A short note in reply to @Frances_Coppola. She disagreed with a paper from Jan Kregal at Levy.
Kregal argues that there are two types of deposit, deposits of currency and coin, and deposits created when loans are made. If a bank makes bad loan
“it is the failure of the holder of the second type of deposit [loan-created deposits] to redeem its liability that is the major cause of bank failure”
so the first type of depositor (of currency and coin) should not bear the brunt of these bad decisions.
Coppola disagrees with this on a theoretical point via twitter.Decisions, Decisions, Decisions
The Equity Residue in Bank Deposits
Andrew Lainton
The monetary sovereign ITSELF should provide a risk-free fiat storage and transaction service. No one else properly can since no one else can properly create fiat to cover accidental losses.
ReplyDeleteAnd that service should make no loans (individual account holders could however), pay no interest and be free up to normal household limits on balance size and number of transactions.
I pretty much agree with F.Beard.
ReplyDeleteKregel is struggling manfully with a problem that was sorted out some time ago by a group of full reserve banking advocates – see:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Laurence Kotlikoff advocates a full reserve system similar to the above lot.
In particular, Kregel is wrong to claim “it is impossible to distinguish between deposits backed by currency and coin, and deposits backed by currently serviced loans or bad loans.” Actually it’s perfectly possible to distinguish. As the above advocates of full reserve explain, all one needs to do is to give depositors the choice between two options. One is having their money stored in a 100% safe fashion (i.e. at the central bank) where, as F.Beard points out, that money is not loaned on, nor will it pay interest.
Second, depositors can choose to have their money loaned on or invested by their bank. But in that case they are acting in just the same way as someone who invests in the stock exchange. They are making an investment, and there is no obligation on taxpayers to rescue them if things go wrong.
@ Ralph
ReplyDeleteWhy does one need full reserve for that? I'm quite certain one can achieve the same objective with 0 reserves. It's just a matter of defining which types of bank liabilities are guaranteed and which aren't. Plus one needs to define a loan to equity ratio to determine how, and presto. At least in principle. It's not the principle that's difficult, it's the faulty loanable funds theory that sees deposits as some sort of junior bank equity, because they're 'loaned out'. So sure, you can increase the amount of non performing assets (reserves) to match the amount of guaranteed deposits, but that just makes credit more expensive and you can just as well insure them via deposit insurance. Same difference.
was meant to say:
ReplyDelete...to determine how much leverage bank owners are allowed....
So sure, you can increase the amount of non performing assets (reserves) to match the amount of guaranteed deposits, but that just makes credit more expensive Oliver [bold added][
ReplyDeleteNot if the amount of reserves was increased by, for instance, an equal and universal bailout of the entire population, including non-debtors, with new fiat at least until all deposits are 100% backed by reserves and perhaps even more if real interest were determined to be too high.
and you can just as well insure them via deposit insurance. Oliver
The monetary sovereign has no proper business insuring the liabilities the banks create. That, in effect, puts the banks in charge of fiat creation. And that's fascism, not a true free market in private money creation.
@ F. Beard
ReplyDeleteAnd by which magical algorithm do you suggest money be created and what for purpose, if not by banks for investment? You seem to deny the endogenous nature of money. And that is what I've always suspected to be at the heart of the 100% reserves debate.
http://www.rokeonline.com/roke/evolutionary%20versus%20revolutionary%20views.pdf
And by which magical algorithm do you suggest money be created and what for purpose, if not by banks for investment? Oliver
ReplyDeleteGovernment money, legal tender for government debts ONLY (but voluntarily useable for private debt too), should simply be spent by monetarily sovereign governments into existence and some (not all!) of it taxed out of existence by that same government. And it should, of course, be inexpensive fiat.
Private money, good ONLY for private debts , never for government ones, could be created by any private party but getting others to accept it voluntarily (with no government privilege) would be the challenge. Private money could be store coupons, futures contracts, etc. but my personal favorite is common stock:
1) Common stock as money requires no borrowing or lending. Assets and labor would simply be bought with new stock issue and the stock would be redeemed with the goods and services produced by the issuing company. Thus no PMs, usury, or fractional reserves are required. This is a huge benefit since PMs, usury (see Deuteronomy 23:19-20) and fractional reserves are all problematic.
2) All price inflation is born by the owners of the corporation since every receiver of the new common stock money is by definition a part owner of the corporation. This is an important moral consideration.
3) With no borrowing or lending, deflation is not built into common stock money as it is with the present money system.
4) Since all money holders are part owners of the corporation then they could vote on how much new money is issued and for what purposes. Thus price inflation is under the control of only those affected by it.
5) The assets of a corporation are typically performing assets though PMs could easily be accommodated too.
6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease.