Coppola Comment

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...

The IMF has produced a paper which purports to demonstrate the virtues of full reserve banking. More correctly, it dusts down an old idea from the 1930s (which was not implemented) known as the Chicago plan, applies some fancy maths to it because these days everything has to be proven to work through DSGE modelling, then presents it as the panacea to all our financial ills. This paper conflates two quite different things, namely full reserve banking and debt jubilee, which causes a fair degree of confusion and I feel it would have been sensible to have separated them.  It was also very evident that the authors were far more comfortable with economic modelling than they were with accounting and financial flows, despite their claim that one of them had actually done loan accounting for a bank. The accounting models in particular are in my view seriously flawed, and insufficient consideration has been given to the impact of the suggested changes on financial flows and the role of b...

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

I've been writing a lot about fear recently, because it seems to me that much of what is happening in the world at the moment is driven by fear. There is nothing new about this. Fear has been a primary driver of human activity for a very, very long time. In fact I would say that humans are innately a fear-driven species. I know this seems odd, because we think of ourselves as successful, the dominant species on Planet Earth with no natural predators left. And indeed we are - now. But we have not always been so. We think of ourselves as predators. And indeed, humans in groups are the most dangerous predators ever to walk the face of the earth. But at an individual level, humans are not particularly good predators: we are small, weak, slow and poorly armed. Nor do individual humans need to be large-scale predators. We are omnivores, not true carnivores: we are capable of gaining sustenance from an extraordinarily large range of foods, including - but most definitely not limited...

This is a fascinating chart from the Office of Budget Responsibility's Forecast Evaluation Report for October 2012:  (click here for larger version) Like all charts, it tells a story. And the story it tells raises serious questions about the conduct of monetary policy and the behaviour of banks. Before the financial crisis, the weighted average interest rate across all lending and borrowing was slightly below the policy rate set by the Bank of England, and the credit spread was downwards into negative territory. In other words, commercial interest rates for both savers and borrowers were generally lower than the policy rate. The result, as we now know, was a credit bubble and inflation in asset prices, as people and businesses were tempted by low rates to take on debt for asset purchase, particularly property.  This chart contradicts the suggestion that some have made that the bubble was caused by the Bank of England's policy rate being too low. In fact t...

On Monday, I attended a fascinating debate on the Economics of Deficit Reduction at the House of Commons (audio link in this post ). Essentially the debate was about the pros and cons of fiscal austerity versus stimulus. On the "stimulus" side were Prof. Paul Krugman and Jonathan Portes of NIESR: on the "austerity" side were Bridget Rosewell of Volterra Consulting and Stephen King, Chief Economist of HSBC. The definitions of both "austerity" and "stimulus" were somewhat unclear. As far as I could tell none of the four were remotely in favour of the severe austerity measures being imposed on some members of the European Union. Furthermore, none of the four were in favour of extensive cuts to capital investment such as the current Coalition government and its Labour predecessor have already undertaken (and more are planned). In fact Rosewell, supposedly anti-stimulus, actually said she was in favour of increased government borrowing for capital i...

The Trussell Trust says there has been a sizeable increase in applications for assistance from its foodbanks. This has been reported in both the Guardian and on the BBC's website. But they aren't saying quite the same thing. According to the BBC , which appears to have interviewed someone from the Trussell Trust, the reasons for the increased use of foodbanks are rising food and utility bills, job loss and less disposable income, and greater awareness of foodbanks. Hmm. These last two look suspicious to me. Money required for essential food isn't "disposable income", really - but if you know that there is a foodbank that will provide you with food if you're so skint you can't feed your kids, you just might maintain or increase your spending on less important things, mightn't you? Or am I being too cynical? But what is much more interesting is the Guardian's report . This identifies two main causes for the increased use of foodbanks: the dir...