Monday, January 14, 2013

Merijn Knibbe — Our land and houses based monetary standard

The single largest kind of money creating debt are mortgages (table, credit to households is largely mortgage debt). It’s not completely bonkers to state that we, to an extent, have a kind of monetary ‘housing standard’. And we bail out banks instead of households when the value of land and houses goes down, unemployment goes up and households can’t pay their mortgage anymore. Weird. The lender and the borrower created the money together and the best thing to do when the value of the collateral goes down is to bail them out, together, for instance by printing vouchers which households can use to pay down (part of?) the debt.
Real-World Economics Review Blog
Our land and houses based monetary standard
Merijn Knibbe | Wageningen University, Netherlands

1 comment:

Ralph Musgrave said...

In reference to banks, mortgagors and collateral, Knibbe says “best thing to do when the value of the collateral goes down is to bail them out, together…” Nonsense.

Bailing out banks equals a subsidy of entities that are supposed to be commercially viable. Why do taxpayers have to subsidise banks? Why do they have to subsidise idiots who have borrowed too much? There is no excuse for that.

The “best thing” (to use Knibbe’s phrase) is to outlaw the Ponzi scheme that banks have run for centuries: promising to return to depositors the exact sum deposited while investing their money in loans or investments that can fall dramatically in value. And that is easily done by forcing depositors who want their money loaned on to bear the cost when it all goes wrong. In contrast, depositors who want 100% safety have their money lodged in a 100% safe way: e.g. at the central bank where it will earn little or no interest.

The latter system is called “full reserve banking”. Let’s go for it. For more details, read Laurence Kotlikoff’s works.