Wednesday, June 25, 2014

Ann Pettifor — Out of thin air – Why banks must be allowed to create money

Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. His ideas are based on the Chicago Plan, advanced among others by Irving Fisher in the 1930s, and shared today by the UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’.
Furthermore, Wolf argues, private commercial banks would only be allowed to:
‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that
many wrongly believe they now are.’
Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so.

I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s.
Prime Economics

20 comments:

Anonymous said...

FWIW, the main problem with banks creating money is the resulting procyclicality of money creation, which produces unnecessary crises and lengthens recessions. Unfortunately, we cannot leave countercyclical policy to people and institutions whose natural inclinations are procyclical. Countercyclical policy must either be automated or left in the hands of relatively few.

Tom Hickey said...

That's what automatic stabilization is about, as well as welfare programs in general. Welfare programs like SS provide a stable base, and automatic stabilizers expand and contract with the changes in cycle.

Then regulate bank lending from the asset side, preventing credit standards from becoming to loose in booms.

Auburn Parks said...

Or maybe just maybe we could require banks to actually hold onto the loans they make. So that they are responsible for their own lending standards and not just how many junk mortgages they can lie about and sell to people.

There is nothing that can be done about the cyclical nature of the economy, its a dynamic biological ecosystem with myriad feedback loops. The key is to use exogenous policy to moderate the natural swings.

Anonymous said...

"There is nothing that can be done about the cyclical nature of the economy, its a dynamic biological ecosystem with myriad feedback loops."

Consider the predator-prey feedback cycle, which can be quite severe. Prey refuges can moderate that.

There are things that can be done, and which have been done, to moderate economic cycles. Perhaps you consider government as exogenous to the economy, but can we really separate the two?

Ralph Musgrave said...

Ann Pettifor is clueless on banking and monetary matters. See my comment after her article, plus:

http://ralphanomics.blogspot.co.uk/2014/06/ann-pettifors-bizarre-ideas-on-money.html

and

http://ralphanomics.blogspot.co.uk/2014/06/ann-pettifors-just-money.html

Ralph Musgrave said...

Tom wants to “regulate bank lending from the asset side, preventing credit standards from becoming to loose in booms.”

We already have measures for dealing with booms: interest rate adjustments, though I think most MMTers would prefer a cut in government net-spending.

As to bubbles, they are notoriously difficult to spot. E.g. if the stock market rises 10% is that “bubble”? If house prices rise another 5%, 10%, 15% etc, where’s the dividing line between a bubble and a non-bubble? Darned if I know.

As to tightening “credit standards” while leaving taxpayer funded guarantees for depositors in place, that leaves a subsidy of banking in place, which I don’t agree with. As to tightening credit standards combined with FDIC type self-financed insurance for banks, that’s getting very close to full reserve banking (which Pettifor opposes). I.e. under both full reserve and FDIC type insurance plus better credit standards, those funding banks pay pretty much all relevant costs.

However there’s a flaw in that idea which I’ll explain on my blog in a day or two. (Would take up too much space here).

Re Auburn’s idea about making banks “hold onto the loans they make.”, Warren Mosler supports that idea. But that isn't guaranteed to stop banks making silly loans. Northern Rock didn’t sell on bundles of mortgages, and it went bust. Indeed, the latter “selling on” was far less prevalent in the UK prior to the crisis than in the US, but that didn’t stop UK banks (in addition to Northern Rock) getting into trouble.

My preferred solution is to simply force all lending entities / banks to fund themselves just from shareholders, rather than depositors. That way it’s virtually impossible for a bank to suddenly fail. And that’s full reserve banking: what Positive Money wants and what Ann Pettifor opposes.


Matt Franko said...

The "busts" in the cyclicality can be correlated with growth in credit that exceeds coincident growth in govt spending... ie system liabilities are created at a faster rate than the income growth that additional govt spending creates which is necessary to service the loans... eventually the loans start to fail and we get a "bust"...

Same thing on the upside, govt spending increases and then the banks start to leverage this additional system income, usually it eventually goes too far... so one thing we could do for a start is limit the creation of bank credit based on a ratio to the increase in govt spending...

rsp,

Ignacio said...

