Summary: MMT understands the monetary system in depth, particularly a fiat monetary system. “Full Reservers”, because they have not always fully grasped the significance of the fact there is no money multiplier and that the loanable funds model is wrong, often have a misplaced emphasis on the reserve ratio and sight deposits. Nevertheless, they can be understood ultimately to be worried about endogenous money, and in effect are arguing for a pure fiat money system. Steve Keen shows the magnitude of the negative effects of endogenous money on the economy. If Keen is properly understood, and what are in effect the anti-endogenous money policies of Full Reserve plans implemented, the end point is a pure fiat money system. And the starting point of a true chartalist system, the natural home for neo-chartalism.Clint Balinger
Modern Monetary Theory & Full Reserve Banking: Connected by Fiat
Again, seems to me to be confused about what fiat is.
33 comments:
And confused about what endogenous is as well.
Until you get banks saying 'come back next month, we're out of funds' like the old building societies used to do, then loans will always be forward sold and the regulatory requirements patched up after the loan sales are underway.
Whether you operate the system 'in specie' or 'insured' is largely a matter of taste. Functionally they operate in the same way - under capital constraints.
It also seems that these so-called analysts are making the problem of ferreting out the patterns in the money system much more complicated than it really is.
"Nevertheless, they can be understood ultimately to be worried about endogenous money,"
Endogenous money creation is good, unethical endogenous money creation is bad. Currently we are bedeviled by the latter.
"and in effect are arguing for a pure fiat money system."
Not necessarily. Fiat should ONLY* be required for government debts and it should not otherwise be privileged for the payment of private debts.
*After a universal and equal bailout of the entire population, including non-debtors, with full legal tender fiat to force the counterfeiting cartel, the banks, to accept it. Turnabout is fair play, no?
“seems to me to be confused about what fiat is”
Tom - I have to say it seems to be MMT that often contains a confused definition of fiat.
MMT can address operational realities or analyze a Chartalist system. But it cannot do both
“Until you get banks saying 'come back next month, we're out of funds' like the old building societies used to do, then loans will always be forward sold and the regulatory requirements patched up after the loan sales are underway.”
Neil, again, you don’t seem to grasp the effects of the changes a plan like the Chicago Plan or especially positivemoney would implement. Your comments would be more useful if they actually considered the operational significance of the proposed changes.
“...these so-called analysts are making the problem of ferreting out the patterns in the money system much more complicated than it really is”
Paul - Actually, a true fiat system would be much more streamlined than the Rube Goldberg bank credit-money dominated system we have now. The only pattern I see is the money disappearing down the pockets of investors in Ponzi-scheme finance at the expense of the public good.
Clint, the major distinction that MMT makes is between convertible fixed rate and non-convertible floating rate currencies.
The Chartalist view is that state money is driven by taxes and serves to move private sector resources to public use. Chartalism is not state money only. Chartalism is perfectly compatible with bank credit money.
MMT describes the current monetary system as endogenous, with inside money making up a greater proportion of the circulating money supply than outside money. MMT has no problem with this per se. It understand how inside and outside money work and what their relationship is.
You seem to be thinking that MMT is monetary proposal rather than based a description of the operational reality of the exiting monetary system. MMT has policy proposals for financial sector reform based on evidential need due to the crisis and also macro policy to achieve growth, full employment and price stability.
According to MMT economists, the system is OK as it stands. It justs needs to be used to potential instead of being misunderstood by most mainstream economists and financial types, and gamed by the plutocracy.
Neil says “Until you get banks saying 'come back next month, we're out of funds' like the old building societies used to do, then loans will always be forward sold and the regulatory requirements patched up after the loan sales are underway.” Exactly! “Come back next month” is exactly what banks WOULD BE forced to say to borrowers from time to time under full reserve.
I.e. I agree with Clint when he says that Neil does not seem to have actually studied how full reserve would work: Positive Money’s version or Laurence Kotlikoff’s version.
Frlbane says “Endogenous money creation is good”. Why? In other words what can endo money do that exo money cannot do better? For example, just in case nobody had noticed, we had a MASSIVE increase in endo money prior to the crunch, which has led to the worst recession since the 1930s. In general terms, private banks tend to create extra edo money in a boom: exactly when extra stimulus is no needed.
But there are plenty of other defects in endo money, and I go into that in a lot more detail in a paper which will be online within about a week.
I don't want to get into the whole full reserve debate here. But I wrote a comment on the more limited fiat money question in the comments section for Tom's previous post on Clint's views.
FRB is an imposed restraint that mimics a convertible fixed rate system but allow policy flexibility from the side of govt, since fiat is exogenous in this system. This puts ALL the power in the hands of the govt.
This would be strongly opposed by people like Bernard Lietaer, not to mention libertarians of all stripes, as giving away the store unless perhaps popular democracy were also established as a prerequisite.
