tag:blogger.com,1999:blog-8764541874043694159.post2447093986151127579..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: The IMF proposes the death of bankingFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger40125tag:blogger.com,1999:blog-8764541874043694159.post-36930293507082758082013-04-08T16:17:08.758+01:002013-04-08T16:17:08.758+01:00Incorrect, I'm afraid. The IMF's proposal ...Incorrect, I'm afraid. The IMF's proposal does not place deposits at risk. All funding for lending has to come from the central bank, not from deposits. Therefore money creation is involved in lending. I discussed this extensively in the post. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-40760387984864023572013-04-08T15:59:28.588+01:002013-04-08T15:59:28.588+01:00Thank you for all the interesting comments on the ...Thank you for all the interesting comments on the IMF paper! <br /><br />I disagree that the proposals do not eliminate money creation by banks however. Indeed they do not eliminate deposit creation because to utilize a loan the borrower requires a deposit. However, if the loan can only be extended if someone else has deposited money in the form of savings, then the net effect is no money creation since savings take money out of circulation. Correct?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-85181173975084357882012-12-04T14:15:26.635+00:002012-12-04T14:15:26.635+00:00Frances,
fyi:
http://monetaryrealism.com/banking...Frances,<br /><br />fyi:<br /><br />http://monetaryrealism.com/banking-in-the-abstract-the-chicago-plan/<br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-58821871897655094162012-11-11T05:19:44.129+00:002012-11-11T05:19:44.129+00:00Didn't like Chicago.Didn't like Chicago.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-84048252422469694152012-10-30T12:50:21.409+00:002012-10-30T12:50:21.409+00:00Ralph,
Read the discussion in the comments on &qu...Ralph,<br /><br />Read the discussion in the comments on "I am a bank". The explanation of how money is created is in there. It concerns the use that my debtors make of the money that they fail to pay to me.<br /><br />"Poor form of money"? Money is money. Qualitative judgements are irrelevant. If it can be used to make the exchanges for which it is intended - even if those exchanges are limited by location, market or product - it is fit for purpose.<br /><br />You don't know much about shadow banking, do you? Much of the money that goes through shadow banks wouldn't go through "regular" banks. The main source of shadow bank money is mutual funds, and the money is lent out against safe collateral for a return. The problem was that rather a lot of the supposedly "safe" collateral turned out to be anything but. These days they use government debt as safe collateral. This is effectively full reserve banking, is it not - especially as the collateral is subject to haircuts?<br /><br />If you want to know how money is created in the shadow banking system, look at the accounting for repo. I did a very basic example in this post: <br /><br />http://coppolacomment.blogspot.co.uk/2012/06/money-machine.html<br /><br />You really should read more of what I write!<br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-80559987153821645682012-10-30T10:10:36.676+00:002012-10-30T10:10:36.676+00:00Francis,
The scenario you set out in the “I am a ...Francis,<br /><br />The scenario you set out in the “I am a bank” post does not involve money creation. Money is anything widely accepted in payment for goods and services (a definition you yourself agree with in your post entitled “The nature of money”.)<br /><br />The debt owed to you by your customers cannot be readily passed from hand to hand in payment for goods and services. So it’s not money. In contrast, (as was common practice in the 1800s) where a trade debtor gives the creditor a bill of exchange (i.e. a promise to pay), and that bill is widely respected and passed from hand to hand, then THAT IS money creation.<br /><br />Same goes for debts owed by shadow banks: those debts are not widely accepted in payment for goods and services, so that’s not money, or at least it’s a very poor form of money. In contrast, the debts owed by Lloyds, Barclays, etc to customers to whom they have granted overdraft facilities are VERY WIDELY accepted and easily transferred. My credit card has never been turned down by a retailer.<br /><br />However, I accept that allowing trade credit makes more efficient use of the existing stock of money, which has a stimulatory effect. Indeed, it’s widely accepted that the BUILD UP of debt is stimulatory (e.g. in the years leading up to the crunch). <br /><br />Also shadow banks have had no net stimulatory effect over the last decade in that all they’ve done is to pinch business from regular banks. <br /><br />Re your claim that much of the expansion of M4 came from shadow banks, do you have any sources to confirm that? I’ve done a quick Google and can’t find anything.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-52649311612649640982012-10-30T00:15:18.298+00:002012-10-30T00:15:18.298+00:00JKH,
