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, February 25, 2013
John Carney — Boston Fed President: Banks May Not Have Enough Crisis Capital
John analyzes capital requirements. More about bank funding.
Carney advocates the conventional wisdom, namely that loss absorbing bank creditors (i.e. shareholders) should form a slightly higher proportion of total bank creditors than banksters want (about 5-10%).
There is actually a good argument for saying that a vastly higher proportion of bank creditors should be loss absorbers (including, as advocated by Laurence Kotlikoff, depositors who want their bank to lend their money on or invest their money). The argument is thus.
Commercial banks create money when they lend. To illustrate, if you lodge $X in a bank, and it lends on the money, both you and the borrower then have access to $X; $X has been turned into $2X.
That money creation is barred under Kotlikoff’s system: when you lodge $X under a K system (assuming you want your money loaned on) you lose your money and get shares in a mutual fund, which can lose value if the underlying loans or investments go wrong (or you might make a profit).
Ergo no money creation takes place, ergo commercial bank’s freedom to do stimulus is constrained. Now does that matter? I suggest not, and for the simple reason that commercial banks do stimulus EXACTLY WHEN IT’S NOT NEEDED. That’s during an asset price bubble. Conversely, they are reluctant to lend exactly when we do need stimulus (like now).
Moreover, when stimulus is needed, everyone looks to government and central bank to do it. Why let commercial banks do it as well? Even if commercial banks didn’t make a total hash of stimulus (exacerbating bubbles), you’d have duplication of effort there.
Carney advocates the conventional wisdom, namely that loss absorbing bank creditors (i.e. shareholders) should form a slightly higher proportion of total bank creditors than banksters want (about 5-10%).
ReplyDeleteThere is actually a good argument for saying that a vastly higher proportion of bank creditors should be loss absorbers (including, as advocated by Laurence Kotlikoff, depositors who want their bank to lend their money on or invest their money). The argument is thus.
Commercial banks create money when they lend. To illustrate, if you lodge $X in a bank, and it lends on the money, both you and the borrower then have access to $X; $X has been turned into $2X.
That money creation is barred under Kotlikoff’s system: when you lodge $X under a K system (assuming you want your money loaned on) you lose your money and get shares in a mutual fund, which can lose value if the underlying loans or investments go wrong (or you might make a profit).
Ergo no money creation takes place, ergo commercial bank’s freedom to do stimulus is constrained. Now does that matter? I suggest not, and for the simple reason that commercial banks do stimulus EXACTLY WHEN IT’S NOT NEEDED. That’s during an asset price bubble. Conversely, they are reluctant to lend exactly when we do need stimulus (like now).
Moreover, when stimulus is needed, everyone looks to government and central bank to do it. Why let commercial banks do it as well? Even if commercial banks didn’t make a total hash of stimulus (exacerbating bubbles), you’d have duplication of effort there.