Frlbane says “Endogenous money creation is good”. Why? Ralph Musgrave
As a check and balance to too little or too much exogenous money creation. Fiat should ONLY* be legal tender for government debts, not private ones.
But the current system is an abomination and allows vast amounts of unethical endogenous money creation. It killed 50-86 million in WWII alone (Google "causes of WWII") and will kill again unless abolished, is a safe bet. But hey, according to Dan K. it has given us better pizza so what's not to like?
* After a universal bailout of the population with full legal tender fiat to force the banks to accept it.
Frlbane,
You say that endo money can put right an excess or deficiency of exo money. I can see no reason in theory why endo money should have that beneficial effect, nor do I know of any instances of it having that effect.
I think the reality is that endo money actually has to OPPOSITE EFFECT, as I suggested above. That is, private banks expand their money creation activities in a boom, which exacerbates the boom. And they do the opposite in the recession. Certainly in the UK over the last couple of years there have been loud complaints about private banks not lending enough.
"Paul - Actually, a true fiat system" - Clint
Clint you need to be more specific about the differences and how those differences will be manifest in economic activity rather than beating around the bush.
The only fiat I am (we should be) concerned with is net government spending…you seem to be conflating bank "mpney" with fiat money…one of them (true fiat) has no offsetting liabilities. I don't know if that's how you mean it or not.
Credit extension of "temporary money" is inherently self-limiting, although in most cases we just run the ship aground and that's a painful way of meeting the limit.
See, I don't beat around the bush.
That is, private banks expand their money creation activities in a boom, which exacerbates the boom. And they do the opposite in the recession. Ralph Musgrave
Yes, that's what the current government backed credit cartel does because:
1) Their virtual private money monopoly forces people to borrow or be left behind during the boom.
2) They lend, not spend, their money into existence and thus require that it be repaid with interest. This guarantees an eventual bust since the interest eventually compounds faster than real economic growth.
But without the government enforcement of and backing for the credit cartel, it is likely that corporations would be forced by competitive pressure and higher interest rates to forgo borrowing and to use their own common stock as private money. Common stock does not require usury and is spent, not lent, into existence so eventual deflation in not built in.
Credit extension of "temporary money" is inherently self-limiting, paul
How? George Soros' "Theory of Reflexivity" indicates otherwise since credit creation drives up asset prices which justifies even more credit creation in a positive feedback loop until BOOM!
And how just how "temporary" is a 30-year mortgage?
Ralph said:
"what can endo money do that exo money cannot do better?"
Democracy. If real resources exist and the public will is to put them to use, then there is no need to get permission from a financier with endo money.
Exo money grants undemocratic veto power to those who have it.
"It" being exo money.
And with a democratic republic instead of popular democracy, it puts all the power in the hands of politicians that are rented by the plutocracy. Such a deal.
Tom said:
"it puts all the power in the hands of politicians that are rented by the plutocracy"
Yes, and until that is changed discussion of other issues is pie in the sky. They're not going to adopt "full reserve" or set policy according to MMT.
"How? George Soros' "Theory of Reflexivity" indicates otherwise since credit creation drives up asset prices which justifies even more credit creation in a positive feedback loop until BOOM!" - fribane
Anything credit does is temporary if not backed up with $NFA.
Private debt can't permanently drive up asset prices unless $NFA expands dollar-for-dollar with household debt (albeit with about a 5-year lag) in order for gains to be realized.
Self-limiting in the sense that asset prices isn't what limits debt…income limits debt…one can have an asset to back up a loan but not have enough income to support the loan servicing (payments).
Self-limiting in the sense that if $NFA doesn't support debt expansion as I wrote above we will end up with a bubble…which will burst…giving back most if not all of the temporary gains.
Increasing $NFA is required to service debt because the parties that are accumulating the asset side do not (can not) return the funds back to the parties left holding the liability side. There is no transfer mechanism other than philanthropy or businesses losing money.
Prudent underwriting practices are designed to avoid bubbles…the institutions we trust betray that trust and we fall for it…over and over.
Credit can only be driven up if lenders ratify price appreciation of the collateral. This was ultimately the downfall of the housing market as lenders colluded with brokers, appraisers and rating agencies to "fix" the marginal value of the asset held as collateral significantly above what it was actually worth should the marginal price even lose appreciable momentum, let alone fall. It was basically fraud, as Bill Black and others have documented.
"lenders colluded with brokers, appraisers and rating agencies to "fix" the marginal value of the asset held as collateral significantly above what it was actually worth" - Tom
Example…my stepson bought a house out of foreclosure a few years ago for $89K under the stimulus $8000 home purchase credit program.