Yes, by all means, if you have more question...JKH,<br /><br />Yes, by all means, if you have more questions do ask. This is a complex subject and I think there are a lot of problems with this paper generally - not just in the accounting - so it would be good to share views. <br /><br />I agree with you that the proposal does not eliminate deposit creation as a consequence of lending. All it does is give funding precedence. But it would be a brave central bank that refused loan funding requests in the interests of keeping the money supply under control. So this proposal must rely on other means to restrict lending growth. As far as I can see, like the other two "full reserve" proposals I've looked at (Positive Money UK and Lawrence Kotlikoff) it actually relies on legislation and regulation to restrict lending growth. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62499129217474397332012-10-30T00:09:23.535+00:002012-10-30T00:09:23.535+00:00From above,
"There are several tributary iss...From above,<br /><br />"There are several tributary issues which are more operational details than substantive additional constraints..."<br /><br />Sorry, I meant to add that I don't regard the simultaneous or advance securing of reserves to be a substantive issue either - it's just timing in relation to the connection between reserves and lending and deposit creation (compared to today's lagged system where reserve requirements do exist). There is no additional supply constraint due to such timing niceties - this is an illusion held by those who believe in this 100 per cent stuff. The CB still runs the overall system book according to interest rate pricing and capital ratio supervision, just as it does now. And the fact that it takes a bunch of stuff off bank books is a separate issue - having to do with the design for the institutional distribution of risk in the system.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87144793084491061962012-10-29T23:48:50.162+00:002012-10-29T23:48:50.162+00:00... cont’d:
“What bothers me is that as far as I ...... cont’d:<br /><br />“What bothers me is that as far as I can see the central bank actually has to create twice as much money as the amount of the loan, because of the need to back deposits 1-to-1 with reserves.”<br /><br />I think I understand the overall rationale in that area of the paper. The full implementation envisages the swapping of those reserve creating bank credits for legacy bank assets already in existence – in that regard, it seems to be a combination of government debt funding, jubilee bank funding, and perhaps core bank funding for what are now the residual bank lending businesses (although I still have to nail down the full balance sheet implications on the latter).<br /><br />Almost all this sort of stuff in the paper amounts to asset swaps through balance sheet reconfiguration – that’s really what’s involved in the end result of a lot of circuitous and difficult to read transactional accounting. It’s quite obscured in the logical flow of the paper – at least my reading so far - and makes it difficult to read and/or understand.<br /><br />“I would give a loan accounting example here but I don't think the formatting will work. I'll do one on Excel and post it here as a pdf some time this week. it will help my own thinking too..”<br /><br />That would be good for everybody. I think I’m OK with it myself, but it would be helpful generally. BTW, I’m not sure the IMF accounting explanation is nearly as much the culprit here as the more general logical flow of the paper (which the accounting should be reflecting – not vice versa). <br /><br />I may try to write up something over the next week or so for Cullen Roche’s sites. Again, I’m just back from being away and seeing the paper for the first time today. If it’s OK, I may have a few questions about your interpretation over the next few days – that would be very helpful for me, I’m sure.<br /><br />Thanks again.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16112359181335362812012-10-29T23:48:14.139+00:002012-10-29T23:48:14.139+00:00Thanks for that response.
