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.
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Monday, November 26, 2012
Ralph Musgrave — Steve Keen’s objections to full reserve banking
Steve Keen does not deny that full reservewould work, but thinks the change would not be worthwhile. He gives three reasons, all of which are a bit shaky.... Ralphonomics Steve Keen’s objections to full reserve banking Ralph Musgrave
First, he claims that under full reserve, government’s ability to fine tune the economy would not be perfect. He says, “I am sceptical about the capacity of government agencies to get the creation of money right at all times.” Steve Keen via Ralph Musgrave
Keen may have a point which is why genuine private currencies for private debts only should be allowed*. Government money, being the only means to extinguish debts to government, need not have a de facto monopoly on the payment of private debts too.
* After a universal and equal bailout of the entire adult population, including non-debtors, with full legal tender fiat both as a matter of justice and to provide the reserves needed for 100% reserve lending.
Could Ralph please explain what "Full Reserve Banking" means and through what mechanism it would change / improve on the system we have now? What is the problem that it solves?
As I see it, after the one time injection of reserves from the Fed that would be required to maintain an interest rate, nothing would materially change. What am I missing?
What is the relevance of "reserves" in any fiat system? I can create an accounting entry of 100 just as easily as I can create one of 10.
In contrast, full reserve tends to counter a much more fundamental cause of instability (which Keen himself has rightly drawn attention to) namely the feed-back loop that is inherent to fractional reserve: an asset price rises, which makes the asset a better form of collateral, which in turn allows more money creation and borrowing based on that collateral, which in turn boosts the asset price still further, etc etc.
With apologies to Mr. Musgrave, that sounds like me. And the repeated denial of such obvious truth sounds like crazed MMTers.
Of course, the complete explanation is that the prices of those assets are artificially bid up by the fractional reserve private banking funny money and do not represent the actual demand for such assets absent more funny money loans. When the gravy train ends, reality kicks in and the prices fall back to reality.
If you are going to attack me, you need to attack Mr. Musgrave as well with a similar level of your usual ignorant viciousness.
Full reserve banking eliminates the ability of banks to create money - so-called "credit." And no, full reserve banking does not mean a central bank to create reserves as needed or at all. Instead, the monetary sovereign (properly) creates all fiat.
As for the new reserves needed for full reserve banking, they should just be given to the entire population equally until all deposits are 100% backed by reserves.
The mistake Austrians make is to assume that one evil, inflation, is countered by another, deflation.
The policy is to eliminate artificial changes to prices altogether. Without the artificial unsustainable increase in prices caused by fiat money, there will be no group of people misled into investing in unsustainable lines of production as a result of the temporary artificially high prices. Without the artificially high prices, there will be no malinvestments caused by those prices and no later price collapse.
MMTers simply do not understand either Cantillon Effects or the nature and problems of economic calculation. And that does not hurt my feelings.
Mr. Musgrave's example is an example of economic miscalculation induced by private money/credit creation. The prices for these speculative assets do not reflect the amount of real resources that could be obtained in trade for the asset but are the result of presuming that someone down the line will be getting an even larger loan created out of thin air and using it to buy the asset. That's a recipe for disaster because at some point, the tendency for resources to trade for resources will overrule the artificial prices.
MMTers simply do not understand either Cantillon Effects or the nature and problems of economic calculation.
They understand these things perfectly well but have different priorities and would handle economic issue differently.
Rothbard's Libertarian-Austrianism (anarcho-capitalism) is based on a value system that just about everyone else rejects as juvenile, other Libertarians. It's appealing to teenagers and people permanently stuck in their teens for some psychological reason they need to see professional help with.
Without the artificial unsustainable increase in prices caused by fiat money,... Bob Roddis
Inexpensive fiat is the ONLY ethical form for government money. There's no way around that since: 1) Government money is backed by the taxation authority and power of government and needs no other backing; any "additional" backing is government waste. 2) Any other choice puts the power of government behind some private interest such as precious metal owners and miners.
That said, government money should only be de facto legal tender for government debts, not private ones (cf. Matthew 22:16-22). However, there is a matter of justice to deal with first: The population was driven into debt and robbed of honest interest rates by a government-backed credit cartel. The entire population, including non-debtors, therefore deserves restitution with full legal tender fiat till at least all deposits are 100% backed by reserves.
And after the restitution, then genuine private currency competition for the payment of private debts only should be allowed. And "genuine private currency competition" does not mean just easily cornered precious metals but ALL potential private money forms including common stock which bypasses usury.