"Same thing on the upside, govt spending increases and then the banks start to leverage this additional system income, usually it eventually goes too far... so one thing we could do for a start is limit the creation of bank credit based on a ratio to the increase in govt spending..."

Yep, and that's something that can be "easily" (technically/legally) done right now.

But even pushing Basel III has been difficult, and that's barely a change from the previous norm on capital requirements (and leverage constraints in practice).

The guys at the banking sector are just too greddy, and they control politicians through financing etc. so don't hold your breath for any change (whatever it is) to be done in the right direction.

STF said...

Ralph

Minsky explained why interest rate adjustments make booms worse, not better. At least adjustments in the short-term rate. I think there's room, though, to adjust long-term rates without adjusting short-term rates.

Pettifor--and MMT's--view of private money creation absolutely does not rest on deposit insurance. That's a straw man. No reason to have such a thing--govt could take over the payments function of banks, for instance, as Minsky/Kregel propose, and as many countries already do via, say, their national post offices.

Full reserve banking and bank "shares" aren't the same thing. The former in essence only gets rid of the need for deposit insurance. The latter is a much more significant change, but still doesn't get rid of pvt money creation, no matter what you say.

The overarching point--which I explained to you on Twitter months ago and you never had a response for and indeed never seemed to actually comprehend--is that there's no such thing as getting rid of private money creation as long as you need to protect the payments system. And you MUST protect the payments system. That's what central banks DO every minute, every hour, every day. Even if you nationalize deposits through a post office sort of thing, you still have to protect payment settlement across different types of accounts or risk having small disruptions to that settlement cause larger financial disruptions. That's why inelastic systems like the gold standard don't work. It's why so-called debt free money--a bit more elastic in theory but necessarily endogenous in practice--can't eliminate pvt money creation. When you, AMI, the positive money people, etc., show even the slightest bit of understanding of the payments system in your arguments for your position, then it will be time to debate and see if you've got something (which prehaps I'm wrong and you do, though you've still got Pettifor's critique of centralized decisionmaking for money creation to deal with). Until then, MMT has no reason to engage with you or them.

Neil Wilson said...

Whatever you can do with an 'in specie' system, you can do with an 'insured' system. The two are operationally identical.

The people pushing this line actually want to make changes to the system (particularly in the UK) that they don't actually want to make explicit - because people won't accept them.

Loans are always endogenous because they take time to come about. During the application process there is an expectation the loan will come about, and work is lined up accordingly. Credit may be extended, etc. That is an expansionary impulse into the economy before any saving withdrawal has taken place.

So you can never restore loanable funds, because loanable funds relies upon loans and savings being instant substitutes. And they are not.

Matt Franko said...

Well Ignacio I would try to inform them that if they are indeed "risk managers", that this relationship between the govt spending flows and the banking system liabilities is THE critical relationship that is "AT RISK" of getting to a point where a systemic malfunction occurs that can take them all down at some point...

So this is a "risk management" issue which they are supposed to be all about, and the reality is they are all ignorant of the whole process...

so I dont know why anyone would go into the banking business in the first place as the industry in general is ignorant of the systemic malfunction that poses the most risk to the whole sector imo...

at least if you are in some sort of diversified consumer non-discretionary business provisioning the citizens, you can always make some sort of money if you manage it well...

rsp,

Ralph Musgrave said...

SFT,

First, I didn’t say that money creation “rests on deposit insurance”. I.e. I’m aware of the very obvious point that there was little or no deposit insurance prior to the 1929 crash, but banks obviously created money prior to that date.

Next, you say “The overarching point--which I explained to you on Twitter months ago and you never had a response for and indeed never seemed to actually comprehend--is that there's no such thing as getting rid of private money creation as long as you need to protect the payments system.”

First I am much amused at the idea that something of this complexity can be explained on Twitter.

Second, if the last three words of your latter passage refer to a payments system involving private money creation, then your statement is a tautology. I.e. you’re saying “there’s no such thing as getting rid of private money creation as long as you need to protect the private money creation and payments system”. That’s a bit like saying I cannot get rid of my car as long as I’m insuring my car. Logically that statement is correct, but it’s a tautology or kind of tautology.