“I meant that the gover...Thanks for that response.<br /><br />“I meant that the government balance sheet would be expanded by the amount of reserves created by the central bank to back the deposits held by private banks.”<br /><br />Yes, that makes perfect sense, thanks. (I thought you might have meant that, but wanted to confirm.)<br /><br />“Loan accounting under full reserve banking would still be double entry and would still have to involve putting money into a deposit account (because the borrower can only draw money or make a payment from a deposit account). So loans under full reserve banking can still be said to "create" deposits. The difference is that the bank can't simply create the deposit entry ex nihilo as at present - it must already have obtained funding and (since this is full reserve banking) reserves for the deposit from the central bank. The central bank creates that funding ex nihilo when the bank requests it.”<br /><br />Again, I assumed/expected something along those lines, but wanted to confirm, thanks.<br /><br />However, one operational wrinkle plus one wrinkle of substantive interpretation:<br /><br />a) It would be possible operationally I suppose for a lending bank to pre-position reserve sourcing from the government, to deny deposit creation to the borrower, and to cut the borrower a cheque which the latter then deposits elsewhere. The reserves would clear from the lender to the new depository bank to make way for the new loan asset on the lender’s balance sheet. That’s just an operational permutation that would sever the deposit creation connection from the lender. However, this mode of example is silly and pointless really, except that it demonstrates an apparent but trivial operational adherence to one version of the notion that "loans create deposits" is somehow threatened by this type of reserve system. On that idea however, my more substantial point is (b) as follows:<br /><br />b) “It must already have obtained funding and (since this is full reserve banking) reserves for the deposit from the central bank. The central bank creates that funding ex nihilo when the bank requests it."<br /><br />This actually doesn’t eliminate the substance of the phenomenon that “loans create deposits” at all, in my view, including a comparison with today's system. And this is one significant logical flaw in the overall argument of the paper, IMO, and in the larger generic argument for 100 per cent reserves, which itself is bigger than the paper. All it says is that in order to lend, the lending bank may well have to “back into” the central bank to source the required reserves associated with that lending – whether for immediate deposit creation purposes, or for immediate clearing purposes, as noted in the a) example above. I don’t regard this as a true operational constraint at all. There are several tributary issues which are more operational details than substantive additional constraints:<br /><br />First, the size of the required reserve ratio - 100 per cent versus today’s less than 100 per cent, including the case of a system like Canada’s with 0 per cent. But the idea remains that the central bank is still there to produce those reserves on demand operationally. Second, the only effective constraint on supply of reserves and/or credit is effectively a continuation of what already exists today, which is pricing discipline in the form of the administered policy interest rate (today, the discount rate), and quantity discipline in the form of Basle type constraints on capital ratios etc. as noted in the paper. So this looks to me to be a big logical flaw in the positioning of 100 per cent reserves in the paper.<br /><br />And BTW, the paper’s particular implementation of 100 per cent reserves cum jubilee cum major system balance sheet changes is only one permutation on the more general issue of 100 per cent reserves. So that type of error in thinking also runs deep in the subject matter.<br /><br />cont'd ...<br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49513800355447594112012-10-29T22:36:07.050+00:002012-10-29T22:36:07.050+00:00JKH,
Re government deposits - sorry, I haven'...JKH,<br /><br />Re government deposits - sorry, I haven't been entirely clear. The IMF writers are not suggesting that deposits themselves would be on the government balance sheet (in this they differ from Positive Money, who do suggest this). I meant that the government balance sheet would be expanded by the amount of reserves created by the central bank to back the deposits held by private banks. This has the effect of expanding the government's balance sheet by the value of the deposits held by private banks, but not by the deposits themselves. Does this make sense?<br /><br />Your question regarding deposit growth I think needs a loan accounting example. Loan accounting under full reserve banking would still be double entry and would still have to involve putting money into a deposit account (because the borrower can only draw money or make a payment from a deposit account). So loans under full reserve banking can still be said to "create" deposits. The difference is that the bank can't simply create the deposit entry ex nihilo as at present - it must already have obtained funding and (since this is full reserve banking) reserves for the deposit from the central bank. The central bank creates that funding ex nihilo when the bank requests it. What bothers me is that as far as I can see the central bank actually has to create twice as much money as the amount of the loan, because of the need to back deposits 1-to-1 with reserves. Lending is starting to look exceedingly expensive. <br /><br />I would give a loan accounting example here but I don't think the formatting will work. I'll do one on Excel and post it here as a pdf some time this week. it will help my own thinking too - this is really quite complex stuff and the IMF's dodgy accounting doesn't help matters. <br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-33797237892121688702012-10-29T17:03:40.743+00:002012-10-29T17:03:40.743+00:00P.S.
