Sunday, June 10, 2012

Ralph Musgrave — The root cause of Spanish banking problems

Ralph manages to propose full reserve banking without mentioning "full reserve" by marshaling some provocative points. With the huge level of private debt overhang that Steve Keen has been going off on for some time, it seems clear that there is too much credit being extended for the system to bear even if the lending were prudent, in that an exogenous shock to the system could bring down the house of cards in a debt-deflationary spiral.

Read it at Ralphonomics
The root cause of Spanish banking problems
by Ralph Musgrave


Jonf said...

Didn't someone say that capitalism is unstable? It builds up to a bubble and ponzi loans and crashes. So I have some sympathy for regulations. But is it not also true that banks don't need deposits to make loans? Now if they have to borrow lots at a high interest rate, that would tend to slow them down. So I suppose you could do it, but is that what you really want at all times? Also federally insured deposits work too. On balance I feel this is a bazooka and a little extreme.

Tom Hickey said...

Let's grant that the 2008 showed that the level of private debt was excessive wrt the ability to repay, so that the crisis was a financial one resulting from falling asset prices instead of the end of a business cycle characterized by inventory buildup. A business cycle clear by reducing excess inventory, so that a new business cycle can begin, whereas a financial crisis persists until the build op of private debt is resolved through inflation, default and writedowns, or balance sheet rebuilding through saving, so that a new credit cycle can begin.

That is to say, assume Minsky's analysis of financial cycles culminating in Ponzi stage finance and the ensuing crash. What is the remedy from the banking side, that is, the credit creation angle?

What Ralph is saying essentially is that creation of credit money can become excessive, and has become excessive. So the question is whether anything can or should be done and if so, what? He has put forward one proposal.

What's wrong with this proposal, and what proposal would be superior and why?

Trixie said...

"What's wrong with this proposal, and what proposal would be superior and why?"

Reinstate Glass-Steagall. Word for word. Limit the asset size of banks so they never become TBTF. Pretend to have lending standards again. Banks need to get bank into the business of servicing the financial needs of local communities. Think Jimmy Stewart style of banking, sans a "loanable funds" model.

To me, the right answer is not to restrict access to credit (and thus economic growth) to creditworthy customers, but instead, make sure the industry is properly regulated. This is a proven model that's worked before. Win/win.

Dan Lynch said...

Banking is not my area of knowledge, so I have to tread lightly here.

If loans create deposits, then how does full reserve banking change anything ? Please explain ?

Mosler has offered some proposals for banking. Unlike me, Warren has actually worked in a bank, so I figure he's worth listening to:

-- banks should lend only to borrowers, and keep the loans on their balances sheets. No more secondary market for loans.

-- US banks not allowed to contract in LIBOR (that's way over my head)

-- banks not allowed to have subsidiaries

-- banks not allowed to accept financial assets as collateral for loans

-- banks not allowed to lend offshore

-- banks not allowed to buy or sell credit default insurance

-- banks not allowed to engage in trading or any other profit making activity other than basic lending.

-- FDIC approved credit models to evaluate bank assets. No mark-to-market.

-- let the FDIC do its job of taking over any bank it deems insolvent. No more TARP or back-door bailouts.