Thursday, December 27, 2012

Ben Dyson,Tony Greenham, Josh Ryan Collins and RichardA.Werner —


Executive Summary

This submission outlines a proposal for banking reform that addresses most of the concerns of the Commission. The proposal has some similarities with 'narrow banking' and 'Limited Purpose Banking' but avoids some of its main drawbacks such as the need for retail deposits to be backed by government bonds), and offers additional advantages over and above narrow banking.

We believe that the banking sector would be more stable and robust under a full reserve banking model, where the transactional function of banking the payments system) is separated from the lending function, than under the current business model, which is open labeled 'fractional reserve banking'.

We also believe this reform would create greater competition within the banking sector, by hugely reducing the barriers to entry in the retail sector. In particular, we would hope to see it made much easier for new, 'Transaction Account'-only banks to enter the market to increase competition in the provision of this core payments system service. We also believe this reform would support the development of a more diverse financial services sector, placing institutions such as credit unions and traditional building societies on a level playing field with banks.

The key feature of fractional reserve banking is that the lending activity of banks effectively creates new money, in the form of new bank deposits. As the Bank of England's 2007 Q3 Quarterly Bulletin states: "When banks make loans, they create additional [bank] deposits for those that have borrowed the money". Put another way, the money supply of the real economy depends entirely on the lending decisions of the banking sector. Mervyn King, the Governor of the Bank of England recently identified these changes in the money supply as being central to the financial crisis:
"At the heart of this crisis was the expansion and subsequent contraction of the balance sheet of the banking system."
In contrast, in a full reserve banking system, the effective money supply is unaffected by the lending activities of banks. An economy running on a foundation of full reserve banking will be less prone to prof cyclical tendencies and less inflationary than an economy based on fractional reserve banking. The view that separation of the activities of lending money and creating money would lead to better stability in the financial sector is also supported by Governor King:
"Eliminating fractional reserve banking explicitly recognises that the pretence that risk free deposits can be supported by risky assets is alchemy. If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets."
Our proposal for full reserve banking ensures that risk-free deposits in the payments system 'do not coexist with risky assets'. The proposal to achieve this is simple: we recommend to require banks to keep safe the money which customers wish to keep safe, and invest only the money that customers wish to be invested.

After a few minor changes to the reserve account systems used by the Bank of England, the economy would have a stable money supply, regardless of the economic climate and the willingness of the banks to lend. These changes would also give customers a truly risk-free method of holding money, regardless of the amount held, and remove the need for taxpayer funded deposit insurance.

Our proposal is similar in spirit to and modernizes those put forward by the leading monetary economists of the twentieth century, namely Irving Fisher (1936), Milton Friedman (1960), and James Tobin (1987). It follows Huber and Robertson (published by nef in 2000) in recognizing the digital nature of modern money, and is designed to cause the minimum amount of disruption to the financial system's computer networks and IT infrastructure in the transition period.

This proposal deserves serious consideration. It is easy and inexpensive to implement – certainly much cheaper than a new bailout, and less disruptive to the City than broader regulation, such as a new 'Glass-Steagal'-type Act. It merely makes banks operate in the way people (including many economists) assume they operate already – as true intermediaries between savers and borrowers. By doing so, it removes one of the primary sources of economic instability.

Towards a Twenty First Century Banking and Monetary System: Submission to the Independent Commission on Banking
Ben Dyson,Tony Greenham, Josh Ryan Collins and Richard A.Werner
Joint Submission by the Centre for Banking, Finance and Sustainable Development — University of Southampton, School of Management (Professor!Richard A. Werner, nef (the new economics foundation) (Tony Greenham and Josh Ryan Collins) and Positive Money (Ben Dyson)

28 comments:

Dan Kervick said...

When I read the stuff by these people, I honestly feel like I am back in the 30's - or the 19th century. Did they read anything about the financial crisis of 2008. The proposal seem geared toward solving early 20th century problems we didn't have in 2008, and does nothing to address the problems we did have.

The framework here is an extremely conservative one, steeped in Austrian financial ideology about the evils of "inflating the money supply", and appears to me to be a recipe for severe stagnation.

Tom Hickey said...