First, he claims that under full reserve, government’s ability to fine tune the economy would not be perfect. He says, “I am sceptical about the capacity of government agencies to get the creation of money right at all times.” Steve Keen via Ralph Musgrave
ReplyDeleteKeen may have a point which is why genuine private currencies for private debts only should be allowed*. Government money, being the only means to extinguish debts to government, need not have a de facto monopoly on the payment of private debts too.
* After a universal and equal bailout of the entire adult population, including non-debtors, with full legal tender fiat both as a matter of justice and to provide the reserves needed for 100% reserve lending.
Could Ralph please explain what "Full Reserve Banking" means and through what mechanism it would change / improve on the system we have now? What is the problem that it solves?
ReplyDeleteAs I see it, after the one time injection of reserves from the Fed that would be required to maintain an interest rate, nothing would materially change. What am I missing?
What is the relevance of "reserves" in any fiat system? I can create an accounting entry of 100 just as easily as I can create one of 10.
In contrast, full reserve tends to counter a much more fundamental cause of instability (which Keen himself has rightly drawn attention to) namely the feed-back loop that is inherent to fractional reserve: an asset price rises, which makes the asset a better form of collateral, which in turn allows more money creation and borrowing based on that collateral, which in turn boosts the asset price still further, etc etc.
ReplyDeleteWith apologies to Mr. Musgrave, that sounds like me. And the repeated denial of such obvious truth sounds like crazed MMTers.
Of course, the complete explanation is that the prices of those assets are artificially bid up by the fractional reserve private banking funny money and do not represent the actual demand for such assets absent more funny money loans. When the gravy train ends, reality kicks in and the prices fall back to reality.
If you are going to attack me, you need to attack Mr. Musgrave as well with a similar level of your usual ignorant viciousness.
What is the problem that it solves? jeff65
ReplyDeleteFull reserve banking eliminates the ability of banks to create money - so-called "credit." And no, full reserve banking does not mean a central bank to create reserves as needed or at all. Instead, the monetary sovereign (properly) creates all fiat.
As for the new reserves needed for full reserve banking, they should just be given to the entire population equally until all deposits are 100% backed by reserves.
When the gravy train ends, reality kicks in and the prices fall back to reality. Bob Roddis
ReplyDeleteReality? It might be "real" under the current system but it is not just. A money supply should steadily grow and NEVER shrink.
The mistake Austrians make is to assume that one evil, inflation, is countered by another, deflation.
The mistake Austrians make is to assume that one evil, inflation, is countered by another, deflation.
ReplyDeleteThe policy is to eliminate artificial changes to prices altogether. Without the artificial unsustainable increase in prices caused by fiat money, there will be no group of people misled into investing in unsustainable lines of production as a result of the temporary artificially high prices. Without the artificially high prices, there will be no malinvestments caused by those prices and no later price collapse.
MMTers simply do not understand either Cantillon Effects or the nature and problems of economic calculation. And that does not hurt my feelings.
Mr. Musgrave's example is an example of economic miscalculation induced by private money/credit creation. The prices for these speculative assets do not reflect the amount of real resources that could be obtained in trade for the asset but are the result of presuming that someone down the line will be getting an even larger loan created out of thin air and using it to buy the asset. That's a recipe for disaster because at some point, the tendency for resources to trade for resources will overrule the artificial prices.
MMTers simply do not understand either Cantillon Effects or the nature and problems of economic calculation.
ReplyDeleteThey understand these things perfectly well but have different priorities and would handle economic issue differently.
Rothbard's Libertarian-Austrianism (anarcho-capitalism) is based on a value system that just about everyone else rejects as juvenile, other Libertarians. It's appealing to teenagers and people permanently stuck in their teens for some psychological reason they need to see professional help with.
Without the artificial unsustainable increase in prices caused by fiat money,... Bob Roddis
ReplyDeleteInexpensive fiat is the ONLY ethical form for government money. There's no way around that since: 1) Government money is backed by the taxation authority and power of government and needs no other backing; any "additional" backing is government waste. 2) Any other choice puts the power of government behind some private interest such as precious metal owners and miners.
That said, government money should only be de facto legal tender for government debts, not private ones (cf. Matthew 22:16-22). However, there is a matter of justice to deal with first: The population was driven into debt and robbed of honest interest rates by a government-backed credit cartel. The entire population, including non-debtors, therefore deserves restitution with full legal tender fiat till at least all deposits are 100% backed by reserves.
And after the restitution, then genuine private currency competition for the payment of private debts only should be allowed. And "genuine private currency competition" does not mean just easily cornered precious metals but ALL potential private money forms including common stock which bypasses usury.