made after migration. PM's proposal is that sight deposits would be migrated to the central bank balance sheets, but the share of debt assets that currently back those sight deposits would remain on bank balance sheets. The total of those debt assets after migration would far exceed the total remaining deposits. The difference would be made up of central bank money, which would put the central bank at risk of very large losses. I'm happy to walk through the accounting if it would help you to understand this.

      Delete
    6. One further thought, especially for Graham and Andrew. We've been discussing the migration alternatives of debt jubilee (IMF) or creation of a central bank deposit to replace migrated sight deposits (PM). There is of course a third alternative, which Andrew mentioned but did not address. That alternative is partial nationalisation, which would be achieved by leaving the debts intact and creating new shares owned by government to the value of the migrated deposits. The increase in equity would not be a "windfall" for the banks, as Andrew supposes, because it would already be fully encumbered by the existing debt assets. This option would put taxpayers at even more risk than the creation of a deposit liability, because they would come first in the loss sequence instead of last. But it would also give government far more control over the activities of banks. I'm not necessarily recommending this, simply noting that it is a third alternative (and one which is likely to be popular with left-wingers!) I think you should note, though, that in my detailed analysis of the IMF's proposal I concluded that banks would find it extremely difficult to make profits post-migration, and that therefore gradual replacement of private banks with state enterprises would be inevitable. You need to consider whether the same would happen under PM's proposal, since it would cause severe restriction of lending and probably a shrinking deposit pool as time deposits migrated to funds.

      Delete
    7. FC: "M1 includes bank reserves (M0)"

      Nice one, had me going for a time. But saying so don't make it so. M0 is notes and coin in circulation and in bank tills plus bank reserves, but M1 excludes bank reserves and substitutes customer sight deposits.

      More later.

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    8. My bad. M1 would indeed fall by the amount of the expansion of M0. But this is simply a question of the definition of monetary measures - which as I have said before, are fundamentally flawed. You would effectively be creating a new category of deposit that was excluded from all monetary measures. I'd call that fudging the statistics, myself.

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    9. Francis

      There is a constant refrain that the Positive Money proposals would put taxpayers at risk. "Taxpayers would face potential losses far in excess of GDP." But what risks? And who are the taxpayers?

      Firstly, we are only talking about sterling loans and deposits, so borrowers will be liable for assessment for UK taxes and will have used the loans to purchase goods and services from suppliers who are also liable for assessment for UK taxes. So borrowers, lenders and suppliers all fit into the category of taxpayer (although any of them may, for the time being, have tax allowances that exceed their liabilities and therefore may not be due to pay any tax). Taxpayers, then, are everyone engaged in sterling-denominated economic activity).

      Secondly, the borrower has consumed goods and services that would otherwise have been available to other taxpayers, but has not yet provided goods and services to compensate them for this. Default means that the borrower has failed to provide such compensating goods either because the goods provided proved to be insuffient compensation since the sales proceeds, if any, failed to cover the cost of servicing the debt or because the borrower has dishonestly decided to use the sales proceeds to buy other goods and services rather than honouring the debt, thereby neutralising the compensatory nature of the goods they did sell.

      So when a debt defaults, taxpayers collectively are in the position of having supplied goods and services to the borrower but with now no prospect of receiving goods and services in compensation (the money the borrower spent simply added to the means for purchasing those compensating goods and services if and when they materialised). This situation is rectified under the current system when the bank writes off the loan, since it also reduces its own equity by the amount written off. This means that the bank is now less able to buy goods and services on its own behalf, leaving those that it would have bought available for purchase by other taxpayers, filling the gap left by the defaulting borrower.

      Now under the Positive Money system, all pre-transition loans remain assets of the banks and defaults will be handled in exactly the same way as under the current system. The banks' losses from defaults will protect taxpayers from competition for goods and services by the banks to the extent of the outstanding compensation due in respect of the borrower's consumption.

      continued ...

