So let me assure PM: I want the understanding and reform you do but please address the real concerns that many who have sympathy have with what you’re saying. We’re spending our time on this to make the process work. We’e worried you’re not delivering a workable or democratic or accountable solution, and that’s worrying.Tax Research UK
On banking: a reply to Positive Money
Richard Murphy, author of The Courageous State: Rethinking Economics, Society and the Role of Government
23 comments:
Richard Murphy is a prat. He starts off (2nd para) by claiming that "with the exception of notes and coins all money is created by lending”. Er.. there’s the small matter of the hundreds of billions created when the central bank buys government debt (which has expanded HUGELY recently cos of QE). Indeed that form of money currently accounts for about 20% of the US money supply.
He then argues (4th para) that because Positive Money’s proposed reform of the bank industry changes banks out of all recognition, that therefor there must be something wrong with those reforms. Well the first answer to that point is that its blindingly obvious there is something SERIOUSLY wrong the bank industry, thus wholesale reform is quite possibly a good idea.
More generally, the idea that ANY reform of ANYTHING is invalid because the reform is wholesale or far-reaching is a dimwit argument.
And finally, note that free speech does not prevail on Richard Murphy’s site. He doesn’t publish comments by me and others that are critical of his articles.
Ralph,
Richard is a Tax expert and a Fellow of the Institute of Chartered Accountants. I don't go for credentials, but since you are very fond of appeals to authority I thought you'd finally defer to somebody with significantly superior knowledge and understanding to you.
Several people who have actually worked in banks, banking, accounting and finance have now explained why Sovereign Money is bunkum - both systemically and politically.
The Bankers, of course, love this since it is a major distraction from the banking reforms that are actually required - limiting *what* banks can lend money for.
So well done for providing a supporting illusion that does nothing but help Bankers cement their political position. A marvellous example of GroupThink at its worst.
Ralph,
"...there’s the small matter of the hundreds of billions created when the central bank buys government debt (which has expanded HUGELY recently cos of QE). Indeed that form of money currently accounts for about 20% of the US money supply."
I was under the impression that such an operation was an asset swap, and these newly created central bank reserves never enter the economy as money. Hence it is *not* part of the money supply. Or is that wrong?
Although, occasionally, you hear MMTers say the huge increase in commodities is due to the rounds of QE. Which leaves you wondering how this is possible if the money doesn't leave the central bank?! Or is it a question that the QE creates a deliberately engineered portfolio rebalancing away from bonds and into other asset classes? It creates a chase for yield elsewhere and thus the bubbles we see today in equities and, sigh, yet again, property?
Neil,
At first sight Ralph's proposals and Positive Money's proposals look extremely attractive. What's wrong with sovereign money? It seems perfectly reasonable to take away money creation from private banks. Indeed, there is a prima facie argument that it is quite deranged to allow the most important part of a monetary economy to be controlled by private interests. If we abhor the idea of an undemocratic independent central bank making decisions, should we not be infinitely more worried by private interests controlling the very thing that creates much of the pathologies we see today (unemployment, poverty, inequality, recessions, environmental damage, asset booms, etc)?
Although it seems the Germans have gotten around most of the issues with a banking system that is apparently 70% credit unions and small local banks. Thus disproving the claim that the City of London is a great asset and without it the UK would be an economic basket case or some such nonsense.
What are the major problems with sovereign money? And in any case couldn't you have a belt and braces approach: limited banking within a sovereign money system?
Are the issues with sovereign money that too much power will be in the hands of a few government officials? That it may prove inefficient in gauging commercial needs? Is it an economic or a political argument, or indeed both?
Neil,
Your comment is false logic from start to finish.
First, you claim that because Murphy is an expert on tax that therefor he must be an expert on banking. Complete nonsense. The fact that someone is an expert on ONE AREA of economics does not mean tax they’re an expert on other areas of the subject.
Next you make the ridiculous claim that because someone actually works in a bank that therefor they know anything about the full versus fractional reserve argument. I suggest you go ask some bank teller or even a bank manager about the full versus fractional reserve banking argument. You find nine times out of then they haven’t the faintest idea what you’re talking about.
Next you claim that the best form of bank reform is to limit what banks can lend for. Well obviously that would work IN THEORY. But does that involve detailed supervision by bureaucrats of every loan that banks make? In the UK you’d need a million bureaucrats to do that.