On the other hand if you’re saying “there’s no such thing as getting rid of private money creation as long as you need a protected or totally secure payments system”, then I flatly disagree, and for the simple reason that government can produce a totally safe form of money (as indeed it already does), and private money creation can be banned or at least severely curtailed. What’s the chance of a $100 bill suddenly becoming worthless in the same way as billions of dollars worth of privately produced money after the 1929 crash vanished into thin air? Almost no chance!

Neil,

You say “Loans are always endogenous because they take time to come about. During the application process there is an expectation the loan will come about, and work is lined up accordingly. Credit may be extended, etc. That is an expansionary impulse into the economy before any saving withdrawal has taken place.”

What – so if I apply for loan and the bank grants it IMMEDIATELY because they know me well, rather than the loan “taking time to come about” then the loan is no longer “endogenous”? Hilarious.

“That is an expansionary impulse into the economy..” Yes, we’ve all got the point that increasing loans is “expansionary” (and the reverse, namely the repayment of loans is deflationary). But what’s that got to do with the argument?

STF said...

OK, Ralph--

Regarding FDIC, I didn't say you said pvt money creation rests on deposit insurance. The 1920s, etc., are not relevant to the point. The point is that full reserve banking, "shares," etc., don't stop endogenous credit creation. Moving from these to FDIC doesn't enable it.

Regarding your "first," so you want to ask me questions on Twitter and then claim that you shouldn't have to consider my responses on the same social media? Nice cop out. Whatever.

Regarding, "second," NO that's not what I'm saying at all.

Regarding, "on the other hand," again, NO that's not what I'm saying at all.

Ralph Musgrave said...

SFT,

You say “The point is that full reserve banking, "shares," etc., don't stop endogenous credit creation.” Yes it does and for the following reasons.

If all lending entities are funded just from shares, then by definition they cannot create money or issue money-like liabilities. Money is made up of units that are FIXED IN VALUE (inflation apart). In contrast, shares fluctuate in value. That’s why shares are not counted as part of ANY COUNTRY’S money supply, nor does anyone see shares as money, and they are scarcely ever used as money.

Having said that, I am of course perfectly well aware that endo money will never be totally banned. As Minsky said, “Anyone can create money. The problem is getting it accepted”. I can try issuing IOUs and try “getting them accepted”, but I’d be wasting my time. And even small firms would be wasting their time. I.e. the only organisations that can create serious quantities of money are LARGE ORGANISATIONS, and they by definition are relatively easy to spot and control.

And if anyone wants to claim that controlling them would be difficult under full reserve, perhaps they can explain why J.P.Morgan was recently fined £20bn. (Yes billion, not million). The indicates rule flouting on a truly ASTRONOMIC SCALE. I.e. if you think regulating banks under full reserve is difficult, then my answer is that attempts to enforce EXISTING REGULATONS are a complete shambles.

Next, you say, “Regarding your "first," so you want to ask me questions on Twitter and then claim that you shouldn't have to consider my responses on the same social media?” You’ve got that the wrong way round. You said above that “I explained to you on Twitter months ago and you never had a response..”. I.e. it’s you asking something on Twitter and me not responding for the very good reason that this is a complex subject – for which Twitter is totally unsuited.

Re Kregel, who you mention above, I regard him as a total idiot and for reasons I set out in a recent paper (link below). Word search for “Kregel” and you’ll see what I mean. (Though it’s possible the point you attribute to him above is valid – I haven’t looked at that.)

http://mpra.ub.uni-muenchen.de/56123/

Andrew said...

Tom,

Automatic stabilizers (unemployment and so on, I assume you mean) are just a terrible way to deal with a bust. If you're talking job guarantee, that has a chance to maintain some decency, but still, wouldn't it be better to do things to try to avoid the cycles in the first place?

Are we just saying that we can't do such a thing? I simply don't believe it to be true. There are so many things that could be done to stabilize the system without just throwing up one's hands, aren't there?

Tom Hickey said...

still, wouldn't it be better to do things to try to avoid the cycles in the first place?