I have no problem with the Treasury/CB conso...P.S.<br /><br />I have no problem with the Treasury/CB consolidation treatment at this level of architectural change. That stuff can always be sorted out in an accounting sense and a policy sense. What's at stake here is higher level than that.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62846512977310597402012-10-29T16:42:56.894+00:002012-10-29T16:42:56.894+00:00Excellent post
I’m currently working my way throu...Excellent post<br /><br />I’m currently working my way through this monster (the paper, not your post), having just seen it yesterday.<br /><br />I think I see roughly what they’re doing in terms of the transition, but having difficulty visualizing some aspects of the thing when it’s up and running.<br /><br />Just wondering - do you understand how new deposits are actually created in this? Even a highly restricted system such as this would require some assumption of trend deposit growth over time, in line with economic growth. What would be an accounting example of how those deposits are created, if banks are no longer allowed to create them in the process of lending? Implicitly, my question would be – how does the government (I guess) cause the creation of the the first new bank deposit liability following the transition stage? What is the transaction and the accounting for it?<br /><br />Although, maybe I’m seeing this differently than you, because I don’t see this:<br /><br />“The result would be that banks would suddenly have enormous debt liabilities with regard to the Government/CB, and Government would have a balance sheet vastly expanded by the inclusion of the total of all domestic customer deposits (and possibly wholesale ones as well) in the form of equity. Figure 2 in the IMF paper shows this.”<br /><br />My reading of it is that the government balance sheet does not include “deposits” (meaning bank deposit liabilities that now require 100 per cent reserves). It includes the reserve liabilities that banks must hold against deposits and it includes credit advanced to banks. But it does not include bank deposits liabilities (as government assets presumably is what you inferred there).<br /><br />“If deposits couldn't be used to fund lending, why on earth would banks want them?”<br /><br />I would guess/view the reserve/deposit section of the bank balance sheets as essentially a government function farmed out to the banking system, in exchange for continuing their remaining banking business. There would be no capital requirement against this section of the balance sheet. It would make sense for the government to regulate it in such a way as to compensate the banks for their non-capital costs – i.e. break even. Not saying I agree with it though. There are lots of problems with this alone the lines of what you’ve suggested, but they pale in comparison to the larger macro problems of this proposal for the efficient functioning of the financial system, I suspect.<br /><br />“Because this is its first loan, the bank has no interest income, so it must either pay the interest from its own capital or..”<br /><br />I don’t see a real problem there. It’s still a spread business. Marx notwithstanding, the accounting still works for that.<br /><br />“As at present, the book entries for the loan create a deposit, but this time it is 100% backed by new reserves already provided by the central bank. So the loan STILL inflates the money supply - it's just that the central bank creates the new money rather than the lending bank creating it.”<br /><br />That goes back to my first question – but why do you think the loan creates a deposit? My understanding is they’re not allowing this.<br /><br />“Will reserves automatically transfer from lending to receiving bank, even for smaller banks and shadow banks that don't currently use central bank settlement accounts?”<br /><br />Agreed - that type of question in general is a huge area/problem not addressed by the paper.<br /><br />“This does of course raise the question of how future lending needs other than investment projects would be met. Mortgage lending, for example ....”<br /><br />Agreed – another huge problem with the paper. It sort of makes the whole thing a joke, IMO.<br /><br />“This proposal is poorly thought through”<br /><br />It certainly looks that way.<br /><br />On the other hand - it’s amazing what bad writing alone can achieve.<br /><br />:)<br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62164452448963364342012-10-29T12:53:29.610+00:002012-10-29T12:53:29.610+00:00Ralph, I refer you to my post "I am a bank&qu...Ralph, I refer you to my post "I am a bank" on small non-banks creating money. <br /><br />Shadow banks do create money. Much of the expansion in M4 (M3 in the US) prior to the financial crisis came from the shadow banking network. Shadow banking is exactly the same as licensed banking, just unlicensed - and these days, arguably safer than licensed banking since it is fully collateralised, mostly with government debt or cash, unlike licensed banking. It has, in a way, already created its own version of full reserve banking.