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    10. ... continued

      You are envisioning, however, that any proposal which protects current accounts from bank failure will result in a mass criminalisation of the mentality of the public who will all decide that because deposits won't be affected they can all walk away from their debts (and their homes, and their cars, and their ability to pay with plastic). Donning my civil-servant-preparing-to-draft-a-response-to-an-FOI-request-on-plans-to-tackle-a-zombie-attack hat, this, were it to happen on any substantial scale, would firstly reduce banks' revenue streams from repayment of principal on pre-transition loans, which would be the primary means for servicing the transitional liability to the Central Bank, and could ultimately lead to the collapse of the commercial banks and default of the transitional liabilities. Where would this leave the central bank?

      Well the central bank is not dependent on revenue from the transitional loans. This is all to be re-issued as an additional source of revenue for the government. Were this revenue to dry up, and were economic conditions to be such that there was no call to issue new money, then the government would lose this additional revenue stream and need to fall back, as now, on taxes and borrowing. As far as taxpayers were concerned, this would be a return to the bad old days of today, tomorrow and every day to come until the system is reformed, but they would be in no worse a position financially, with the exception of those who profited from the mass fraud, of course. In the absence of bank closure, the central bank would not need to take any action, the transitional loans can be carried indefinitely. If a bank failed then its successor, who took over its investments accounts and fund, the residue of the pre-transition loans and the administration of the failed bank's customers' transactions accounts, would negotiate the extent of the transitional liability it would also take on, but the balance would need to be written off the central bank's balance sheet. This could require an injection of capital from the government which could take the form of an undated zero-coupon gilt. There would be no diversion of tax revenue from other expenditure areas, and no demands on future revenue for servicing write-off costs. The cost to taxpayers would be the goods and services consumed and not replaced by the defaulting borrowers minus the equity surrendered by the failed bank.

      Of course, the arcane minutiae of central bank accounting would not be a major issue in a country beset by hordes of homeless, carless, cardless pedestrians shambling desperately after cash to feed the brain-dead existence of those who thought it was a good idea to walk away from a bank loan.

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    11. Congratulations, Graham. You've just completely undermined the main argument for full reserve banking, namely the idea that current account depositors need to be 100% protected from the possibility of default. If there's no risk to taxpayers after transition, there is no risk to depositors now. QED.

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    12. On monetary measures, I agree they are flawed because they can only ever be proxies for money under a fractional reserve system, since the final means of payments settlement (M0) bears no relation to peoples' ability to make payments, much of which is created on the fly through bank credit extended at the time of payment. Under a Positive Money system all payments would be settled from pre-existing transactions accounts which would, in aggregate, define the money stock.

      Delete
    13. I see you laid a cunning trap which I walked right into. But your cunning trap has a back door. Under a fiat money system such as ours, the sovereign creation of money is cost and risk free unlike the use of bank liabilities for money.

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    14. As you know, Graham, I don't agree that the sovereign creation of money is either cost or risk free.

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  22. The "gradual replacement of private banks with state enterprises" will simply accelerate the mass drive towards decentralised electronic currencies that are global in nature and inflexible like gold. http://www.americanbanker.com/issues/177_209/bitcoin-merchants-plan-own-version-of-black-friday-1053951-1.html Government employees have shown themselves to be poor at allocating assets, and highly incompetent, and these factors are becoming increasingly impossibly to ignore.

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    1. I'm not that negative about government employees, myself, but I do agree with you that the trend is towards global e-currencies. I wrote about this in my post "The Nature of Money", where I argued that we may need a new "Bretton Woods"-style agreement for these currencies because of their gold-like nature.

      http://coppolacomment.blogspot.co.uk/2012/07/the-nature-of-money.html

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  23. Frances,

    In response to your comment (1 November 2012 01:53), thank you for your offer to “walk me thru” the accounting entries involved in changing from fractional to full reserve. However, it’s obvious from some of your comments (details below) that you still haven’t grasped the Positive Money / Werner / Kotlikoff proposal. I’m happy for you to walk me thru whole thing as you see it, but if you don’t mind, I’ll walk you thru the proposal first. It might save you a lot of time. Here goes.