MMT has framed the issues the way they need to be framed by addressing effectiveness in terms of goals. An economy is for the welfare of society as its material life-support system.

In doing so, it draws a distinction among various monetary options in berms of the policy space they afford in the interest of greater flexibility in the face of changing circumstances and increasing complexity.

Without such an approach, design proposals are ad hoc, addressing some narrow issues but missing the big picture. Or aiming low based on "political practicality."

Tom Christoffel said...
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Tom Christoffel said...
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Tom Christoffel said...

This is a bit of old news, having been submitted in November, 2010. According to Positive Money: "Unfortunately, judging from their interim and final reports the ICB failed to fully understand our proposals or their benefits." http://www.positivemoney.org/our-proposals/

Still it contains important insights. The fact that credit acts like money in driving price appreciation, but is debt that must be repaid with interest that, in bubbles ultimately collapses values - and leaves the debt burden.

It is easier to bid up prices on existing assets with a false demand from easy credit that to actually invest in a productive capacity to make a profit on the value added proposition. This enables fraud and Ponzi scheme marketing. Those problems of the 1930's that were present in 2008 and throughout history.

The "profit motive" of the quarter preys on the asset base that the "community motive" has built over generations. Un-hyped growth feels like stagnation; it is also known as reality.

Sovereign money may be issued to enable commerce, but its total nominal value should relate to the asset values, public and private of the sovereign. A country with a net value of Currency Units 1 trillion should not have Currency Units 5 trillion in circulation.

Bernard Lietaer's calls for monetary diversity makes sense to me. Regional currencies by and for the people may be a more rational preparation. Nate Hagens lectures make sense. We are unlikely to rationally change our minds and be conservative when our energy use puts us at such a high standard of living compared to our recent ancestors.

We think we're good when its mostly luck. Yes we work hard, but our efforts are so leveraged that we can't relate in real terms.

These folks can be found on YouTube.

Note: Preview did't work.

Anonymous said...

Bernard Lietaer's calls for monetary diversity makes sense to me. Tom Christoffel

Indeed. And that means that all government privileges for the banks must be abolished else no truly private currencies can compete with them.

joebhed said...

While this is an old submission to the GB Banking Commission, just like the Fisher 100 Percent Money proposal, it remains relevant today.
I know the PM group is authoring a book o full-reserve banking and 100 Percent Money that will spell out in detail its relevance today.
This group is submitting to the Icelandic Parliament study of its money system and the group's writing will likely be similar as the Icelandics are specifically looking at separating the banking from the money-creation functions of the banking system, and restoring money creation to a public function.
I have offered repeatedly to Dan that Hyman Minsky was calling for a Monetary Commission review in this country just shortly before his passing, including consideration of the exact same proposals that originated from the Soddy study of money, and yet Dan claims repeatedly that these are a throwback to the gold standard or, as here, to an Austrian perspective.
I'm sensing some serious MMT myopia here.
The Austrian perspective is TOTALLY about privatizing the money system.
Can you say: The Denationalization of Money?
All of these reform proposals are for "nationalizing" the money system to a public function -- the exact opposite of what the Austrians or gold buggers are proposing.
From one of "these people".
For the Money System Common.

Dan Kervick said...

"Monetary diversity" is code for further disempowering democratic governments and moving it to private enterprise. Count me out of that Rothbardian libertarian nonsense.

Tom Hickey said...

There is not agreement in the MMT camp over the distribution of monetary creation power. No one wants 100% private. Bill Mitchell seems to think that 100% is most appropriate. While I have not heard specifics from the others, I suspect that at least some don't want to trust either the govt or the private sector with 100%.

Dan Kervick said...

joebhed, as far as I can tell the core idea of the PM folks is that banks should exist primarily as a place to warehouse savings for payment purposes, and that the advancement of credit by banks should be limited to loans from a fixed poll of loanable funds that are explicitly dedicated by savers for that purpose, and where the lending is further constrained by the requirement that creditors must at all times have reserve assets in their possession of an amount greater than or equal to the totality of their liabilities. It strikes me that this is an extremely conservative and altogether unnecessary approach to finance that will act as a heavy anchor around national progress and capital development.

They also want, for some reason, to go away from interest rate targeting toward money supply targeting - a Friedmanian idea that failed when it was tried before, and can only be implemented by requiring the central government to exert an iron grip on the total quantity of money in existence. Apart from the fact that the idea can only be implemented via this kind of draconian centralization, it also accomplishes no really useful purpose that I can see.

Despite the fact that there was no commercial bank run in 2008, the PM folks seem determined to implement an antiquated plan that was designed to address the commercial bank runs associated with the no-longer-existing financial architecture of the early 20th century.
The serious issue they are addressing is the propensity of private sector credit to create bubbles. But they are addressing it with backward 75-yr old ideas based on the reform of an architecture that no longer exists.

The PM group seems not to grasp the extent to which the banks are already just private sector intermediaries in a state-run credit system. The liquidity crisis occurred in the shadow banking system and upper levels of the derivatized financial system, which existed outside the level of commercial bank accounts, which remained safe.

PM is too focused on "money" and the "creation of money", and seems not to get the fundamental issue of credit and its regulation. Bank "money" is just one kind of IOU. They also seem to be part of the group promoting the misguided notion that the bailouts were a drain on the assets of taxpayers or tax revenues, and do not understand the role of the central bank in backstopping the financial system with lender of last resort tools w/o requiring taxpayer revenues. The concern with profiteering and moral hazard is a serious one. But the idea that the "taxpayers" had to bail out the banks is misleading.

I do strongly favor the expansion of the role of government spending as a way of injecting financial assets into the real economy. But the idea that dollar expansion via spending can totally replace dollar expansion through credit seems very implausible and unworkable to me. Even if we had entirely state run and not-for-profit banking system we would need to employ credit and lending as tools for the capital development of the nation, and as a method for disciplining entrepreneurial activity. And we need to let the so-called "money supply" grow in a natural and decentralized way in response to the creative initiatives and endeavors of enterprising and imaginative individuals, rather than imagine it can all be accomplished through some kind of centralized, all-seeing authority.

PM is too fixated on this idea of the money supply, and an Austrian-style confusion of inflation and bubbles. We have seen you can get bubbles without inflation and inflation without bubbles. These are different problems.

Dan Kervick said...

There is not agreement in the MMT camp over the distribution of monetary creation power. No one wants 100% private. Bill Mitchell seems to think that 100% is most appropriate. While I have not heard specifics from the others, I suspect that at least some don't want to trust either the govt or the private sector with 100%.

Tom, to me the really big issue is not so much whether the banking and credit system is private or public, but how it is structured and how centralized or decentralized the decision-making is. The problem with PM is not that they want purely public sector money creation. It's that they want rigid centralized control over the money supply, with the banks just operating with a fixed pool of loanable funds whose quantity is determined by central government monetary policy determination. If you want to open a pizza shop, and you need capital, your ability to get that capital depends on pool of loanable funds already in existence, which itself depends on the quantity of funds that savers have set aside in their "investment accounts". So if everybody in a recessionary economy has freaked out and moved all of their savings to their "transaction" accounts, nobody can get capital.

Tom Hickey said...

Dad, the issue of control is more social and political than economic. There are reasons to counterbalance govt and private sector power, and also put roadblocks in place to prevent private capture of govt. Many people rank this as the highest priority.

Then there's the issue of picking winners and losers. A decentralized private sector with adequate govt controls is probably best for this. A powerful govt and a centralized private sector worst, other than a centralized private sector capturing govt or vice versa, since both are fascistic.

Politically, but from the economic POV, the trade-off is in terms of politic space. How much policy space should govt be given, who controls it, etc. These are political issues more than economic ones.

The primary purpose of the financial sector in capitalistic economies is risk management. The ideal is to restrict the financial sector to risk management and from risk-taking.

Tom Hickey said...

Oops. "Dad" should be Dan. :)

Dan Kervick said...

Tom, Minsky argued that banks should be small, decentralized and local. I think this is still true, even if the banking system were a publicly owned, non-profit utility. The guy who wants to open the pizza shop should be able to walk into a local place, staffed by people from his own community, and get a loan if he is a good risk.