<br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-6134213190484192732012-10-29T10:31:58.739+00:002012-10-29T10:31:58.739+00:00The shadow banking industry for the most part conn...The shadow banking industry for the most part connects large borrowers to large lenders: that is, the shadow banking industry is into casino banking rather than high street or retail banking. And if a casino bank goes bust, who cares? Barings went bust in 1995 and no one turned a hair. Plus Barings was not a backstreet “in the shadows” bank. It was biggish.<br /><br />Next, shadow banks are not a threat to full reserve banking for the following reasons. Fractional reserve involves money creation by private institutions, while full reserve aims to stop this. Now any old fool can create money in theory: I can do it by writing an uncrossed cheque and trying to persuade the person I give the cheque to they’ll be able to endorse it and pass it on to a third party in payment for goods and services. But that’s just a joke. It doesn’t work 99.99% of the time. In general terms, money creation by small unheard of organisations is difficult. And far as I know, shadow banks don’t create money: as pointed out above, they are primarily intermediaries between large borrowers and lenders.<br /><br />On the other hand, as soon as a shadow bank becomes “big”, it cannot escape the notice of the authorities. If the tax authorities can catch out self-employed plumbers or electricians with a turnover of say £50,000 a year who are trying to avoid being noticed by the authorities, the authorities shouldn’t have much difficulty in spotting a shadow bank with a turnover of a million a year. And a million a year turnover bank is minute half-baked sort of bank. <br /><br />And if an organisation comes to the notice of the authorities, it can be made to obey the rules of the game, just as Lloyds or Barclays would have to obey to rules of the game under full reserve. I.e. while the flight of depositors from the shadow bank industry explained much of the crunch, this wouldn’t happen if shadow banks were made to obey the rules of the game.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-24874424455376710732012-10-28T23:47:47.776+00:002012-10-28T23:47:47.776+00:00Graham,
However, I have changed the section about...Graham,<br /><br />However, I have changed the section about reserve movements. If all banks used central bank settlement facilities then 100% reserve coverage for deposits would be maintained when they move. However, not all banks use central bank settlement facilities. There is also a considerable issue with money supply management: this proposal does not end money supply inflation through lending, it just moves it from lending bank to central bank, which creates uncertainty regarding the responsibility for authorising loans. <br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-78765954318206881372012-10-28T23:14:24.946+00:002012-10-28T23:14:24.946+00:00Graham,
I fear you don't entirely understand ...Graham,<br /><br />I fear you don't entirely understand some of my remarks.<br /><br />- Re central banks. The central bank, not government, creates reserves. Full reserve banking is not possible unless there is a central bank. The IMF paper continually refers to "government" not to central bank when it talks about reserves. Therefore it is treating the central bank as an adjunct of government. This is contrary to the IMF's historic insistence that central bank must be independent of government.<br /><br />Although I was corrected over whether the Fed could be consolidated into US federal government accounts (see comment above), there would be a considerable problem with treating the ECB in this way. The ECB was set up to be independent of government, and there is currently no government with which it could be meaningfully consolidated. Nor is there a government which could agree to the ECB issuing reserves to back deposits in national banks. Full reserve banking as proposed here would not be possible in Europe at the moment, though they are making progress towards banking union.<br /><br />- Re deposits. The definition of "deposits" does matter if 100% of all deposits are to be backed by reserves. This is the IMF's paper, not the Bank of England's. The IMF writers have not defined their terms.<br /><br />- Re Chicago plan. I was reviewing the IMF's proposal, not the original Chicago plan. I think I made that clear.<br /><br />- Re reserve movements. You have inadequately described the present system. The intraday transfer of reserves from the lending bank in the RTGS system creates a reserve imbalance which is managed during the day by intraday repo from the central bank, and at the end of the day by interbank lending. <br /><br />Interbank lending is NOT separate from the RTGS system - it is consequent upon its operation. The IMF's plan would end interbank lending, so in future the central bank would have to perform a rebalancing function - actively recycling excess reserves to fill gaps elsewhere. It doesn't currently do this.