In his piece on helicopter money, Lord Adair Turner seemed to argue that:
1) The money multiplier provides the needed boost to expansionary fiscal policy, yet this boost could generate inflation.
2) The risk of inflation could be managed by raising reserve requirements as needed.
Both statements are incorrect.
And this is the slightly expanded version of my Letter to the Financial Times (FT.COM published an abridged version)….
Money And The Real Economy
Helicopter money: Too confused to be helpful
Andrea Terzi, Professor of Economics, Franklin College, Switzerland
Helicopter money: Too confused to be helpful
Andrea Terzi, Professor of Economics, Franklin College, Switzerland
59 comments:
Actually, from an ethics viewpoint, "Helicopter Money"* should be, besides normal deficit spending by the monetary sovereign, the ONLY means of creating new fiat. Otherwise, someone is being cheated and that's typically the workers and the poor.
As for inflation risk that will be greatly reduced once other privileges** for the banks are eliminated.
It's no time to back down on HM but to double and redouble down. It's the banks or the rest of us.
*ie equal fiat distributions to all citizens financed with sovereign coins ("Trillion dollar coins")
** primarily government-provided deposit insurance and exclusive access to inherently risk-free accounts at the central bank.
monetarist scrambled eggs...
" from an ethics viewpoint, "Helicopter Money"* should be, besides normal deficit spending by the monetary sovereign, the ONLY means of creating new fiat"
No, unaccountable moroncrats (refuse to call them technocrats) at unaccountable institutions shouldn't have any control over money creation in a democracy. Maybe ""ethical"" at dictatorships and oligarchies though.
HM should be financed with "Trillion Dollar coins" and authorized by, in the case of the US, Congress. What's undemocratic about that?
You are not paying attention if you think that's what is being suggested by AT here and other monetarists.
Andrew,
Helicopter money is just a direct infusion of new interest-free money into the economy without buying something.
In the US, Congress creates new interest-free money every time it authorizes spending. It already IS the only means of creating new fiat. Period. The US Treasury distributes it through the central bank to the vendors.
Bank credit-creation money is not new fiat. It is offset by the asset, the loan. It all nets to zero. That’s an accounting fact, a truism. The federal government does not have this restriction; however, it uses the same accounting method and the same accounting language as businesses, households, investors, and all domestic and foreign banks and governments that use the USD. The US Treasury calls it “debt.” But it ain’t the same kind of debt that all non-federal government have. The latter owe it back.
No workers or the poor are cheated in this. What cheats the workers and the poor is the failure of Congress to do its job, and spend appropriately to create and protect “the general welfare” of the people, according to what they want their future to be and not the desire of Wall Street.
"...every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically.
HM should be financed with "Trillion Dollar coins" and authorized by, in the case of the US, Congress.
It is my understanding that the change to the law in 1996 permits the President to authorize the Secretary of the Treasury to create a trillion-dollar coin without Congress’ approval.
It already IS the only means of creating new fiat. Period. MRW
Liar.
Loans from the Discount Window and Open Market Purchases are new fiat creation.
Bank credit-creation money is not new fiat. It is offset by the asset, the loan. It all nets to zero. MRW
I never said it was except in the case of the central bank.
Yes, I understand basic accounting but I also understand that the liabilities the banks create ("loans create deposits") are largely virtual except among themselves and other account holders at the central bank which DOESN'T, by neglect or by wicked design, include the citizens of a country, only depository institutions.
The simplest analogy to helicopter money is a transfer payment. That is the government increases the financial assets of a non-government account without a corresponding exchange of assets as happens in spending on goods an services in which government acquires resources from non-governemtn to government, as it punching an aircraft from a defense contractor.
The Bush administration convince Congress to appropriate a one-time general transfer payment. The US Treasury then directed the Fed as its fiscal agent to make the payments on its behalf. Everyone received a credit from the Treasury, e. g., a check in the mail. When the check was cashed, the bank credited customers deposit accounts and the Fed credited the banks reserve accounts. This would be charge to the Treasury account at the Fed. which is funded by taxes and debt issuance.
In HIM, the Fed board as monetary authority would decide that the economy needed an injection rather than the fiscal authority, in the US, that would be Congress.