    Bank deposits by definition are either lent on / invested or they are not. PM’s proposal makes that fundamental truism open and transparent: depositors choose between, 1, having their money instant access and 100% safe but not earning interest (as is currently the case with “checking accounts”). Or 2, they can have their money loaned on / invested by their bank. In that case the money is not instant access, it DOES EARN interest (reflecting the fact that it’s been invested), plus the depositor takes the risk (reflecting the fact that the depositor is acting in a commercial fashion: the depositor is effectively making an investment, no different from investing on the stock exchange). And that’s not a hundred miles from how deposit accounts already operate: e.g. access to some deposit accounts is very limited or slow. The difference is that depositors take a risk, but in return they’d get a better rate of interest.

    Thus there is a flaw in your claim that “PM's proposal is that sight deposits would be migrated to the central bank balance sheets, but the share of debt assets that currently back those sight deposits would remain on bank balance sheets.”

    The flaw is that there just aren’t any “debt assets” to back sight deposits because the relevant money is not lent on or invested. Thus that money cannot be lost - other than in some extreme scenario, like a senior bank executive walks off to South America with all the bank’s assets: hardly likely given the billions involved for say Lloyds or Barclays. I.e. there is still a risk there for central banks / taxpayers, but it’s minimal. (BTW, that’s my first reason for thinking you still haven’t “got” the PM proposal.)

    Having said there are no “debt assets”, the relevant commercial bank does of course have an asset to match its liability to depositors: it has central bank money.

    That’s the scenario AFTER completing the switch from fractional to full reserve. In contrast, there is the “change over” PROCESS, which runs as follows. (continued).

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  24. On announcing that significant restrictions have been placed on commercial banks’ freedom to lend, and that depositors must henceforth carry any losses arising from whatever their money is invested in, there would be a significant drop on bank lending. To compensate for that deflationary effect, the government / central bank machine just prints and spends extra money into the economy (and/or cuts taxes).

    The net effect is that all private sector entities (households, firms, etc) have a bigger stock of cash, and thus don’t NEED TO borrow so much. Of course the City of London / Wall Street criminals and fraudsters, and the politicians they’ve bought (Tory Party in particular) will be sobbing on their pillows at this outcome. The plebs actually having more cash in their pockets? Can’t have that, can we?

    So when the change is announced, a significant amount of debt owed by households and firms to banks is repaid, and in the aggregate, that is compensated for households and firms having a bigger stock of cash. Of course there’d be some temporary disruption: the PATTERN of borrowing and lending would change. That is, there’d be more funding done by the stock exchange, mutual building societies, friends and family members lending to each other, etc etc.

    In a subsequent comment (17.05) you say “If there's no risk to taxpayers after transition, there is no risk to depositors now. QED.” That’s my second reason for thinking you still don’t basically understand the PM proposal.


    As to the evidence, the idea that there is no risk to taxpayers now is hilarious in view of the trillion dollar bailouts for banks in the US, the UK, and elsewhere. And it’s doubly hilarious in view of Mervy King’s claim that Basle III won’t prevent the next crisis.

    Second, and as to logic, the fact that there is no risk to taxpayers under the PM proposal does not prove there is no risk now: reason is that the two scenarios are ENTIRELY DIFFERENT!!!!!!! The whole point of PM’s proposals is to set up a different scenario, amazing as that might seem.

    Under the EXISTING SYSTEM, taxpayers are on the hook because when commercial banks’ loans go bad on a big scale, the taxpayer bails out banks. In contrast, under PM’s proposals, taxpayer exposure is near non-existent. First, as to sight accounts, the relevant money just isn’t invested or loaned on. So there’s no risk there. As to deposit accounts, it’s depositors who carry the risk, so there’s no taxpayer exposure there either.