<br /><br />- Re investment lending. See p.52 of the report:<br /><br />"Of course this presupposes that banks can be prevented from borrowing from the treasury for the purpose of investing in reserves, or in other words that treasury credit can be guaranteed to strictly only be disbursed to finance investment projects. That however does not need to be difficult to do."<br /><br />Sounds like restriction of lending to investment projects to me. <br /><br />They are inconsistent, though - in the calibration of their DSGE model they gave steady-state interest rates for mortgages and unsecured loans. It really isn't at all clear exactly what they are proposing regarding the scope of lending post-transition. <br /><br />But actually continuing to allow lending other than for investment projects is not a great idea. Current mortgagees get their debts written off, but future ones don't? Political dynamite.<br /><br />I think you are wrong that this model doesn't consider non-bank lenders. It's written with a US focus, remember, so the authors will be mindful of the existence of GSEs - which are effectively already guaranteed by government. But the authors clearly intend the model to encompass all forms of "banking", not just traditional banks. <br /><br />- Re shadow banking: that is a very typical UK comment. The UK has universal banks and an originate-to-hold banking model (Northern Rock and HBOS were exceptions). The US has a far more fragmented banking system and an originate-to-distribute model. It relies very heavily on shadow banking. As do pension funds, money market funds and so on. The effect of killing all this off needs to be carefully thought through. I'm not necessarily saying it's a bad thing, but it's a much bigger change than UK people tend to realise.<br /><br /><br /><br /><br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31712452648583729922012-10-28T21:16:14.198+00:002012-10-28T21:16:14.198+00:00... continued
FC: " ... the bank would have... ... continued<br /><br /><br />FC: " ... the bank would have large amounts of money sitting around doing nothing, yet it must borrow EVEN MORE money in order to lend."<br /><br />This is the true criticism of the Chicago Plan. It leaves checking deposits (current accounts) as liabilities of the banks, balanced 100% with assets which are owned by the banks but which the banks aren't allowed to touch. In contrast, the apparently similar reforms proposed by Positive Money (www.positivemoney.org.uk) remove current accounts from banks' balance sheets and leave the banks free to use their own assets in whichever way they please.<br /><br />FC: "When the loan is drawn, the borrower spends the money and the person or business receiving the money deposits it in another bank. The lending bank then has an excess of reserves equal to the amount of the loan, and the receiving bank has an equivalent shortage of reserves. Under the present system this imbalance would be mopped up at the end of the day through interbank lending."<br /><br />Under the present system the receiving bank only consents to accept the increased deposit liability to the payee if the lending bank provides a balancing transfer of assets - reserves. Clearing payments through the interbank settlement system is not interbank lending. Covering excess reserves through interbank lending is an entirely different activity. Payments settlement under the Chicago Plan would be just the same as under the current system.<br /><br />FC: "4. In future, banks will be allowed to lend only for investment projects. "<br /><br />The authors state " ... it is plausible to assume that a real-world implementation of the Chicago Plan would involve at least some, and potentially a very large, [Government] buy-back of private debt. In the simulation of the Chicago Plan presented in this paper we will assume that the buy-back covers all private bank debt except loans that finance investment in physical capital." It is not the case, therefore, that banks would necessarily be restricted in their future lending, other than by the availability of finance. Other models could be devised which would simulate the effects of further bank lending to consumers, housebuyers and businesses.<br /><br />A consequence of this assumption is, however, that the changes reported in the levels of consumer and mortgage loans on the banks' balance sheets during the transition cannot be taken to reflect the changes in levels of household indebtedness, since the model does not consider recourse to non-bank lenders.<br /><br />FC: "The question is, why did the authors stop short of recommending full nationalisation of the banking system, since that is the only way the model could work in the longer term? The authors think that private banks funding long-term investment projects is a Good Thing, but they offer no explanation for this belief."