Why Did Canada Have no Mass Banking Failures in the Great Depression?
It's very sparse, but fascinating.
The answer is mostly "public guarantee of solvency" for the nation's currency system, acting through it's banking industry. It's quite revealing to see the many, different ways in which Canada did similar things as we, using slightly different operations. This article should be distributed nationwise, just to get people to think about what really goes on in operating a sovereign currency system.
(Hat Tip, AustralianMMTer, @AUSmmt)
I was reading this
ReplyDeletehttp://www.kaushikbasu.org/papers/1.%2009-11.pdf
today and the new World Bank Chief Economist,Kaushik Basu, was saying a similar thing about India and China during the current crisis.
"To increase the supply of credit, instead of the policy of rescuing all the banks that are
making losses or the investment corporations that have taken a bad hit because of sub-prime
lending or ‘temporary nationalization’ of all floundering banks that have been written about, it
may be best to have one or two nationalized banks that deliberately lower the creditworthiness
cut-off of potential borrowers and give out loans to them. This will of course entail incurring
some fiscal cost but much less than helping all loss-making banks. As soon as there is one large
bank giving out loans more liberally (by using a lower credit-worthiness cut-off), this will
improve the lending environment of all lenders and encourage them to lend more. Hence, the
supply correspondence will move down.
It is arguable that nations like India and China, where some banking is in the hands of
public-sector banks, have seen a less severe financial crisis because of this reason. The presence
of a few public-sector banks actually helped the private banks. In mid-2008 there was some
anxiety that India may get into its own sub-prime crisis (Chandrasekhar, 2008). Structured
finance whereby mortgages are pooled and sub-divided into CDOs, with tranches of different
seniority, was happening in India. But such a crisis never took hold. There are many reasons for
this but the presence of public sector banks was a factor. "
Adam2, I don’t care for that idea because, as you rightly suggest, it involves a subsidy of the bank industry. There is actually a very simple way to ensure no bank fails at the same time as offering no subsidy worth talking about for the bank industry. It goes like this.
ReplyDeleteWhere a depositor wants 100% safety, they can have it, but the only way of ensuring 100% safety is not to invest the relevant money at all. So those depositors get no interest.
Alternatively where a depositor wants to act in a commercial fashion and get a “dividend” or interest on their money, they can so**ing well carry the risk normally involved in acting in a commercial fashion. I.e. if the investments or loans their money is placed in do badly, they take a hit. The bank as such does not take a hit. Or if the loans/investments do well, the relevant depositors make a profit.
And in the event of widespread poor bank performance, as in the recent crunch, lots of depositors (who would in effect be similar to equity holders) would lose. But that would be little different to a stock market set back. And as Mervyn King, governor of the Bank of England said, “…we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis.”
The only small problem with the above is that getting a loan would be more difficult. But that’s easily dealt with by having government print and spend more money into the economy. The result is that everyone would have more cash, and thus would not need to borrow so much.
The above system is the one advocated by Laurence Kotlikoff and others.