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    1. I do wish you wouldn't forget that as PM's proposal doesn't include debt jubilee, after transition there would be debt assets backed by taxpayers' money sitting on private bank balance sheets. You don't seem to understand this.

      And once again you resort to "well just look at the present situtation" instead of looking at the reality of the PM proposal.

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    2. "OMG it's all the evil bankster fraudsters fault"

      Yawn.

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  25. It's not all the "evil banksters" fault, but they certainly played a central role in the financial crisis. How about increasing debt, inflating property prices, Libor rigging, PPI mis-selling, endowment mis-selling, the tax payer bailing out banks, millions thrown out of work or made bankrupt for starters. Bernie Madoff is everyone’s favourite uncle, and Goldman Sachs have the moral authority of the Pope. 40 years ago, banking was seen as safe, boring, reliable and your money was safe there. Now, more than half the population don't trust bankers or the banking system, and even less trust the financial services industry in general. They are seen as a legal mafia by many. Their reputation has been shredded in a few short years by the immoral, greedy, illegal activities of a few, and it will take decades for trust to be restored. The worst thing is that the general population is having to suffer for the sins of others, and most of the sinners have walked off with their ill-gotten gains.

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    1. Dear Simon,

      With all due respect, I would find it most gratifying to witness you rise above the widespread feeling of outrage and jealousy at what the evil bankers Madoff with, but instead use your supercomputer to process the data and construct a toy model of how exactly they were enabled to achieve this daring feat of daylight robbery from everybody else around them.

      They couldn't pull it off on their own.

      They were also not the only ones to obtain tangible benefit from the expansion of debt. Although I would agree if you questioned whether a lot of it was truly beneficial.

      However, if you wish to persist in following so many others naively placing all of the blame on the heads of bankers, that is your prerogative. As long as you don't mind being wrong. And you STFU about it please.

      Sincerely,

      A.Nobody

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    2. Mr A Nobody, the person who dare not reveal their name.
      Of course the bankers did not do it on their own. They did it with the connivance of incompetent or bribed politicians, weak legislation, inadequate regulators, incompetent auditors who wished to turn a blind eye, borrowers who misrepresented their incomes, and above all because the system allowed them to do it. Who is to blame, the drug user or the drug dealer ? I put 70% of the blame on the dealer. Who was to blame for my friend with no job, no assets, and on disability benefits getting £50,000 in debt on his credit cards ? Him or the banks who lent him the money ?
      I, along with millions of others have every right to feel outraged. I feel no jealousy, just sadness for the millions of people who have suffered because of gross failure of our financial system, and continue to suffer. Not all bankers are bad, in fact the majority of usually low paid people who work in financial services are honest and decent, and try to do the best for their customers. It has been brought into disrepute by the actions of a few, in the same way a small number of idiots chanting racial comments at a football match can bring the game into disrepute.