Moreover, Positive Money’s proposals DO INVOLVE a FEW limitations on what banks can lend for. But that’s not BASICALLY what they advocate. Their BASIC idea is to have a broad set of rules not a hundred miles from the Vickers commission ideas, as follows.
Like Vickers, PM advocate splitting the bank industry in two (separated by the famous “ring fence” in the case of Vickers). The two halves (in the case of Vickers) are first a risky or “investment banking” half which would be allowed to lend as it pleased (unimpeded by bureaucrats) and fail in the event of problems (not unlike PM’s system). The second half is a safe half would do retail deposits and mortgages for UK home owners, loans to SMEs etc. So your criticism is as applicable to the Vickers’s ideas (which are currently being put into practice) as they are to PM.
Next you need to think about the fact that the rules of full reserve (aka Sovereign Money) are being imposed by the SEC in the US on money market mutual funds. Though I wouldn’t expect you to know about that. Perhaps you can tell us where the SEC has gone wrong.
Finally, and re this great idea of yours about “limiting what banks can lend for”, who has fleshed out that idea? No one that I know of. The latter idea is just a cheap off the cuff remark made by people who know nothing about the subject.
But I look forward to being corrected: where has this “limit what banks can lend for” idea been fleshed out?
John,
Taking your points in turn, what’s the difference between an “asset swap” (where one of the assets is money) and a loan? If I get a loan from my bank in exchange for the title deeds of my house, that’s an asset swap: I get money and the bank gets a house.
Re your claim that reserves are not part of the money supply, that’s a popular claim, but it’s wrong basically. Suppose I sell some government debt (or any other asset) to a central bank (say as part of the QE operation). I get a cheque from the CB (assuming transactions are done by cheques, which I know are a bit past their sell by date now). I deposit the cheque at my commercial bank and they credit my account at that bank (and that’s real money “out there in the economy”). Plus the commercial bank passes the cheque on to the CB who credit the commercial bank’s account in the books of the CB. I.e. the commercial bank’s reserves go up.
Net result of QE is that bank reserves rise and sundry private sector non-bank entities’ stock of “real money in the economy” also rises. The only exception to that comes where the relevant government debt is ACTUALLY OWNED by a commercial bank. But that’s a small proportion of total government debt.
Finally I don’t know why you ask Neil anything about Sovereign Money. Far as I can see he know precisely nothing about the subject. I dealt with about 40 criticisms of Sovereign Money (aka full reserve banking) in a book I wrote recently (link below). The criticisms ranged from the dumb to the moderately intelligent.
https://pdf.yt/d/J3al4g-8KAPvzA24
I didn’t bother with any of Neil’s criticisms because I didn’t think they reached the dumb level.
BTW are you the “John” who sent me an email yesterday about books on banking?
It's always about price not quantity. ....
Ralph,
That's me, and thanks again for your reply. I've emailed a few people who seem to know what's what, including Neil, who seems to me about as clued up as it is possible to get.
By the way, Ralph, as I said to you I ordered your book. However, this morning I came across this paper: http://mpra.ub.uni-muenchen.de/57955/1/MPRA_paper_57955.pdf Tell me, it's not the same as the book, is it?
I understand that this is an extremely serious and important subject and is therefore subject to a bit of heat at times, but come on boys, we're all on the same side, or at least I think we are. To quote a lovely American phrase: "Make nice".
Ralph: "Next you claim that the best form of bank reform is to limit what banks can lend for. Well obviously that would work IN THEORY. But does that involve detailed supervision by bureaucrats of every loan that banks make? In the UK you’d need a million bureaucrats to do that."
But isn't that exactly what Germany and Japan achieved, in practice, not in theory, with credit guidance, and without a million bureaucrats? Moreover, extremely productive economies were the result! If they can do it, I can't see why we can't.
I don't see why banks should have a right to make loans that they want. A banking licence is a privilege, not a right. With privilege comes responsibilities to society.
Ralph, this is ridiculous:
"In a Sovereign Money system, private banks do not create money. Instead this power is in the hands of the Central Bank, which is tasked with working in the interest of the economy and society as a whole. In the Sovereign Money system, all money, whether physical or electronic, is created by the Central Bank.