The Fed would credit banks' reserve accounts and the banks would credit customers' accounts. The Fed would charge the total payment and fund it from equity. "Fund it" here means to charge it to an account on the entity's books.
Even though HM is conducted entirely by the monetary authority has powers granted by the governing authority, in the US, Congress, the operation is fiscal from the MMT standpoint because it increases aggregate nongovernment net financial assets.
It is my understanding that the change to the law in 1996 permits the President to authorize the Secretary of the Treasury to create a trillion-dollar coin without Congress’ approval.
Congress has already granted approval to mint platinum proof coins. So further approval in not required. Same as interest payments. They are pre-approved.
You are not paying attention if you think that's what is being suggested by AT here and other monetarists. Ignacio
Politically speaking, equal fiat distributions to all citizens should be wildly popular* so there's no need for the central bank to be in charge of it. Indeed, the power of the central bank should be decreased (to mere fiat accounting and transactions, except for fiat creation for the monetary sovereign), not increased.
*if combined with the elimination of privileges for the banks to reduce price inflation risk.
The Fed would credit banks' reserve accounts and the banks would credit customers' accounts. Tom Hickey
Of course individual citizens should be allowed accounts at the central bank and thus not forced to lend (a deposit is legally a loan) their fiat to the banks or other depository institutions with accounts at the central bank.
Terzi makes several not desperately significant criticisms of Turner. It would take me too long to deal with them here, so I'll deal with them in an article on my own blog shortly. Thanks for highlighting Terzi's article. I'll give MNE an "h/t".
Of course individual citizens should be allowed accounts at the central bank
Why? What for?
Why? What for? MRW
I could name a number of reasons including financial stability, not forcing the citizens to lend to depository institutions, social justice, etc., etc., etc.
But why not? Is fiat the citizens' money or the banks'? Then why should the citizens not be allowed fiat accounts just as the banks have? Cui bono? Can you guess?
Loans from the Discount Window and Open Market Purchases are new fiat creation.
Offset by treasury securities, or other existing collateral.
When the Fed buys someone’s treasury security on the open market, it is exchanging the seller’s security, the seller’s CD, for cash. The seller doesn’t know he’s sold the treasury security to the Fed. No clue. He could have been selling it to me. Whether the US Treasury proper or its bank, the Federal Reserve, pays for it is immaterial. When the seller bought the damn thing to begin with, the USD were already in the system, i his bank account. No new fiat created.
But. when the Fed buys that treasury security, it removes all subsequent interest income from the real economy, reducing the amount of USD available for things for sale.
Andrew, you don’t understand this stuff at a transactional level. Social justice and what the citizens want their government to spend their money on--what kind of society they want--comes later. It’s politics.
Offset by treasury securities, or other existing collateral.
MRW
So what? The Fed creates fiat to buy or lend against that collateral in order to increase bank reserves (fiat account balances held by depository institutions).
Which is exactly my point. The Fed creates fiat to buy from or lend to private interests, the banks, etc.
Why the heck should it? Cui bono?
Answer: The banks, etc. and the rich, the most so-called credit worthy.
And if you say the economy depends on the banks then I say let's end that.
What do you say?
Social justice and what the citizens want their government to spend their money on--what kind of society they want--comes later. It’s politics. MRW
One does not build a stable society on privileges for a usury cartel and the rich, the most so-called credit worthy. Politics? The current system has brought us to where Donald Trump seems like an improvement to many people!
I ask you again:
Why shouldn't citizens be allowed accounts at the central bank so that they may deal with their Nation's fiat conveniently and safely? Just as the banks, etc. do?
Why should citizens be forced to lend their fiat to depository institutions instead?
Why should the deposits of banks be insured by government when accounts at the central bank are inherently risk-free?
Andrew Anderson,
The Bank of England takes some retail deposits; some econ prof got an account and wrote about it.
Retail banking is very different than central banking. There is a lot of infrastructure involved. (In the case of the Bank of England, you have to go to their main offices to transact with the bank. Not very helpful if you live in Nottingham.) If you do not want to use a commercial bank, you either need a postal banking or state banking system. (The distinction is that postal banks are generally just payments and deposits, but they do not lend to anyone other than the central government.) Having such a system is probably in the public interest, but at the same time, many of the countries that had them dissolved them for a number of reasons. It comsumes much less real resources for regulators to force banks to accept all customers with reasonable fees, than it is to build brand new redundant infrastructure to accomplish that goal.