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  26. I was wondering what percentage of the money supply just consisted of current accounts at the big banks. many of these accounts will be overdrawn, the average balance may be £1000 to £2000 perhaps ? This is still a substantial chunk of money, but may be a relatively small percentage of overall M4. If this cannot be used as a basis for lending, and is merely "safe deposit" money in a transaction account as Positive Money suggest, then it should not be too harmful to the commercial bank if this money is taken off the balance sheet. Ralph anyway explains very well above how over time debt free money will replace debt money in society. A shrinking of the big banks balance sheets will be a very good thing as one of the big banks will be less able to hold the tax payer to ransom. The big banks wield the most power because they have control of 95% of all the current accounts, and cash machines. People get used to the status quo, and find it hard to imagine something different. I have to say I am reasonably happy with the way HBOS administer my current account and Internet banking. I dislike the fact that they pay no interest on it, as the cost to the bank is minimal, apart from maintaining computer systems. They are obviously desperately repairing their balance sheet, and making £5 billion provision for PPI mis-selling. I only write 2 cheques per year now, and don't even receive paper bank statements as it is all on the Internet. The best way to reduce the power of the big banks is for other providers to offer current accounts, so people have real alternatives. I think some credit unions may already be starting to do this, and the Internet will facilitate this process. I don't see why a mobile phone company, or Tescos could not offer a current account service, although their service needs to not have a big bank like RBS standing in the background behind it, and be truly independent. The separation of retail from investment banking as proposed by Vickers misses many of the points as to why we had a crisis in the big banks, and will provide a rather limited safeguard for "granny" who wishes just to run a current account, and have her savings kept at low risk.
    I do see some problems with the Positive Money proposals re transaction and investment accounts - Current account holders may not wish to pay a fee to run a transaction / current account, because many are "free" at present, and others may be worried about losing the £50K tax payer guarantee on savings accounts, even though the risk is reflected with higher interest. I loathe the fact that the taxpayer is on the hook at the moment, and banks can take excessive risk knowing the tax payer will ride to the rescue. It would be much better for banks to have an insurance fund which they pay for themselves, a bit like tour operators have to be ABTA bonded. The requirement now for banks to hold more capital goes a little way towards the insurance fund.
    The increasing debt burden, wealth inequalities, cost to the tax payer, manic depressive characteristics, and inflating of asset prices which are features of the present system have already been covered by me and others in previous posts.

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    1. Simon, thank you for this - it's a very helpful summary.

      One thing you may wish to consider is the reason why banks took to selling added-value products such as insurance. It's the SAME reason as the movement towards high-risk, high-value "investment banking" activities and away from traditional retail banking. The fact is that core retail banking services are unprofitable, and have been so for over 40 years. None of the recent developments in core retail banking do anything to increase its profitability - in fact if anything they make it even less profitable.

      Both universal banking and cross-selling of non-banking products through retail branches were an attempt to make banking profitable while still offering core banking services. Both have gone massively wrong. We have lots of proposals for stopping banks doing these things, but none for making provision of basic banking services profitable. But unless these can be made profitable, banks will simply find other ways of making money which may be even more dangerous for society than what they were doing before.

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    2. Simon,

      having now read your comments in more detail I have the following additional points to make.

      - From memory, current accounts are around 60% of the deposit base of large retail banks. A proportion of those will of course be overdrawn, and they do of course generally have low balances compared to savings accounts. However, current accounts do make a very significant contribution to retail banks' loan funding. PM's proposal would ensure that banks were not harmed by the loss of sight deposit accounts, because they would replace them with an equivalent deposit from the central bank.

      - You are right about the need for bank balance sheet repair driving the widening credit spreads we are seeing at the moment. However, you may wish to remember that the LOWEST cost of funds for the bank is the bank rate, currently 0.5% - and that requires collateral, which itself is costly. Unsecured lending is more expensive. They aren't going to pay interest on current accounts (which have constantly moving balances and can be withdrawn with no notice) at anywhere near that rate. A few basis points is the most you can expect.

      - Deposit insurance is already paid for by the banks through a bank levy similar to an ABTA bond. The limit is now £85K not £50K - it was extended recently to bring it into line with EU deposit insurance limits.

      - Increased capital requirements provide ADDITIONAL protection to depositors over and above deposit insurance. They are not a contribution to the insurance fund.

      - As I've explained in other places on this thread, replacing sight deposits with a central bank deposit still leaves the taxpayer on the hook in the event of significant private debt default.

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    3. Thank you Frances for this, it appears that we are heading back to a less risky era in some ways, similar to the late 1970s. This means lesslending by the banks, and probably an on going correction in property prices, perhaps for the next 10 years. I did not realise current accounts formed such a large part of the deposit base, although nearly every citizen will have an account. I agree current account holders may have to start paying for their account if they want to have a "less risky" bank, or one that does not indulge in mis-selling. The staff at my local HBOS branch were under huge pressure to sell me various products a few years ago, and Paul Moore explains in the Telegraph and on the Positive Money web site the culture within the bank when he was head of risk there. They should still be able to make a decent profit though, as they have the privilege of money creation. However that relies on them finding good, new borrowers, whether it is the private sector or government. All this requires economic growth under the present system, a reduction in the debt mountain, and affordable house prices so people start to feel wealthy again.

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  27. Frances, I would like to say a bit more about my father Bill Davies’ proposal of Registered Money. He has the same view as Positive Money in that all new money should be created without interest, by the Bank of England. Under Registered Money, all existing deposits and current accounts would be registered at the Bank of England. Electronic money would be regarded in exactly the same way as physical cash is now. Banks would lend existing money and compete for deposits. In effect, they are account holders at the Bank of England (I know they already settle balances between themselves there now at the end of each day anyway). When they lend, their balance reduces, when they receive loan re-payments and deposits, their balance increases. Banks could still lend to each other. Individual account holders at banks are treated in exactly the same way.
    Your point that deposits currently have loans on the other side of the balance sheet, and that the taxpayer is then standing behind the Bank of England in the event of defaults, as opposed to individual banks, is relevant. However banks would still be required to have reserves, and deposit insurance as they do now, and as Ralph says further up this thread, debt free money would replace much of the debt money over time. Banks would have to charge for current accounts, as their profitability is reduced. He is quite right in saying that the big banks would be sobbing on their pillows, because their ability to game the system by money creation, and make large profits would be greatly reduced. They would have to earn their keep, just like any business. Wage inflation would ease the burden on debtors, which was welcome when I had mortgage in the 1980s. I do not want any inflation now, as I have savings. The present situation is like a drug addict who is hooked on heroin. There is no easy solution to the problem, we need methadone (debt free money) as opposed to more heroin, to reduce the debt burden and get the economy moving again. I am sure Bill would welcome a bit of an arm wrestle with you, he can explain Registered Money much better than me, and would appreciate your extensive knowledge of the banking system. He became interested in money and banking 40 years ago, after the great inflation of the 1970s, he has produced a good piece of work, and I do not want it to go when he does. He does not publish comments on his web site www.legalforgery.com, although you can contact him there. I became interested because of him, and I had savings in Northern Rock in 2007.

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  28. I disagree on a lot of levels with this post. It starts with that there is 1 argument (the same as Turners) against non debt based money. Well, I do not agree with that argument and have other reasons to be against debt based money.

    First of all the premise that without money as credit, young people wold have more difficulties to obtain a mortgage for their homes. Surely, this is at most only a 'startup' problem during the first 2 generation of the money system. In the steady state, there would be so much savings, hoardings, that savers compete to lend out their money, thereby lowering interes ratest.

    Bit there are so many drawbacks to a debt-as-money based system that it should be abolished. For me, there is a BIG moral problem to use a money system for social engineering/political aims. Do your well intended wealth transfers with taxes, and if that does not go far enough, tough luck.
    But for me also the practical case that governments, given the finger, take the whole hand and borrow money in ever expandig quantities for current expenditures - social welfare, is a big draw back. That is not sustainable.
    The fact that it takes ever more money -thus debt- to pay the interests. The fact that interest is lowered toward zero to prolong the cycle, destroying the savings.
    No system can probably prevent business cycles, but boom and severe busts where all is wiped out must be prevent by all means. (by switching to positive money and/or a gold standard (busts where shorter under the gs).

    I have been to some countries where mortages are not widely used, guess what? no major problem with housing. In Germany most people rent. In Belgium people buy homes aided with savings from their parants. Switserland was on a gold standard till some 20 yrs back. This promotes savings and a prudent lifestyle, moneywise.
    For me this compares favourably with the mad housing bubbles in uk, usa and to a lesser extent holland.
    Another observation is that the price level of houses rises when mortgages come avaiable to the public. inthe end this is not helping the home buyers, only the banks.

    Finally, I do believe banks earn a lot (as in too much) on debt based money. First on interests and secondly on derivatives. The whole vast shadowbanking system in which trillions are pumped around is all based on huges debts. (And because investment banks and high street banks are interdependent, taxpayers have to bail out investment banks to save the money system.)

    Now one could try to reduce all drawback of debt money by all kind of regulations, but in my opinion that gives opportunity for tax evasions, bending the rules, cheating, bribing politicians and so on. I therefore fiersly strive for an inherently stable money system. One that makes banking a boring profession again. And families less spend thrift.

    I suspect that with a positive money system we would not have seen the usa housing bubble with its foreclosures, nor the riots in Greece, nor the housing bubble in Spain, nor the explosion in derivatives. A positive money system could only reduce the instability, in my opnion.

    [sorry, have no time to streamline rablings into coherent narrative]

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    1. Combining full reserve banking with a gold standard would force the UK to buy gold on the open market, as it currently doesn't have anywhere near enough to support the amount of currency in circulation. This would require a massive issuance of public debt. Public debt is already at 80% of GDP. Is this really a wise move?

      The alternative would be a huge debasement of the currency to "fit it" to the amount of gold the UK already has. Is that what you had in mind?

      I do wish people would think not just about the system they would like to see instead of this one, but about the process of change. That's partly what I have been trying to address in this post. Changing the system is very far from being cost-free.

      You don't seem to care very much about the impact of this change on the 2 generations you think would be unable to obtain credit. Those are my children and grandchildren that you are talking about. I care very much about them: currently they are facing too much debt, and I wish to change that, but replacing that with NO credit is in my view going much too far. I don't believe we have the right to force two generations into poverty in the interests of a mythical stability. Full reserve banking has never been tried before on any scale, so we actually don't know if it would work. And the gold standard wrecked the lives of thousands of Americans in the Depression.

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    2. You ♥ gold standard?

      If you really want a gold standard, stop wasting your time trying to convince everyone else, because the majority will never vote for it. You can only change yourself.

      You can have the gold standard of your dreams for yourself right now, today. Enter the market and exchange all your saved currency for gold, nobody is stopping you.

      Oh, but wait. That isn't really what you want is it? You want the State to mandate that you can in future exchange your gold for currency at a nice price. You want Central Planning and Price Fixing. You are the ultimate Socialist.

      Sorry, ain't gonna happen dude. And why should society guarantee this for you anyway?

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    3. @frances: your point that the transition will be painful is well taken. But I think it is inevitable that the current elastic money system will collapse anyhow, might as well use the enormous disaster to install a more stable system. I think history also shows that will happen (if history rhymes again).
      I further think it is better to soften the blows for the victims of this transition than keeping a bad system in place for ever.

      Btw, Alisdair McLeod mentions this transition too:
      http://goo.gl/ou75v "The paper’s bias is betrayed in a footnote on page 35, where the authors extol the benefits of the plan for social redistribution."
      and these gems
      "The IMF paper is riddled with dangerous assumptions arising from a paucity of true economic knowledge. There is a naivety over the intentions of governments and their desire to fund escalating welfare payments: there can be no doubt that any “solution” to the problems of government finance coming from establishment economists invariably becomes a springboard for further monetary expansion. The writers’ analysis of how money works is selectively empirical: in other words they select their historical evidence to support their cause. Their use of mathematical equations in a 71-page paper is obtuse and betrays minds that think in an accounting vacuum without relating to the real world.
      "


      @ (other) anonymous: I happen to have invested quite a large part of my net worth in actual physical gold. Accumulated over the last few years. When I first held the gold bars I was overwhelmed by the realisation that this object of enormous value had no government sign on it, no country or law approval stamp. The bar could have been thousand years old and I probably would not have been able to tell. Wonderful!

      No, I am not counting on any government to guarantee a price for my gold in the future. I hope they leave the price alone as there always will be people that want to put their wealth (postponed consumption) into something not meddled with by governments, so there will always be a market for gold.