Credit in itself has nothing essentially to do with interest or usury. Even if the loan is 0% interest or negative interest, it's still credit. The fact that the guys has to pay back the loan means that he is much less likely to take the money and then fly to Thailand and spend it all in brothels. I don't think we would want all development to take place via grants. Credit is very useful, even if extended by government and completely non-usorious.

Tom Hickey said...

A good model for retail banking is community credit unions with full fed govt backing. A govt alternative would be retail banking service administered by the Post Office, with mortgage handled by an agency like FHA. Retail banking is not complicated and can largely be digitized now. Aso solves the issue of the "unbanked," currently about 8% of the US population, IIRC. See Warren's Fixing the small banks

Capital formation is best handled by investment banks that are prohibited from acting a hedge funds, as under Glass-Steagall.

Managed funds should be allowed, but not trading in complex derivates. CDS should be regulated as insurance.

See Warren Mosler Proposals for the Banking System, Treasury, Fed, and FDIC (draft), and comments.

joebhed said...


Dan,
Thanks for expanding on your opinion of the reform proposals of the group named in the header.
I hope this can expand our common understanding of things.

The submission of the authors is especially connected to the presence of a central bank Governor’s truly unique opinion - it being the heart of their position.

When you commented earlier that these people seem ‘goldies’ or ‘Austrians’, I cringed with disbelief. Being familiar with the history of the document and its use of Governor King’s comments about fractional-reserve banking, and of the potential benefits of full-reserve banking, (which have since been confirmed by some of the world’s leading macro-economic modelers), your attempt to marginalize the ideas of the authors as somewhere between archaic and right-wing or conservative Libertarian (Rockwellian) in nature, is exactly why I saw myopia in your observation above.

Settling the matter is that Governor King’s comments are ADDRESSING the cause of the financial crisis, yet somehow you question whether the lessons of the financial crisis are lost on those who propose reform of the money system itself as the solution to preventing another financial crisis.
This IS the position that Minsky achieved late in his work.

The reason that these ideas have been around for so long is because the causal matter remains to be resolved.

We begin with a different reality about money.
Money is not debt.
Only when the potential that exists from an understanding that combines the reality of a sovereign fiat money system of REAL public issuance, along with the fact that that public money issuance need not involve any debt, does the potential for the real socio-economic agenda of both the MMTers and the reformers come within grasp.

For now I am only going to observe that there is a lack of questioning in your position. There are assumption and conclusions drawn without any basis; there are obvious misunderstandings or misstatements of the mechanics involved.

I have opined elsewhere, yet you ignore this reality.
There is nothing about a full-reserve banking system that limits the use of private bank lending for the capital formation needed to carry on commerce.
Why TF do you think Milton Friedman supported it?
Why TF do you think that the 1939 Program – for which I provided a link – was authored by six of the most prominent monetary-economists of their time and publicly supported by over 400 economists?
If you think any of the causal matter involved in that discussion has been resolved, please say how, where and when.
Otherwise, the unsustainable economics of the modern money system STILL requires systemic reform. Now, more than ever.
My guess is that it is the money-is-debt base understanding that prevents understanding that the government can provide all the money needed for exchange while the banks can do all the lending necessary for commerce – just as people think they do now.

If you have any reason to think this is not true, from where does this reason come?

Thanks.

Tom Hickey said...

My guess is that it is the money-is-debt base understanding that prevents understanding that the government can provide all the money needed for exchange while the banks can do all the lending necessary for commerce – just as people think they do now.

First, polling shows that most people in the US think that money comes from the govt and not the banks, and that banks lend out savings.

Secondly, most people understand fiat currency and its capacity for direct issuance. They are afraid of direct issuance for fear politicians will abuse this power and create inflation. They think that under the current system, govt needs to tax and borrow to get funds and they like it that way.

So I don't see direct issuance being an easy sell to the voting public without a lot of prior education, which would have to face down a massive counter-advertising campaign to discredit it by interests opposing it, like the entire financial industry that runs on rent-seeking.

Jeff65 said...

joebhed,

The govt already provides all of the money. The govt grants charters to banks and allows them access to the federal payment system. Without this access the banks can only offer credit which, as you say, is not money.

The problem at hand is how to wrest govt from those who have bought it and how do we keep others from buying it in the future.