As for why there is deposit insurance, that is because the government has an interest in not letting private sector activity collapse soely based upon idealistic notions of non-intervention by the state. We have centuries of experience with bank runs, and deposit insurance is ultimately very low cost when compared to the alternatives.
Why shouldn't citizens be allowed accounts at the central bank so that they may deal with their Nation's fiat conveniently and safely? Just as the banks, etc. do?
(1) They would only be able to bank at the central bank, the closest District Federal Reserve, which could be two states away. There are 12 districts. Some districts have branches, but it’s a small number. Wildly inconvenient.
(2) They do deal with the "Nation's fiat conveniently and safely” right now. It’s called FDIC up to $250Gs per account. More than that in your account? Buy treasury securities just like everyone can. You can buy one for $1000 on treas.gov.
(3) Banks are not allowed to use depositors’ money to invest. Banking regulations. Banks have no way of knowing when a depositor is going to move his money to another bank. This happens everyday with a new mortgage. But they make interest off the depositors’ accounts; that’s how they can pay lesser interest to the depositor.
(1) They would only be able to bank at the central bank, the closest District Federal Reserve, which could be two states away. There are 12 districts. Some districts have branches, but it’s a small number. Wildly inconvenient. MRW
Your erroneous assumption is that a central bank should provide all or nearly all of the services a commercial bank does when all a central bank should do is:
a) create fiat for the monetary sovereign and only for the monetary sovereign.
b) provide accounting and transaction services in fiat for all citizens, the monetary sovereign, businesses, State and local governments, etc.
c) deal with foreigners through accounts at their central banks (but only on behalf of its citizens using their fiat to buy foreign fiat) and by allowing their central banks to have accounts with it so its citizens can sell fiat to foreigners.
(2) They do deal with the "Nation's fiat conveniently and safely” right now. It’s called FDIC up to $250Gs per account. MRW
Liar.
Accounts at commercial banks deal with liabilities payable in fiat, not with fiat itself.
More than that in your account? Buy treasury securities just like everyone can. You can buy one for $1000 on treas.gov. MRW
Interest paying sovereign debt is welfare proportional to wealth, not need. Bill Mitchell calls it "corporate welfare." I agree.
(3) Banks are not allowed to use depositors’ money to invest. Banking regulations. Banks have no way of knowing when a depositor is going to move his money to another bank. This happens everyday with a new mortgage. But they make interest off the depositors’ accounts; that’s how they can pay lesser interest to the depositor.
Hey guys look! Someone who believes in "loanable funds"!
As for why there is deposit insurance, that is because the government has an interest in not letting private sector activity collapse soely based upon idealistic notions of non-intervention by the state. Brian Romanchuk
You mean idealist such as in having an inherently risk-free payment system independent of the usury cartel? So the banks, etc don't hold the economy hostage like they currently do? That's idealistic to you?
We have centuries of experience with bank runs, and deposit insurance is ultimately very low cost when compared to the alternatives.
We need a HUGE bank run to inherently risk-free accounts at the central bank AND a huge and equal fiat distribution to all citizens to provide the needed fiat for the transfer of at least some currently insured deposits to those inherently risk-free accounts at the central bank Think of the unjust wealth inequality that could be reversed thereby!
So let's get to abolishing government-provided deposit insurance and get the run started, I say.
Idealistic you say?
Andrew, I’m bored with this. You’re unable to make a distinction between the issuer and the user of the currency. The "loanable funds” false story is connected to the issuer, the federal government. Banks are users, commercial banks, and that’s what I was discussing.
Your last post is incomprehensible.
Andrew,
Whether or not banks "hold the country hostage" is a political decision. The Canadian regulators have repeatedly hinted that the banks are ultimately expendable and they can nationalise the payments system. The issue is the collapse of private lending, which is independent of payment systems issues. Whether or not a postal banking system exists, the private sector runs on privately-supplied credit. The provision of credit is why deposit insurance exists; by preventing runs, the lending system can continue to function in a crisis.
Anyone concerned about lending to banks is free to leave their cash holdings in Treasury bills. The fact that very few people so so tells us that this is not considered to be a major concern.
The "loanable funds” false story is connected to the issuer, the federal government. Banks are users, commercial banks, and that’s what I was discussing.
MRW
It's connected to both. Of course a monetary sovereign (currency issuer) need not borrow what it can create at will.
But banks are not mere currency users. Instead, because of government privilege, the liabilities the banks create ("loans create deposits") are largely merely virtual, ie. a sham EXCEPT among themselves, the monetary sovereign (eg. US Treasury) and the central bank itself. As far as the general population is concerned those liabilities DON'T EVEN EXIST unless people are willing to deal with inconvenient, unsafe physical fiat which the banks are trying to get abolished anyway. And even if a large amount of deposits were withdrawn as physical fiat, the central bank would likely just lend the banking cartel reserves to replace them.
So what good is accounting if the liabilities are a sham? Except to cheat and confuse the public? Which HAS been cheated and confused, btw.
Let's allow everyone to have accounts at their central bank, abolish government provided deposit insurance and the lender of last resort and then the liabilities the banks create will be very real indeed. Then we'll have honest accounting.
You don't oppose honest accounting, do you? Then let's make bank liabilities real instead of a sham.
... the private sector runs on privately-supplied credit. Brian Romanchuk
Actually, it runs on legally stolen purchasing power since the poor and other non so-called creditworthy are forced to lend their fiat to depository institutions for the benefit of said institutions and for the benefit of the so-called credit worthy, which always includes the rich.
Let's allow everyone to have accounts at their central bank and then we can all lend fiat if we desire, just as depository institutions do among themselves (inter-bank lending). And since accounts at the central bank are inherently risk free then government-provided deposit insurance should be abolished too as an unnecessary subsidy of the banks* and the rich.
As for politics, the current money system has made our society dangerously unstable just as it was a major cause of the rise of Hitler in the 1930's. We had better wise up this time and genuinely repent wrt to looting the poor.
* I use "banks" and depository institutions with accounts at the central bank interchangeably so credit unions, etc are also included when I say "banks".
Does anyone else think that Andrew Anderson sounds an awful lot like the commenter Frank Beard that used to peruse these econ sites a few years ago?
A son in law who has been converted at some family Thanksgiving gatherings maybe?
Greg it was F Beard...
Frank Beard is the drummer in ZZ Top... ;)
Matt, Greg is referring to a commenter named Frank Beard who was on nakedcapitalism, and neweconomicperspectives for years.
Obtuse as hell.
There are already forms and formulas to save with little to no intermediation from the banking system using state securities, that's not a problem per se. But unfortunately that solves very little, not even anything.
One of the primary functions of banking, now more than ever, is operating the payment system and ofc, lending. For both of those functions you need infrastructure and institutions built around those services, is not just 'hey let's make possibl to have saving accounts in the CB'.
I live in a country were we had public banking (actual public credit institutions) until very recently, it changes nothing, because it's operated by market principles and managed as a private corporation, and is often worse than if it was operated privately, as it's subject to worse corruption. Many people in Europe should be aware of how that works as this system was widespread in many countries (including Germany, via Landesbanks).
Unfortunately the change needed is not as simple as to have 'let's have public banks, because it's nice', but for those banks to operate under a totally different set of rules and goals, and be regulated a different set of laws. I'm totally up for that, but the fact is that there is little interest on knowledge on this issues by the uneducated masses.
Nothing of this is straightforward and requires a push from the public, and interest, that is non-existent nowadays.
This is tantamount to saying "we need a more education public!", well, huh, ofc we do, captain obvious, most of our problems wouldn't be such if we had "more educated public" and a decent "civic society" instead of uninformed people empowering idiots and crooks. The history of humanity!
What does ofc mean?
One of the primary functions of banking, now more than ever, is operating the payment system and ofc, lending. For both of those functions you need infrastructure and institutions built around those services, .... Ignacio
Who the hell (literally, it seems) says the central bank should lend? It shouldn't. Such lending would be new fiat creation. But the central bank should only create fiat for the monetary sovereign. Otherwise it is allowing the so-called credit-worthy to loot the poor and other non so-called creditworthy.