Although commercial banks will no longer create money, they will continue to administer payments services for customers and will make loans by acting as intermediaries between savers and borrowers.
The payments service will consist of Transaction Accounts held by individuals and businesses. The funds in Transaction Accounts will be electronic sovereign money created by the Central Bank. Transaction Accounts are risk free, as they are kept at the Central Bank, and interest-free as they are not available to the bank to invest."
http://www.forsaetisraduneyti.is/media/Skyrslur/monetary-reform.pdf
Credit creation is endogenous, you cannot get around that. Every day hundreds of companies get operating credit as the need arises, is central bank going to provide that credit. You caqnnot be serious. You don't even technically need banks for the credit creation to take place.
I was under the impression that such an operation was an asset swap, and these newly created central bank reserves never enter the economy as money. Hence it is *not* part of the money supply. Or is that wrong?
Most of he dollars created under QE are part of one money supply - MB, or the "monetary base" - but not part of broader money supplies, such as M1 or M2.
Do they enter the economy as money? It depends what you mean by "the economy". One sector of the economy consists of entities that have deposit accounts at the central bank: mostly commercial banks, but some other kinds of firm as well. The dollars in those accounts are the dollars those firms use to pay one another, so they are circulating in one sector of the economy. But households and non-financial businesses do not have such accounts, and so they make their payments with other forms of money.
"It seems perfectly reasonable to take away money creation from private banks. "
It does. But you can't - because Endogenous Money.
What you can do is put on a show worthy of the finest Stage Magician. But it is ultimately all an illusion, as I have detailed previously.
Doesn't work, can't work, won't work. The people proposing such an idea need to be incarcerated in a bank until they understand how they actually operate.
"Perhaps you can tell us where the SEC has gone wrong."
Interesting appeal to authority. Perhaps because they are experts in ONE AREA of financial life they are not experts in other areas of the subject?
I've included Capital letters for you. Because I know you like them as well.
"but does that involve detailed supervision by bureaucrats of every loan that banks make?"
Perhaps in a mind desperate to come up with a reason why Sovereign Money is required, but out here in the real world we have a more pragmatic solution.
You make the loans unenforceable unless they fulfil the criteria laid down by the central bank. That turns anything outside the criteria into gifts of shareholder's funds. Since judges don't like calling in loans anyway (particularly mortgages) they would relish the power to declare a loan Ultra Vires.
Once you have that in place then the banks will stick very well inside the criteria determined by the central bank and banks would undertake multiple checks and balances to ensure they could make the loan stick- because one bad loan undos the earnings from dozens of sound loans. And of course such a risk would automatically put up the cost of loans as well.
The limiting factors for loans have been discussed by Minsky and Wray decades ago and are well known to those who have read the papers. The Kiwis already have loan to value restrictions in place for example.
You could of course simply proscribe in law any loan that isn't used for 'promoting the capital development of the economy' and let the judges work out what that means via the precedent system.
All very easy and straightforward.
Although, occasionally, you hear MMTers say the huge increase in commodities is due to the rounds of QE. Which leaves you wondering how this is possible if the money doesn't leave the central bank?! Or is it a question that the QE creates a deliberately engineered portfolio rebalancing away from bonds and into other asset classes?
One effect of QE is to take safe assets (government securities) off the table. This results in portfolio shifts into riskier assets. Coupled with low interest rate that translate into low margin cost, the price of riskier assets rises — equities, commodities, etc. This is supposed to result in a wealth effect that contributes to spending needed to fuel a recovery. The Fed admitted as much.
John,
Re “Muenchen” I plonked a paper or two there, but then decided I’d develop it into a book.
Re credit guidance in Germany and Japan, I suppose this is the old Anglo-Saxon versus continental Europe argument. I saw recently that bureaucrats in Germany tell all and sundry what the sale price for their houses will be. Most Brits and Americans would regard that as too much bureaucratic interference. I agree: I think house prices like bank lending decisions should be left to the free market. But in the case of banking I favour a system (full reserve) which means that even when banks make silly decisions they don’t go insolvent (though their share prices WILL decline). Ergo we don’t get credit cruches as a result of silly bank decisions. Can’t see what’s not to like there.
