There are two ways the banking universe can pan out as far as I can see.
One is the Gorton way, where everything is eventually collateralised and anyone with credibility or collateral can issue collateral-type obligations that turn into collateral money.
In this world banks are as good as the collateral they hold, and they can flourish if they can persuade the markets to accept new types of collateral when old forms run out.
The other is the Admati view which is about going towards a Fisher style full reserve banking plan. Banks can take all the risk they want provided they can persuade “depositors” to fully fund them in these ventures and to bear all the risk.
I like Admati’s view but also see some benefits to Gorton’s — which basically represents a truly liberalised money market.Toward A Leisure Society
The Notgeld Issue
Izabella Kaminska
Isabella Kaminska is all over the place. She says in relation to Irving Fisher type full reserve banking “The problem . . . is that we are basically reducing banks to venture capitalists. That’s fine. But if depositors are going to bear all the risk, it makes sense their upside exposure should not be capped to a specific return.” Well hang on: if depositors bear all risks, then banks are not acting as “venture capitalists” as that term in normally understood, and that includes bearing risks.
ReplyDeleteSecondly, the advocates of full reserve (certainly Positive Money and Laurence Kotlikoff) do not advocate that “upside exposure should be capped”.
That’s a near record number of mistakes in one sentence. Congratulations Isabella.
I thought it was an odd piece as well. I am glad to see her attention to some of these issues, but she was all over the place as you say. She needs to read more widely.
ReplyDeleteAnd choosing Gorton and Admati as representative of whole schools of thought is a bit strange.
(An aside Ralph- On the term "full reserves" - I really think it is better to say "state money only", "limited purpose banking", "no reserve banking" (PM) etc. (depending on is being mentioned) and completely drop any reference to reserves; reserves just aren't the issue, it is who creates credit-money and how they are constrained that is the real issue.)
In any system in which any agents can issue debt liabilities of any kind, especially negotiable liabilities, the potential for financial crisis exists. It doesn't matter whether a certain subclass of those liabilities are given the honorific title "money" by the state or the folk.
ReplyDeleteIf lots of people have debts, and if those who have debtors are usually also creditors, than the potential exists for those chain reactions of illiquidity, devaluations and defaults that constitute financial crises.
You can regulate the specific institutions of banks and money all you want, but if you don't regulate credit itself, then people will rapidly innovate bank substitutes and money substitutes.
In any system in which any agents can issue debt liabilities of any kind, especially negotiable liabilities, the potential for financial crisis exists. It doesn't matter whether a certain subclass of those liabilities are given the honorific title "money" by the state or the folk.
ReplyDeleteThis is the big issue now with shadow banking.
"This is the big issue now with shadow banking."
ReplyDeleteYes, I think this is the issue a lot of the monetary reformers aren't getting. They have absorbed a lot of Chicago school thinking, and like Friedman they are convinced there is a huge difference between money and other easily exchanged debt instruments. So they focus on controlling the money supply. But in a world in which all kinds of people are free to issue all kinds of negotiable debt, you can't get a handle on instability by narrowing in on money.
Ellen Brown's book Web of Debt has a great title. The monetary reformers should take that picture more seriously.