The previous sale price for the house was $190k
Credit can only be driven up if lenders ratify price appreciation of the collateral. Tom Hickey
A credit boom can easily cause incomes to rise (at least for a while) so a credit boom CAN increase the ability to service debt, at least temporarily. So fraud is not necessarily needed for a bubble to form.
"A credit boom can easily cause incomes to rise (at least for a while) so a credit boom CAN increase the ability to service debt, at least temporarily. So fraud is not necessarily needed for a bubble to form." - fribane
fribane, both times this kind of crisis has occurred in our lifetimes (the S&L crisis and GFC) it has been a result of accounting fraud, ie bad underwriting. Fraud means it was done intentionally.
See here for a graph of the events…
https://dl.dropbox.com/u/33741/Debt%20series%20v2.png
Note the peaks of the events above the red line (approximate stable equilibrium) and the dates for CMDEBT.
Also pay attention to how long the deleveraging took.
How would you suggest stopping households from incurring debt? Does it matter where the debt originates?
A credit boom can easily cause incomes to rise (at least for a while) so a credit boom CAN increase the ability to service debt, at least temporarily. So fraud is not necessarily needed for a bubble to form.
As long as incomes (wages) rise along with prices, including asset prices, no problem except for savers and creditors, since the currency will inflate. In fact, in prosperous times, this is often what happens.
The problems arise when income is drawn forward that cannot be paid back in a timely way. Then the illusion of prosperity created by imprudent credit is exposed by the stark reality of cash flow issues and then insolvency.
"a credit boom CAN increase the ability to service debt" - fribane
fribane, I don't believe this is possible across-the-board…It can only shift nominal wealth from one place to the other and gains are measured in increased valuation of some assets not a net increase in nominal dollar assets (which isn't possible).
The valuation increase is on paper until you get someone to monetize it by purchasing the asset from you but at the end of the day someone ends up carrying a loss (musical chairs scenario) if the fiscal authority doesn't "bless" the gains with $NFA.
How would you suggest stopping households from incurring debt? paul
It is negative real interest rates (especially in housing) that force people into debt and it is the government backed credit cartel that causes negative real interest rates. So:
1) Abolish government backing for the banks.
2) Since previous operation of the credit cartel has cheated both debtors and non-debtors, the entire population deserves restitution from the monetary sovereign to restore the equity they would have otherwise had. More equity means less need to borrow by borrowers and more to lend for genuine lenders.
3) Encourage the use of non-usury, non-lending types of private money such as common stock.
The problems arise when income is drawn forward that cannot be paid back in a timely way. Tom Hickey
Steve Keen says that our debt-based economy requires accelerating debt to avoid recession and that nothing can accelerate forever.
paul, the increases in asset valuation do add to wealth. If the price appreciation is passed on to wages and goods price, then there is inflation of the currency in the sense of a general price rise. This is stimulatie of growth, which results in investment and increase in "real savings" in the form of capital goods and inventories.
As long as income expands so that real wages are not falling and govt is offsetting saving desire appropriately a corresponding increase in asset, goods and wage price is not an issue.
Issues arise if effective demand outpaces the capacity of the economy to expand supply, however. Then excessive credit becomes a problem.
But as long as debt can be serviced, no problem. Over time that can only come from income, since debt draws income forward.
But hey, I'm not opposed to purely private banks. If credit is so essential then surely the private sector should be able to provide it without government privileges. If government privileges are required, then a scam is being run for the sake of the banks and the so-called "creditworthy."
"paul, the increases in asset valuation do add to wealth." - Tom
They add to the value of real assets, not net financial wealth, except that the value of real wealth can't get out very far ahead of $NFA growth before it contracts, which will happen if suficcient deficit spending isn't extended..
Calling a short-term inflation of value "growth" is misleading at best.
The value of real assets increases linearly with the growth in net financial wealth over the medium to long term. Don't take my word for it…check it out yourself.
If valuations get inflated they tend to snap back unless sufficient deficit spending is extended.
The mistake you are making is conflating bubble growth with sutainable growth…the difference is the level of $NFA created along with the growth.
"But hey, I'm not opposed to purely private banks. If credit is so essential then surely the private sector should be able to provide it without government privileges. If government privileges are required, then a scam is being run for the sake of the banks and the so-called "creditworthy."" - friable
Not that I disagree with this completely but I wonder what kind of an economy we would have under this arrangement.
Investment levels would be much lower because the major risk would be borne by the investor, and these folks don't like to gamble…they like a sure thing.
This means the government would have to be behind a great deal more investment or the economy would contract…probably a lot.
This approaches Socialism…which I'm not opposed to…but I'm not sure the citizens are on board with that yet.
Ay! So much to catch up on here - sorry I am only here sporadically, I will try to respond when I can. Hope to get a new VPN this week and then will have unlimited uncensored internet again here in China (fingers crossed)
"Again, seems to me to be confused about what fiat is."
That's why I put the little picture up there
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