Vickers is a bit different: they say “let investment banks do what they want, and if they go bust, why should we care?” I quite like that, but a drawback is that the failure of Lehmans (an investment bank) was very disruptive. So I prefer full reserve.
Moreover, detailed bureaucratic supervision in Germany has not stopped Germany having its share of bank insolvencies, scandals and all the rest.
Re your final para, who could possibly argue with your claim that banks should be “responsible”? But to repeat my question to Neil: who has set out the details on that idea? You could cite Frank-Dodd, but’s turned into a bureaucratic mess as numerous economists have pointed out. To quote just one (Prof John Cochrane) “In recent months the realization has sunk in across the country that the 2010 Dodd-Frank financial-reform legislation is a colossal mess.”
Kristjan,
You claim that “Credit creation is endogenous, you cannot get around that.”
Just to clarify, the word “credit” has two meanings: granting a loan and second creating some form of money, and indeed a loan or debt can be a form of money. Obviously it’s money we’re talking about, not loans.
As to whether it’s possible to clamp down on endogenous money creation, back street counterfeiters do a form of endogenous money creation, and that is messed up fairly effectivly by the authorities.
Private banks aren’t much different: it’s easy to clamp down on the vast majority of private bank money creation (while not eliminating all forms of privately produced money). All you have to do is ensure that banks are funded just by shares (and possibly also by bonds that can be bailed in) rather than by short term deposits.
Money is a liability of a bank with zero or very short maturity. Shares and bonds are not a form of money because they have much longer maturities. So just tell banks to do the above, plus audit them regularly to ensure they’re obeying the above very simple rule, and that pretty much puts an end to private money creation.
That’s about a thousand times simpler than Frank-Dodd.
One effect of QE is to take safe assets (government securities) off the table. This results in portfolio shifts into riskier assets.
Tom, that doesn't seem like a plausible story. Nobody forced banks to sell their government securities for dollars. QE securities purchases were conducted via auctions and were voluntary on the part of the seller.
Of course no one forced anyone to sell assets in order to shift portfolios around. It was quite voluntary. The Fed offered an attractive price that holders of tsys were happy to sell for. The point is that these funds that were held in portfolios were already committed savings. Selling one asset was likely to result merely in a portfolio shift in savings vehicles and asset classes rather than an increase in spending for household consumption or firm investment. Saving is a "voluntary tax" in MMT terms, that is, the taking of funds off the table for spending. So the net result was that aggregate savings became more risky since fewer "safe assets" were being made available by government.
Dan: "QE securities purchases were conducted via auctions and were voluntary on the part of the seller."
Not if it's toxic junk, which the financial institutions were more than happy to offload, thus cleaning up their balance sheets.
And presumably the performing bonds that they weren't offloaded will rise in price as interest rates are driven down by QE, further distorting the balance sheet of an otherwise bankrupt institution. Moreover, knowing the effects of QE, the big financial institutions probably loaded up on equities and commodities, further enhancing their profits, while triggering another asset booms and life extremely difficult in poor countries as they see basic commodities inflated by gangsters.
It's a brilliantly engineered scam! But as with all scams, it's coming to an end.
I love Neil’s solution to all this, namely to ban any loan “that isn't used for 'promoting the capital development of the economy'”
Just one teensy problem there: about half of all loans are for the purchase of EXISTING houses. Those loans do not “promote capital development” one iota.
Neil has obviously thought long and hard about this.
Moreover, if someone wants the borrow money to assist in DOWNSIZING their housing requirements, why shouldn’t they? In that case the loan is being used to assist in capital DESTRUCTION!! E.g. I’m sure there are plenty of elderly couples wanting to borrow money to help them live in a house that is too big for their needs for a few more years, kids having left the family home. Then after a few years such couples might sell the house, move into a smaller one and repay the loan from the sale of the larger house. Can’t see anything wrong with that.
QE1 took a lot of MBS off the banks books. A lot of it was GSE liabilities. But a lot of the subsequent QE was conducted with Treasury securities designed to influence the yield curve, especially with an eye to keeping long term rates low to support mortgage lending.
That's just more pointless land speculation, Ralph. Not something banks should involve in."To assist in downsizing" well 100% Land Value Tax will help with that.
People are fairly free to bank unearned tax-free capital gains as it is.
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