Risk-free storage of and transactions with fiat for all citizens and not just depository institutions require very little in the way of personnel or infrastructure. Yet those services, along with the abolition of government-provided deposit insurance and other privileges for the banks would profoundly reform our money system for the better.
ofc = "of course"
"Such lending would be new fiat creation. But the central bank should only create fiat for the monetary sovereign."
Print and spend, instead of "borrow" and spend. I don't think many people around here are against that, preaching to the choir. This has nothing to do with all the other banking stuff.
"Risk-free storage" solutions already exist (broadly speaking, treasury securities), it changes nothing. The management of a payment system for the wide public (transactions) actually requires a good deal of infrastructure and personnel, the public, and in general everybody, is oblivious to whether you are using 'fiat' or 'credit' (as both are materially undistinguishable) and it changes ZERO about the actual transaction and credit relationships amongst different actors. You can't just wrap your head around that fact: there are already trillions in unfunded liabilities (not insured) and the private sector will always find ways to create and leverage credit because it's an endogenous function of the system and how it works.
What you want in practice is what defenders of 100% reserve (non-fractional) banking always want, pivoting to that model doesn't change jackshit in practice because the "private sector" will always find ways around that because is what happens when trade is involved. What's the difference? None, that when the pyramid of liabilities collapses due to market prices the authorities have to steep in and save the system off the records (ie. 2008).
It won't magically change behaviour of people, it wouldn't do anything, because the material relationships and behaviour is basically the same. Instead of seeking magic fixes via fringe monetary and banking engineering we shall start looking for more endurable changes, otherwise we are just iterating over the same system of the last centuries regarding credit relationships.
It has been like that sicne th first freaking civilization were commerce existed, wrap your head around that, making 'everything fiat' won't change a damn thing
p.s: ofc = of course
What you want in practice is what defenders of 100% reserve (non-fractional) banking always want Ignacio
No. What I want is honest accounting and that means liabilities that are real and not a sham. Let banks create as many liabilities as they dare, I say. But let them be actual liabilities wrt the general public.
As for infrastructure, you are surely mistaken. What I propose should easily be accomplished with the Internet and ATM's at local post offices. Are you being deliberately obtuse?
Besides, government subsidies for private credit creation are a looting mechanism whereby workers and the poor have been/are cheated. That alone more than justifies the very modest real cost of doing away with them.
because the "private sector" will always find ways around that because is what happens when trade is involved. Ignacio
That's no excuse for government subsidies for such behavior but rather an argument for why they should be eliminated.
Besides, I'm not arguing for elimination of the "social safety net" since investment is good and investment requires taking risks. We should not be too frightened of failure since that is self-defeating.
Instead of seeking magic fixes via fringe monetary and banking engineering we shall start looking for more endurable changes, otherwise we are just iterating over the same system of the last centuries regarding credit relationships. Ignacio
Bank have ALWAYS, at least since the abolition of the Tally Stick, been at least implicitly privileged by government since it is the apparent moral duty of a monetary sovereign to provide a risk-free transaction and storage service for its fiat and not leave that to the private sector. So what I'm suggesting has NOT been tried to any significant extent.
I'm calling for justice including honest accounting, not magic, though the results (God's blessing) may well seem magical to some.
"Print and spend" is socialism. "Borrow and spend" is capitalism. The difference is risk assumption with the opportunity for extraordinary reward for individuals wiling to take on risk by borrowing to invest. In printing to spend there is no risk and the distribution is more even.
What is the rationale for borrowing to spend and creating risk? To create individual incentive to invest in order to drive capital formation.
This is the basis of capitalism that began with the Venice bankers in the late Renaissance that would develop into capitalism during modernity.
See Peter Dorman's "Modernity and Capitalism" that I just put up here.
A third alternative is print and spend publicly and then use private borrowing from loanable funds created by spending (outside money) for private investment. All inside money is outside money. The monetary system is exogenous rather than endogenous, and government decides on the amount to inject by spending (including transfer) and the amount to withdraw by taxation in order to control growth, employment and price stability, rather than allowing markets to do so, since markets have a history of price instability, chronic unemployment, and boom-bust cycles.
I'm not saying is not possible, or that it shouldn't be done, but you are disingenuous if you think it's something simple or easy to implement.