Dan Kervick said...

joebhed,

I feel like I responded to the piece Tom linked to with with fairly direct criticisms of the PM proposal. But you have responded to my arguments with a rambling set of rhetorical questions and slogans. You seem to have a strong resistance to addressing the concrete details of the proposal, and tend to drift off into abstract doctrine about whether "money is debt" and vague statements about the government "providing" the money the economy needs..

But lets focus on one simple example to start with: You are an entrepreneur. You have a good idea for a business you would like to start, but you have no capital. In the PM system, how do you get your business going?

Ben Dyson said...

@Dan - "You are an entrepreneur. You have a good idea for a business you would like to start, but you have no capital. In the PM system, how do you get your business going?"

There is more than enough money looking for places to invest to fund all business lending even if banks are operating on a pure intermediary (eg. full reserve) basis. In the UK alone time deposits are more than enough to cover all business lending many times over. The idea that there will only be sufficient investment in business if banks have the ability to create money through creating demand deposits doesn't stand up to any analysis.

Besides, the banks have completely lost interest in investing in business. The problem you refer to - businesses being unable to get investment - is exactly the problem we have today, as banks prefer to invest in financial speculation and property bubbles.

All that we're arguing for, essentially, is that banks are made to work on the same basis as the rest of the investment industry, in that they can only lend what they have first borrowed from members of the public, rather than having a special privilege that allows them to create the demand deposits that are used as money for the rest of the economy.

In response to your other points:

"where the lending is further constrained by the requirement that creditors must at all times have reserve assets in their possession of an amount greater than or equal to the totality of their liabilities."

I think this is a misunderstanding, although it's not completely clear what you mean from what you've written above. Full reserve banking is very simple; either the customer wants their money available on demand, in which case it's stored in a Transaction Account (with the money being held at the Bank of England), or they want their money to be invested by the bank, in which case they give the bank permission to invest their funds and they (the customer) lose access to that money for a period of time. There's no need for 'reserve assets' - either the bank has the money in their accounts at the Bank of England, or it has invested the funds and lent them to other customers.

" The problem with PM is not that they want purely public sector money creation. It's that they want rigid centralized control over the money supply,"

Do you think we don't have that centralisation of control over the money supply today? The situation in the UK is worse than in the US, but our 5 largest banks have 85% of the market share for lending; that means the 80-odd board members of those banks can control the money supply by changing how quickly the bank expands it's lending.

"So if everybody in a recessionary economy has freaked out and moved all of their savings to their "transaction" accounts, nobody can get capital."

Right now we have savers and pensioners desperately looking for somewhere to invest their funds where they can get a return higher than a couple of percent. There are also millions of businesses desperately trying to get investment from banks. But the banks have freaked out, so they're refusing to lend to businesses and no-one can get capital. So the situation that you see as being a downside of the reforms we're proposing is exactly the situation we have today.

It does seem like you're still following the fairytale of banks as institutions that get money from savers and invest it in productive businesses, helping the economy to grow and create wealth. That story hasn't applied for at least the last 20 years.

Dan Kervick said...

"There's no need for 'reserve assets' - either the bank has the money in their accounts at the Bank of England, or it has invested the funds and lent them to other customers."

How can you have 100% reserves banking if there are no reserves?

Dan Kervick said...

Do you think we don't have that centralisation of control over the money supply today? The situation in the UK is worse than in the US, but our 5 largest banks have 85% of the market share for lending; that means the 80-odd board members of those banks can control the money supply by changing how quickly the bank expands it's lending.

But there is no money supply targeting in that system. Nor could there be. Central banks shifted to interest rate targeting after money supply targeting decisively failed. I think PM is barking up the wrong tree with its focus on regulating the money supply vs. regulating credit. The problem is never the quantity of money - it's the degree of leverage.

Dan Kervick said...

It does seem like you're still following the fairytale of banks as institutions that get money from savers and invest it in productive businesses, helping the economy to grow and create wealth. That story hasn't applied for at least the last 20 years.

No, I think this is the PM model, according to which the guy with no capital who wants to open a pizza shop is dependent on the existence of pools of loanable funds in investment accounts created from the savings of bank depositors.

paul said...