<br /><br />The authors aren't proposing anything or recommending anything. The sole purpose of the paper is to assess the extent to which claims made by Fisher to four major advantages of the Chicago Plan were justified.<br /><br />FC: "Maybe the real purpose of this proposal is to force the death of commercial banking, and in particular, shadow banking."<br /><br />What's so great about shadow banking? Borrowing from A to lend to B so B can lent to C who lends it back to A is not just a monumental waste of human endeavour it is also guaranteed to destroy economies. £600 billion of fictitious bank deposits were created in this way between 2001 and September 2007, and it had all disappeared by December 2007, following the collapse of Northern Rock.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-41275341904277340912012-10-28T21:15:37.414+00:002012-10-28T21:15:37.414+00:00I fear that you read rather more into this paper t...I fear that you read rather more into this paper than is actually there.<br /><br />FC: "undocumented assumption #1 is - all central banks that are not currently nationalised will be."<br /><br />The status of the central bank is irrelevant to the argument of the paper. It is the means of final settlement of payments that is to be nationalised, not the central banks. The authors state: "Our model completely omits two other monetary magnitudes, cash outside banks and bank reserves held at the central bank. ... Bank reserves held at the central bank ... do not play any meaningful role in the determination of wider monetary aggregates. ... Banks are therefore modeled as having no incentive, either regulatory or precautionary, to maintain cash reserves at the central bank." Under the Chicago Plan, central banks, whether publicly or privately owned, lose their monetary relevance.<br /><br />FC: "The writers seem to assume that "deposits" includes bonds. But what about interbank and repo balances? Are they "deposits" too? Whatever, it is clear that undocumented assumption #2 is - private banks' debt consists entirely of customer deposits. "<br /><br />That is certainly how the Bank of England views them. They are all officially classed as deposit liabilities. Only derivatives, accruals and items in suspense and transmission count as non-deposit liabilities.<br /><br />FC: "Undocumented (and totally wrong) assumption #3 is - private banks lend only to domestic households and corporates. "<br /><br />This is a valid criticism. The Chicago Plan is concerned only with deposits and loans denominated in the domestic currency of a monetarily sovereign state, but failure to recognise the potential impact of foreign currency assets and liabilities on banks' domestic currency balances undermines the generality of the model. The authors do go to considerable lengths, however, to explain how and to what extent they have incorporated interbank lending and shadow banking into the calibration of their model.<br /><br />FC: "As customer deposits are a moving target, I assume this means that the central bank will have to provide reserves on a daily basis as at present, though the paper doesn't say so."<br /><br />This is so only under the current situation where banks create and destroy deposits by extending and redeeming loans. The Chicago Plan puts a stop to all that. Customer deposits will constitute a closed pool and merely transfer between banks, accompanied by the pre-existing underlying reserves. Reserves will be created only when the government spends new money into existence, into the recipients' deposits. The central bank will be out of the picture except to the extent that it operates the payents settlement system.<br /><br />FC: "The result would be that banks would suddenly have enormous debt liabilities with regard to the Government/CB, and Government would have a balance sheet vastly expanded by the inclusion of the total of all domestic customer deposits (and possibly wholesale ones as well) in the form of equity. Figure 2 in the IMF paper shows this."<br /><br />Which is the inevitable consequence of repatriating all of the money that the banks have created to their own advantage over the previous two to three hundred years.<br /><br />FC: "2. Banks will not be able to use customer deposits (or any other sort of private borrowing) to fund lending."<br /><br />It is important to distinguish between the model specified by the IMF authors and the Chicago Plan of which the model is a representation. In 1939, the principal authors of the Chicago Plan published "A Program for Monetary Reform," the full text of which is available on Wikipedia under this title, and it makes it clear that bank lending was to be funded from the repayment of existing bank loans, from the banks' own retained earnings and from money borrowed for the purpose from customers and other sources (which would not exclude other banks). The IMF model doesn't consider this, which is another shortcoming.<br /><br /> ... continued<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-15534715128841740232012-10-28T15:59:24.453+00:002012-10-28T15:59:24.453+00:00Thank you. I stand corrected!