I'm all for it as I believe a public alternative should exist, but I'm also telling you that there are already solutions around that are similar in nature or there are in other places and that won't change the real material relationships because fringe monetarist and banking reform does not fix things (in fact more often than not it ends up being destructive), because they don't change ultimate social behaviour and relationships.
Current accounting is 'honest', as long as the market prices hold up, and in accordance to the laws. If you don't like them you have to change them, I'm not saying I like them, but I'm not twisting language to advance an agenda either.
As for the rest, I have enough with a set of idiots driven by "morality" ruining the eurozone with their policy, and seen enough what "moral" does when applied to economics (the moral of whom?). I would rather focus myself on what does better the lives of the population and what doesn't, instead of spiralling down into a debate about morals that won't get me anywhere and more often than not ends up with destructive policy. Things have to stand on their own without appealing to higher metaphysical , outcome driven policy, not ideologically driven agenda. Ideologically driven agenda is what is killing society, more than dishonest banking system.
P.S: History is by now long enough to have a good insight on many monetary and banking experiments, is worth learning about them as the results are often completely different of what you could expect of them a priori.
Current accounting is 'honest', as long as the market prices hold up Ignacio
No it isn't. How can one have honest accounting when the liabilities the banking cartel creates are almost entirely a sham wrt the general population? Market prices when we have a government enabled boom-bust cycle?
Besides, at worst, what I'm proposing is morally obvious, should do no harm, and the abolition of government provided deposit insurance alone should require a huge amount of new fiat to be created and distributed equally to all citizens. What's not to like?
As for dislike of appeals to morality all I'm asking for is simple honesty and equal protection under the law. Is that too much to ask? How much lower a standard do you think safe wrt survival of our society?
Ignacio,
they think their "morals" are the most important part in this and this is just wrong...
Morals dont get you anything... you have to be technically competent when you are dealing with material production/distribution systems which is what the whole problems are about these days..
To people like us this wouldnt even be hard to set up....
A third alternative is print and spend publicly and then use private borrowing from loanable funds created by spending (outside money) for private investment. All inside money is outside money. The monetary system is exogenous rather than endogenous, and government decides on the amount to inject by spending (including transfer) and the amount to withdraw by taxation in order to control growth, employment and price stability, rather than allowing markets to do so, since markets have a history of price instability, chronic unemployment, and boom-bust cycles. Tom Hickey
Yes, except I would allow banks to create as many liabilities as they dare in the name of endogenous money creation.
Andrew, what you are missing is that this is already how it works.
As I said above: there are already trillions in unfunded liabilities around! You are focusing on the 'nomination' of the liabilities instead of focussing on the asset side which is what matters.
Is always about the asset side, is never about the liability side. Messing with the liability side is what the current morons in power do and it achieves nothing because the 'system' (all the actors involved) will always leverage and create their own liabilities endogenously.
If you want to experience this first hand all you have to do is go live in a nation where the monetary and payment system and the institutions are in collapse mode. But this happens ALL the time also in normally functioning nations.
Corporations create liabilities all the time, and all of them may as well be completely faux and bollocks in the future if things go south. And that's what happens when the shadow banking systems runs amok sometimes, and is not just "big bad evil banks", but corporations and even physical persons (ie. China huge shadow bank bubble does not have official institutions of credit involved).
Many forms of securities are used as 'money' and that is nominated in USD or CNY doesn't matter a single iota, because that's just the nomination. What matters is that you are using a security to acquire other security or an asset.
Stop obsessing over the liability side of the balance sheet, it doesn't work like you think it does, funding it to a 100%, requiring 100% reserves, having separate 'nomisma' units for the public or private credit, etc. does not change any of the above, ever.
As I said above: there are already trillions in unfunded liabilities around! Ignacio
So what? I don't want my government subsidizing any of that. And the proper abolition of government provided deposit insurance should require billions if not trillions of new fiat to be distributed equally to all citizens. Shouldn't you rejoice at the reversal of so much unjust wealth inequality and the unwinding of so much leverage?
Asset side you say? Why in God's Name should owning an asset qualify one for what is in essence the PUBLIC'S credit? Do you not realize that's a formula for the rich to loot the poor? As they have done so?
Government provided deposit insurance is completely undefensible - especially now given inexpensive fiat and today's computers and communications.
So what the heck are you defending if not injustice?
