An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
The trouble with that system is that commercial banks then have assets that can fall in value (when it’s discovered that the loans are duds) and liabilities that are FIXED in value (inflation apart). And when enough of the loans turn out to be duds (think 1929 and Spanish and Irish property loans five years ago), the bank is bust.
In contrast, if the only form of money is base money, and if commercial banks are funded just by shares, then they cannot go insolvent.
And they can't then lend sufficiently at cheap enough rate to fund the capital development of the economy - particularly in an economy suffering from profit stagnation as all developed economies are.
So then you are relying entirely upon centrally planned government investment to make up the borrowing difference.
That's centralisation of project assessment for no benefit whatsoever to society. Loss aversion is a bad enough issue as it is, and centralising just amplifies the problem.
Banks failing are *not a problem* as FDIC shows on an almost weekly basis.
Centralisation does not solve the problems of distribution. It just swaps them for a different set of problems - primarily once around rigidity, inflexibility and ossification. That is a bad idea in a dynamic economy.
Given that mortgagors were paying up to THREE TIMES the rate of interest in the 1980s in the UK as compared to current rates, and given that economic growth was better in the 1980s than over the last 5 years, I think the idea that higher interest rates harms economic growth is very questionable.
Second, given that banks have a nasty habit of refusing to roll over loans (particularly in the UK in the case of business loans) anyone funding a long term business investment via a bank loan needs their head examining. And in fact a significant proportion of business investment is funded by shares, not bank loans. All in all, banks raising their rates is near irrelevant. So there is no need for the “centalisation” you refer to.
Third, a recent Fed study found little relationship between interest rates and investment. Or in the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.
Fourth, it is widely accepted in economics that GDP is maximised where prices are at free market prices (including interest rates) unless there are strong social reasons for thinking otherwise. A system under which banks get no artificial or taxpayer funded support (just like any other business) is a free market. Thus if the free market rate of interest is higher than the current rate, then GDP would rise, not fall, when rates are raised.
As to FDIC, they only deal with SMALL banks in the US. As to large banks, only the state can rescue them, and THAT nearly bankrupted more than one state in the last 5 years. It’s large banks that pose serious systemic problems. As for the idea that the trillions of public money needed to bail out those banks was “not a problem”, I think the entire world will disagree with you on that.
That’s not to say that if banks are funded just by shares, there wouldn’t be a downturn when banks suddenly find half their loans are duds. But there is a big difference between bank INSOLVENCY, which is what the present system gives us, and a sharp decline in bank share prices, which is all that would happen in a “banks funded by shares” scenario. I the latter scenario, banks would just cut their lending to the level that the market can sustain, just like if car makers find they’ve made too many cars, they have to cut their output.
Given that mortgagors were paying up to THREE TIMES the rate of interest in the 1980s in the UK as compared to current rates, and given that economic growth was better in the 1980s than over the last 5 years, I think the idea that higher interest rates harms economic growth is very questionable.
Second, given that banks have a nasty habit of refusing to roll over loans (particularly in the UK in the case of business loans) anyone funding a long term business investment via a bank loan needs their head examining. And in fact a significant proportion of business investment is funded by shares, not bank loans. All in all, banks raising their rates is near irrelevant. So there is no need for the “centalisation” you refer to.
Third, a recent Fed study found little relationship between interest rates and investment. Or in the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.
Fourth, it is widely accepted in economics that GDP is maximised where prices are at free market prices (including interest rates) unless there are strong social reasons for thinking otherwise. A system under which banks get no artificial or taxpayer funded support (just like any other business) is a free market. Thus if the free market rate of interest is higher than the current rate, then GDP would rise, not fall, when rates are raised.
As to FDIC, they only deal with SMALL banks in the US. As to large banks, only the state can rescue them, and THAT nearly bankrupted more than one state in the last 5 years. It’s large banks that pose serious systemic problems. As for the idea that the trillions of public money needed to bail out those banks was “not a problem”, I think the entire world will disagree with you on that.
That’s not to say that if banks are funded just by shares, there wouldn’t be a downturn when banks suddenly find half their loans are duds. But there is a big difference between bank INSOLVENCY, which is what the present system gives us, and a sharp decline in bank share prices, which is all that would happen in a “banks funded by shares” scenario. I the latter scenario, banks would just cut their lending to the level that the market can sustain, just like if car makers find they’ve made too many cars, they have to cut their output.
"In contrast, if the only form of money is base money, "
The only form of money cant be reserves. Private bank customer deposits must be that banks IOUs\liabilities = money. There is simply no way around the accounting.