Nonetheless, the I...Thank you. I stand corrected! <br /><br />Nonetheless, the IMF writers do conflate government and central bank, which is contrary to the IMF's usual insistence that the central bank must be independent of government.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-64272809216726234892012-10-28T15:56:03.392+00:002012-10-28T15:56:03.392+00:00The Federal Reserve System is basically divided in...The Federal Reserve System is basically divided into the Board of Governors of the Federal Reserve, and twelve regional Federal Reserve Banks. The Board of Governors, located in Washington, is an 'independent agency of the federal government' (part of the executive branch), and is appointed by the president of the US. The Board determines monetary policy, oversees the Federal Reserve System, and issues currency in accordance with its mandate, as established by Congress.<br /><br />The regional Federal Reserve Banks are public-private institutions that carry out monetary policy in their region, as determined by the Board. The stock in the regional FR Banks is owned by their private member banks on a specific legal basis, however the FR Banks are also defined as instrumentalities of the federal government, whose profits belong to the government. <br /><br />"The amount of stock a member bank must own is equal to 3% of its combined capital and surplus. However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors. From the profits of the Regional Bank of which it is a member, a member bank receives a dividend equal to 6% of their purchased stock. The remainder of the regional Federal Reserve Banks' profits is given over to the United States Treasury Department."<br /><br />http://en.wikipedia.org/wiki/Federal_Reserve_System#Legal_status_of_regional_Federal_Reserve_Banks<br /><br /><br />Federal Reserve liabilities are liabilities of the US government. As such, US government debt and Federal Reserve liabilities can be placed on the same side of a consolidated balance sheet if needs be.<br /><br />"Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States" <br /><br />http://www.law.cornell.edu/uscode/text/12/411<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-91914507125570161182012-10-28T01:12:33.552+00:002012-10-28T01:12:33.552+00:00Central banks should not be privately owned entiti...Central banks should not be privately owned entities. The U.S. system is out of kilter compared with practises elsewhere in the world.<br /><br />JHAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-79990400785078853412012-10-27T23:33:06.692+01:002012-10-27T23:33:06.692+01:00Bunny,
Good point about banks becoming simply par...Bunny,<br /><br />Good point about banks becoming simply part of the money distribution machine. There doesn't seem to be a role for "banking" as such. <br /><br />I share your concerns about the future of democracy. We seem to be swinging towards technocratic control of economies. That may make for stability, but at the price of loss of democracy. I think that's too high a price to pay. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27675473871421790932012-10-27T20:18:04.489+01:002012-10-27T20:18:04.489+01:00Visit Leigh Harkness site :)http://www.buoyantecon...Visit Leigh Harkness site :)http://www.buoyanteconomies.com/TechnicalitiesOfMonetarySystem.htm<br /><br /> Hólmsteinn Jónassonnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-34839573719869935792012-10-27T19:32:54.274+01:002012-10-27T19:32:54.274+01:00Leonard, I am very uncomfortable with the notion t...Leonard, I am very uncomfortable with the notion that taxation should be decided by "technocrats". To me this is an unacceptable dilution of democracy. The "whims" of Congress, or Parliament in the UK, represent the democratic will of the people and therefore should be acted upon, not sidelined in the interests of "maintaining economic stability". <br /><br />As far as mortgage policy is concerned...I don't know what the Ascending Interest Rate mortgage is. I'm in the UK. Most people have variable rate mortgages here, and at the moment we don't have that many underwater borrowers. Where there are a lot of underwater borrowers in a stagnant economy, it makes some sense for the government to provide some relief in order to support aggregate demand. Beyond that I can't comment, I'm afraid. <br /><br />I don't plan to comment further on your ideas here. If you wish to discuss the points made in this post, I am happy to do so. But this blog is not the place to promote your ideas. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com