And that's what happens when the shadow banking systems runs amok sometimes, and is not just "big bad evil banks", but corporations and even physical persons (ie. China huge shadow bank bubble does not have official institutions of credit involved). Ignacio
Much of the allure of shadow banking is that deposits there earn higher interest rates than the artificially suppressed rates the banks pay.
You want to reign in shadow banking? Then eliminate all privileges for the banks and then they'll have to pay decent interest rates for deposits. And if those interest rates are deemed too high then distribute new fiat equally to all citizens to drive them down.
"Asset side you say?"
Aka lending. Bank assets.
Aka lending. Bank assets. Random
I thinking of an asset pledged as collateral.
But more broadly, how in the heck does the probable ability of a borrower to repay legally stolen (from the non so-called creditworthy who nevertheless must keep their fiat in a bank or else be forced to use inconvenient, unsafe physical fiat) purchasing power (plus interest, of course) justify the theft in the first place? It doesn't.
Allow everyone to have accounts at the central bank and abolish other privileges for the banks and the moral problem is eliminated except for the problem of the unjust debt the population was driven into, cheated non-debtors and perhaps other needed restitution as well.
It's quite a mess pragmatists have made. We'd best get to cleaning it up and preventing it from happening again.
It's not pragmatists, it's what commercial relationships do all the time. Unless you forced somehow everyone to clear transactions immediately through liquid assets (and provided enough liquidity) this would happen even if you forbid it by law.
I'm sorry but is how humans operate, 'credit' is built-in in human relations. As I said the shadow banking and unfunded liabilities do not necessarily revolve about the official system, it can be inter-family lending which leverages the system (as in China). You apparently can't wrap your head around that.
Even if you managed to enforce it, somehow, you would have no way to know which is the endogenous demand for liquidity on aggregate and be able to provide it to the private sector. I don't see how this would work in practice in anything but a communist system, because the problem with endogenous supply of credit and leverage is that is created on-demand by the private sector until it doesn't (and the other way to stop bubbles is 'disciplining' the asset side by law and effective regulatory and judicial apparatus (again, not the liability side because as we have seen repeatedly over history this absolutely fails).
You can call it theft all you want but I don't see how what you want to do actually works in practice with a radical change on how both production and transactions, and behaviour, take place in the system.
this would happen even if you forbid it by law. Ignacio
Forbid? Forbid what? Let people, banks, etc extend as much credit as they dare, I say. Where's the forbidding in that?
Communist? No, I'm an anti-fascist which is to say I'm against welfare proportional to wealth and not need.
No one has refuted what I'm proposing, not even on purely practical grounds. Apparently you're not hearing what I'm saying to suggest I want to forbid anything except special privileges for the banks.
There is nothing special on removing deposit insurance, is what I'm telling all the time... it doesn't change the credit relationships, expansion etc. But, whatever, if you think that that will fix anything, I would like to see it happen, not that I lack examples why it doesn't change anything (you can take Greece and Cyprus as recent examples).
Removing deposit insurance is necessary but by no means sufficient. We also need to allow central bank accounts for all and remove the power of the central bank to create fiat except for the monetary sovereign.
And a partial fix such as removing deposit insurance without a massive (and equal, of course) distribution of new fiat to finance the massive bank run that would result would, of course, be a disaster.
The Eurozone may not have deposit insurance but Eurozone citizens are not allowed accounts at the ECB either. Thus the choice is either lend to a bank (a deposit is legally a loan) or unsafe, inconvenient physical fiat and the mattress or safety deposit box.
If Eurozone citizens, businesses, governments, etc. had been allowed accounts at the ECB then the deposits in Eurozone banks would have been, by definition, only at-risk, not necessarily liquid investments and not the funds necessary for the economy to function till insolvent banks could be foreclosed on.
In other words the Eurozone would have had two payment systems within the ECB, one that worked through the banks and one that worked independently of the banks via peer-to-peer transactions between individuals, businesses, government, etc. Thus the failure of French, German and other banks with exposure to Greek government debt might have been painful but not necessarily catastrophic.
Still, new fiat might have been needed and that's where equal fiat distributions to all Eurozone citizens would come in to provide it without cheating anyone.
And thanks for your feedback, btw, Ignacio, since:
Iron sharpens iron, So one man sharpens another. Proverbs 27:17
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