Are we just saying that we can't do such a thing? I simply don't believe it to be true. There are so many things that could be done to stabilize the system without just throwing up one's hands, aren't there?


Of course, Andrew, just not under "capitalism."

Politically, this is what the debate is about.

With capitalism comes inequality of income, wealth and power, economic cycles, distribution based on ability to afford rather than need, systemic risk, and so forth.

To the degree these disadvantages are reduced politically, reliance on capitalism also decreases

Those who accept the assumptions about capitalism, e.g., that capitalism is the basis for optimal growth, believe that the upside outweighs the downside. But these are also the ones that gain most from the upside. so there is conflict of interest operative. Unfortunately they also tend to be those in power.

So while it is also assumed that capitalism and liberal democracy are are necessary conditions for each other, there is a tension within liberal democracy to ameliorate the disadvantages of capitalism through a mixed economy.

Those who strongly believe in capitalism as the optimal system both politically and economically wrt to maximizing individual freedom, resist the tendency of democracy to reduce the disadvantages of capitalism, generally based on trickle down.

But whatever system is deployed there will be tradeoffs. The question is who the winners are and who the losers. This is the political tug of war.

The issues are much more political, legal, and institutional than economic in the sense that economics is presently pursued. This is not to say that the present system cannot be vastly improved by taking into consideration all relevant factors rather than simplistic assumptions that don't reflect reality and which have shown themselves to be inadequate in prediction, hence, inadequate for policy formulation.

y said...

Ralph,

it's STF, not SFT.

Scott Thunderbird Fullwiler. That's what it stands for.

Dan Kervick said...

I'm sure this has already come through somewhere in the discussion, but could we all try to keep in mind that the question about whether or not banks should emit money is is different from the question about whether private entities should emit money? We could have a monetary system that relies almost entirely on bank-emitted money, but where the banks in question where all government agencies. We could also have an (admittedly weird) system in which private entities that play no banking function in the economy are permitted to issue money and spend it.

The fundamental question, it seems to me, is whether money is emitted by bank-like institutions of any kind as part of the process of lending. And that just comes down to a question about how negotiable the IOUs of lending institutions are to be, what legal constraints are to be placed on the emission of those IOU's and what those IOU's are to be IOU's for.

STF said...

"Re Kregel, who you mention above, I regard him as a total idiot "

Only a total idiot would say that about Kregel. If I had to choose 1 most intelligent person I've ever met, I'd be hard pressed not to choose him. And I know many others that would be similarly hard pressed.

Kregel's forgotten more about economics than you've ever known, Ralph. And anyone who knows Kregel knows that he NEVER forgets anything.

Again, it's beyond amazing how you can make statements about Ann being "clueless" and Jan being a "total idiot" and then whine on Twitter about how you're being treated.

Ralph Musgrave said...

Dan,

Re having non-banks issue money, that was common 100 to 200 years ago. That is rich individuals and large firms issued bills of exchange. Bills of exchange have declined in popularity, though a total ban on them or on “bill of exchange like contracts” would be impossible. However I don’t think that stops governments and central banks having a dominant role when it comes to controlling the money supply and deciding whether the bulk of that money should be central banks issued (a la full reserve) or commercial bank issued (a la fractional reserve).

STF,

Re your criticism of my claim that Kregel is an idiot, I notice you don’t deal with any of the detailed reasons I set out in the link below as to why several of the ideas he puts in relation to full reserve are idiotic. Is that because you can’t be bothered looking at my reasons, or is it because you can’t answer them?

http://mpra.ub.uni-muenchen.de/56123/

As to Ann Pettifor, what do you reckon to her idea that commercial banks are a near inexhaustible source of free wealth? See item 2 here:

http://ralphanomics.blogspot.co.uk/2014/06/ann-pettifors-just-money.html

I regard her free wealth idea as a form of “cluelessness”. Plus if you look at my 700 word comment after her recent article (link below) I spotted a whole string of flaws in her article.

http://www.primeeconomics.org/?p=2922

Having said that, I think one book (which she co-authored with Victoria Chick) was a decent bit of work, as I mentioned in the above first link.