6 comments:
The trouble with that system is that commercial banks then have assets that can fall in value (when it’s discovered that the loans are duds) and liabilities that are FIXED in value (inflation apart). And when enough of the loans turn out to be duds (think 1929 and Spanish and Irish property loans five years ago), the bank is bust.
In contrast, if the only form of money is base money, and if commercial banks are funded just by shares, then they cannot go insolvent.
And they can't then lend sufficiently at cheap enough rate to fund the capital development of the economy - particularly in an economy suffering from profit stagnation as all developed economies are.
So then you are relying entirely upon centrally planned government investment to make up the borrowing difference.
That's centralisation of project assessment for no benefit whatsoever to society. Loss aversion is a bad enough issue as it is, and centralising just amplifies the problem.
Banks failing are *not a problem* as FDIC shows on an almost weekly basis.
Centralisation does not solve the problems of distribution. It just swaps them for a different set of problems - primarily once around rigidity, inflexibility and ossification. That is a bad idea in a dynamic economy.
No mention of collateral requirements... other loan terms ie recourse, etc... overly simplistic...
Neil,
Given that mortgagors were paying up to THREE TIMES the rate of interest in the 1980s in the UK as compared to current rates, and given that economic growth was better in the 1980s than over the last 5 years, I think the idea that higher interest rates harms economic growth is very questionable.
Second, given that banks have a nasty habit of refusing to roll over loans (particularly in the UK in the case of business loans) anyone funding a long term business investment via a bank loan needs their head examining. And in fact a significant proportion of business investment is funded by shares, not bank loans. All in all, banks raising their rates is near irrelevant. So there is no need for the “centalisation” you refer to.
Third, a recent Fed study found little relationship between interest rates and investment. Or in the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.
Fourth, it is widely accepted in economics that GDP is maximised where prices are at free market prices (including interest rates) unless there are strong social reasons for thinking otherwise. A system under which banks get no artificial or taxpayer funded support (just like any other business) is a free market. Thus if the free market rate of interest is higher than the current rate, then GDP would rise, not fall, when rates are raised.
As to FDIC, they only deal with SMALL banks in the US. As to large banks, only the state can rescue them, and THAT nearly bankrupted more than one state in the last 5 years. It’s large banks that pose serious systemic problems. As for the idea that the trillions of public money needed to bail out those banks was “not a problem”, I think the entire world will disagree with you on that.
That’s not to say that if banks are funded just by shares, there wouldn’t be a downturn when banks suddenly find half their loans are duds. But there is a big difference between bank INSOLVENCY, which is what the present system gives us, and a sharp decline in bank share prices, which is all that would happen in a “banks funded by shares” scenario. I the latter scenario, banks would just cut their lending to the level that the market can sustain, just like if car makers find they’ve made too many cars, they have to cut their output.
Neil,
Given that mortgagors were paying up to THREE TIMES the rate of interest in the 1980s in the UK as compared to current rates, and given that economic growth was better in the 1980s than over the last 5 years, I think the idea that higher interest rates harms economic growth is very questionable.
Second, given that banks have a nasty habit of refusing to roll over loans (particularly in the UK in the case of business loans) anyone funding a long term business investment via a bank loan needs their head examining. And in fact a significant proportion of business investment is funded by shares, not bank loans. All in all, banks raising their rates is near irrelevant. So there is no need for the “centalisation” you refer to.
Third, a recent Fed study found little relationship between interest rates and investment. Or in the words of Jamie Galbraith, “Firms invest when they can make money, not when interest rates are low”.
Fourth, it is widely accepted in economics that GDP is maximised where prices are at free market prices (including interest rates) unless there are strong social reasons for thinking otherwise. A system under which banks get no artificial or taxpayer funded support (just like any other business) is a free market. Thus if the free market rate of interest is higher than the current rate, then GDP would rise, not fall, when rates are raised.
As to FDIC, they only deal with SMALL banks in the US. As to large banks, only the state can rescue them, and THAT nearly bankrupted more than one state in the last 5 years. It’s large banks that pose serious systemic problems. As for the idea that the trillions of public money needed to bail out those banks was “not a problem”, I think the entire world will disagree with you on that.
That’s not to say that if banks are funded just by shares, there wouldn’t be a downturn when banks suddenly find half their loans are duds. But there is a big difference between bank INSOLVENCY, which is what the present system gives us, and a sharp decline in bank share prices, which is all that would happen in a “banks funded by shares” scenario. I the latter scenario, banks would just cut their lending to the level that the market can sustain, just like if car makers find they’ve made too many cars, they have to cut their output.
Ralph-
"In contrast, if the only form of money is base money, "
The only form of money cant be reserves. Private bank customer deposits must be that banks IOUs\liabilities = money. There is simply no way around the accounting.
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