Something that seems to be missing from this discussion is the fact that under the current system the government is the main risk-taker in investment financing...businesses have comparatively little skin in the game in terms of their own money.

Businesses invest knowing (well, they should know it) the government will provide the funds they need to make a profit...net spending... and all they have to do is compete (actually fish) for the dofllars. We know the playing field has been tilted in their favor...risk is minimal from any perspective.

I'm talking mainly about big companies here...not small business.

It appears to me investment will be a lot riskier under a system where a much higher level of non-government financial assets are at risk. The institutional pushback here will be immense.

Maybe there is too much exploitive investment now, and that might decline if the risk was greater, but I see overall investment declining.

That means more government investment, i think we need that so maybe I am being won over by this idea.

Ralph Musgrave said...

Dan Kervick: If you want to comment on a document or paper, how about reading it first? The Werner paper does not oppose “inflating the money supply”. It SPECIFICALLY ADVOCATES printing new money and spending it into the economy when stimulus is required.

Re your claim that PM’s ideas (i.e. full reserve banking) will be a “heavy anchor around national progress and capital development..” that is a very popular and flawed objection to full reserve. It’s blindingly obvious that the restrictions on lending involved in full reserve will result in less lending. But that deflationary effect is easily countered by the above mentioned creation and spending of more money into the economy (as indeed is advocated by MMT as a cure for a recession).

Moreover, fractional reserve banking is a system that just cannot do without a subsidy. You’ll doubtless have heard of the TBTF subsidy and the recent trillion dollar bailout for the banking industry. Full reserve does not need subsidies. What’s so wonderful about an industry that cannot survive without a subsidy?

“it also accomplishes no really useful purpose that I can see…” It gets rid of a system that cannot function without taxpayer subsidies. Is that good enough?

“Despite the fact that there was no commercial bank run in 2008…” Hilarious. Of course there wasn’t: billions worth of assistance from taxpayers stopped any potential runs. In any case, there WAS A run in the UK: Northern Rock.

“the idea that the "taxpayers" had to bail out the banks is misleading..” Not sure about the US, but in the UK the government is still sitting on huge losses on the shares it bought in various banks. Moreover there are numerous estimates as to the size of subsidies that large banks get. This one by Andrew Haldane of the Bank of England puts the figure at several times bank profits:

http://www.voxeu.org/article/what-contribution-financial-sector

If that is anywhere near right, then the existing fractional reserve banking system is HOPELESSLY UNECONOMIC.


Clint Ballinger said...

I am still catching up on reading and just saw these comments. I try to get to the root of some of the disagreement/misunderstanding between some MMTers and some anti- private credit money creation here (they really shouldn't be called /use the term [pro] Full Reserve Banking, as that is not really the issue as PositiveMoney always takes pains to point out} Towards a Pure State Theory of Money I hope to have more on the topic but this is a start. Dan's characterization of the issue shows he has not taken the time to fully understand Werner, Kotlikoff etc., neither the problems they see nor their proposed solutions.





Clint Ballinger said...

Dan Kervick writes "the PM folks seem determined to implement an antiquated plan that was designed to address the commercial bank runs associated with the no-longer-existing financial architecture of the early 20th century." and "The liquidity crisis occurred in the shadow banking system and upper levels of the derivatized financial system, which existed outside the level of commercial bank accounts, which remained safe."

But this is misleading. The plans Kotlikoff and Werner argue for do have a narrow banking component, but it is not the most important part of the plans, not by a long shot.

Kervick's statement shows the blind spot many MMTers seem to have concerning private credit money creation and the GFC.

It wasn't simple bank runs that caused the crisis, but the systemic effects of private credit-money very much did, interacting with state money & the various sectors of the economy in harmful yet complex ways. Steve Keen's work especially helps illustrate this, http://www.debtdeflation.com/blogs/2010/07/03/are-we-it-yet/ and his many other articles like it. Kotlikoff, Werner and similar plans are aimed at stopping these problems, not [just] simple bank runs, although they do that as well. Kervick and others with similar critiques of PositiveMoney and similar plans just do not get the full extent of the harmful effects of a system based on private credit-money.

Kyle said...

I second what Clint said. Well stated.