With the emergence of interest-bearing money, the concept of ‘money supply’ is now meaningless. Theobsolescence of interest-free money is not just a consequence of payment of interest on reserves by the Fed (as Steve Waldman argues). If short-tenor government bonds are liquid enough, then no one needs to hold non interest-bearing deposits for any meaningful length of time. For example, let us assume that rates are at 6%, the Fed has sold off all its QE holdings and is no longer paying interest on reserves. Therefore, bank deposits yield no interest. In such a scenario, most individuals can put most of their risk-free investments into an ETF or index fund invested in T-bills that pays say 5.80% (with 20 bps fees). In a world of such liquid risk-free investments, there is simply no need to hold cash except immediately before the need to make a payment arises.Macroeconomic Resilience — towards a more resilient macroeconomy
Unifying The Fiscal And Monetary Functions: A Policy Proposal
Ashwin Parameswaran
This proposal is along the lines of outline I've suggested of separating "retail" banking from commercial banking and having government take over retail since the public is already on the hook. Ashwin Parameswaran is a former banker and knows a lot more about how to do this than I do. His proposal is definitely worthy of consideration.
6 comments:
Ashwin gets very near to advocating full reserve banking. In particular, he says “Rather than shackling incumbent risky banks, my proposal simply separates them from the risk-free depository and payments system.” Well that’s straight out of the full reserve book. E.g. see this work published 2010:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Laurence Kotlikoff, also argues for the latter separation as part of his full reserve system.
Both Kotlikoff and the work linked to above advocate splitting the existing banking system into two halves. First, there is a “risk-free depository and payments system” to use Ashwin’s phraseology. Second, there is a “risky bank” section where anyone depositing money gets a decent rate of interest, but they are treated in very much the same way as people putting money into mutual funds: if the fund does badly, they take a hair cut.
Ralph, I don't think that full reserve could ever pass politically in the US. Don't know about UK. But I think that Ashwin's proposal has legs here and could get some traction. A lot of people are fed up with the public backstop for bank's risk-taking. This would separate public and private and conceivably the commercial banks could develop their own payments system. The large banks pretty much use clearing houses now anyway.
Hi Tom,
I agree there are big political problems involved in implementing full reserve, though Laurence Kotlikoff thinks these are soluble.
One political problem is that full reserve rules out bank accounts which earn interest AND ARE 100% safe, and people think they have a right to that combination, even though it does not make economic sense. Those sort of accounts are necessarily subsidised (via the TBTF subsidy and occasional billion dollar bank bailouts). It’s bread and circuses all over again. In Ancient Rome people thought they had a right to subsidised entertainment at the Coloseum, and they objected at the merest hint of subsidised entertainment being removed.
Another political problem is the huge ignorance in top political circles. Senior politicans don’t understand the basic nature of national debt, deficits and so on. They don’t realise they are abysmally ignorant suckers who are taken for a ride by banks at every turn. So the chances of their understanding full reserve banking is minimal.
As long as there is an urge to 'save' and have some sort of rent due to retirements etc. it will be very difficult, if not impossible, to change much of the dynamics at play here.
People will feel entitled to that 100% safe and profitable investments, so we will keep the inflationary banking credit system with the occasional bailouts, and instruments such as public debt securities instead of 'print and spend'.
This is aggravated by the public perception of 'countries can run out of money', which takes out of the question a bigger safety net for the elderly which removed the urgency to save for the retirement and feel entitled to current banking status quo.
We will need a transition policy period if we are going to go to "no bonds".... that cannot/should not be done "cold turkey" imo... rsp,
Matt, what about Nixon going from gold to fiat unilaterally without warning by just announcing it. Technically, that was a US default. I don't see transitioning to no bond as being anything like that. Just redeem bonds as they come due and don't issue new bonds. If the Fed want to set the rate they can use IOR, but I am against Congress delegating this power to a command system run by technocrats. That power should rest with the executive. IIR, beowulf even thinks it is unconstitutional. Whatever, it is terrible policy.
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