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    4. I took the IMF's paper apart myself in this post:

      http://coppolacomment.blogspot.co.uk/2012/10/the-imf-proposes-death-of-banking.html

      It's seriously flawed in my view. However, McLeod is wide of the mark when he talks about the authors thinking "in an accounting vacuum". They are in a DSGE vacuum, not an accounting one. Their accounting is awful. He's right that they ignore external effects though, and they make some very strange assumptions about pricing.

      Do be aware that not everyone shares McLeod's hard money views. I don't myself - although I think you do, am I right? But I don't need to be a hard money supporter to see the problems with the IMF's proposal.

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  29. Friends, Coppolans, Safety-seeking Full-Reserve-Banking Hard-Money Advocates... lend me your minds?

    The idea that "fractional reserve banking" is bad, wrong, or the flaw in the system, is simply wrong in my opinion. The way the real economy has always used "the pure concept of money" is, in one simple word, credit. When physical gold emerged as the most versatile item for long-distance trade, that was not really the use of money per se. It was still just a tradable item, one of many, and simply the best on the road. When it was used as money was when we started trading using credit denominated in it. But that doesn’t mean that there was an ounce of gold for every "ounce of credit" in existence.

    That early banker who issued more receipts than the gold he had on deposit issued those receipts (lent them out) against the credibility or the character of the borrower—and his promise to repay the debt. We do this all the time in the real economy—issue credit to our clients and receive credit from our vendors based on their known credibility or character and this is what keeps the economy running. There is not a monetary base unit set aside for each unit of credit we extend to our clients. If there had to be, the economy would grind to a standstill.


    Money is credit

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    1. Yes

      Who cares about the reserve ratio? The CB can create commercial bank reserves with the click of a mouse today. They can swap a bank's assets (promissory notes) with reserves, temporarily or permanently, in any amount, at any time. Commercial bank reserves were more important back in 1933 when they included gold coins. But today they are not.

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  30. Hi Frances,

    I have been reading with interest your comments about full reserve banking in this blog. I must say that I don't understand your repeated comments that "depositors would be protected at the expense of everybody else" or that "the risks would be borne by the central bank" or that "debt forgiveness might be necessary".

    In very simple terms, a banks assets consist of reserves and loans (arguably IOUs issued by the borrowers). A banks liabilities consists of customer deposits and equity.

    Under fractional reserve banking, when a bank makes a loan, its assets (loans) and liabilities (deposits) both increase. When a borrower makes a principal repayment, both deposits and loans decrease. When a borrower makes an interest payment, deposits decrease but bank equity increases. The reserves come into play when cash is deposited or withdrawn or when money is transferred from an account at one bank to an account at another bank.

    Under full reserve banking, when a bank makes a loan, it is the bank's equity that increases. The money for the loan comes from a pool that was created when depositors transferred money from their on demand accounts to an investment account. (Bank income also forms part of that pool). If a bank were to fold for any reason then that means that all the money in the pool was already transferred back into the demand deposit accounts. So the only people who lose out would be those who put some of their money into an investment account.

    Without going into the specifics of any of the particular full reserve proposals, transitioning to full reserve banking involves the central bank creating enough reserves to cover all the on demand deposits and also enough reserves for the pool so that the banks could service the investment accounts. This would increase bank equity but it would have no effect on existing loans (although overdraft services would probably have to be converted to an on line credit facility like a credit card is).

    If there is one criticism of yours that we should be concerned about it would be the removal of deposit insurance from investment accounts. This could cause a run on such accounts so the government would probably have to continue insuring those accounts for a while.

    Can you explain (in basic terms like these) where the risk to taxpayers would come from and who would be "paying" for the protection of on demand deposits?

    Yours sincerely,
    Greg.

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    1. No, Greg, I can't. I have discussed this issue extensively and explained my thinking on this repeatedly in the comments on this post. If you still don't understand how backing private debt on bank balance sheets with central bank liabilities places taxpayers' money at risk, there is really nothing more I can say.

      Comments on this post are now closed.

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