Banks as Social Accountants and Screening Devices for the Allocation of Credit
Ya think? That was the ORIGINAL idea, from day one! Only thing that's amazing is that economists had forgotten it. Marriner Eccles must be appalled, and rolling over in his grave.
Watching economists in their slow action is like watching priests - after decades of profound meditation - reaching enlightenment, and coming to the suspicion that there are these things called humans?
Makes you wonder who on earth turned their lights out in the first place.
15 comments:
It's troubling that a view of banks that many of us have always held...that they are public-private partnerships that exist for public purpose...funding growth...has to be pointed out in a paper written in 2013, by a well-known economist that inexplicably didn't always know it.
We live in a world where reality is what our elites say it is...logic be damned...and we dare not question it.
Dare, Hell...it's considered blasphemy to question conventional wisdom.
Actually, Stiglitz's paper was written some years ago, but your point still holds.
Another example of lights having been turned out is the never ending and inane suggestion we keep getting from so called professional economists that expanding the deficit means expanding the debt.
As Keynes pointed out, the deficit can accumulate EITHER as more debt OR AS more monetary base. Evidently studying Keynes is not a requirement when applying for a job as professor of economics. Maybe studying economics is not a requirement either.
Evidently studying Keynes is not a requirement when applying for a job as professor of economics.
In many places, NOT having read Keynes is a requirement of candidates for an academic position.
"the deficit can accumulate EITHER as more debt OR AS more monetary base"
This has me puzzled…maybe I don't know what the intended definition of monetary base is.
A deficit is the arithmetic difference between spending and taxation over a defined period…two items that are pretty much unrelated.
Under a system in which the Treasury issues bonds as a deficit offset and the cb issues currency, the amount of $NFA corresponding to the deficit can be held in non-govt as either tsys or rb, the composition varying depending on cb policy.
I think I've figured out the answer to my own question...
Increasing the monetary base increases the interest burden because we pay interest on reserves...which increases the deficit...
Makes sense.
Except that overall interest collected is still lower than before we started paying interest on reserves because QE has lowered the portfolio rate.
"the amount of $NFA corresponding to the deficit can be held in non-govt as either tsys or rb, the composition varying depending on cb policy."
Technically rb may be $NFA (i don't know) but as far as non-government agents participating in economic activity they are non-existent.
rb do not exist on any balance sheet IN the non-government, only in the netherworld balance sheet that exists across the boundary between banks and the central bank.
Interest paid on reserves does enter non-government balance sheets though. Interest on the National Debt is a line item in the budget.
When the cb purchases tsys, it credits bank accounts at the cb with rb. The amount of $NFA is constant, only the composition changes.
"When the cb purchases tsys, it credits bank accounts at the cb with rb. The amount of $NFA is constant, only the composition changes."
Ok, you are basically saying the same thing I said in different words...I need to improve my reading comprehension...changing the composition changes the composite portfolio rate which changes the interest paid by the government to the non-government which changes $NFA as Ralph noted.
Unfortunately for the 99% an increase in $NFA this way is effectively a decrease...the net result is greater inequality re relative wealth.
"the deficit can accumulate EITHER as more debt OR AS more monetary base"
That should be "or as more monetary base AND bank deposits"
That should be "or as more monetary base AND bank deposits"
Not really. Bank deposits are liabilities of the commercial banks, whereas monetary base is a liability of the consolidated govt sector.
Thus it is correct to say that the deficit can accumulate as either debt (securities issued by the govt) or monetary base (liabilities of the central bank and assets of the commercial banks).
I think it's just a distinction between "print and spend" or "borrow and spend".
A monetary sovereign nation can decide between both, as both Keynes (hence the reference) and Friedman pointed out, states could and should "print and spend" instead of "borrow and spend" (regardless of how operationally is done, if the state decides to auto-borrow for each expenditure it does in practice there isn't much of a difference).
Jose, that's true.
However the effect of deficit spending without bond issuance (to non-banks) would be a net increase in bank deposits held ny non-banks.
If all government bonds were sold only to banks then not selling bonds would only change the size of the monetary base, nothing more.
However given that most government bonds are held by non-banks, not selling bonds would have the additional effect of increasing bank deposits.
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