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.
Pages
▼
Pages
▼
Saturday, August 3, 2013
Joseph Huber — Modern Money and Sovereign Currency
He doesn't appear to have gotten a single thing right about MMT. Asserting its founders don't recognize the need for serious reforms and "like" the current arrangements between CB, Treasury and banking system shows he has read very little in the literature, as does his claim they are supportive of fractional reserve banking when in fact they are ambivalent regarding reserve requirements of any kind.
It takes real intellectual myopia to get a subject so incredibly wrong.
Huber’s ideas aren’t from “la-la land”. He is in full agreement with one of the basic MMT ideas, namely that in a recession the government / central bank should create new money and spend it into the economy (and/or cut taxes).
Where he differs from MMT is that (like me) he is a strong critic of fractional reserve banking, whereas most MMTers don’t pay much attention to the flaws in fractional reserve.
The basic flaw in fractional reserve is closely related to the complete failure of the authorities in the US and elsewhere to get rid of the TBTF subsidy, and for the following reasons.
Fractional reserve lets commercial banks lend money into existence (i.e. loans create deposits). But those deposits are not 100% safe, so government makes them safe by underwriting them with billions of taxpayers’ money. And that’s a nonsense: banking shouldn’t be subsidised.
Under the reform advocated by Huber (and other opponents of fractional reserve like Laurence Kotlikoff), the risk involved in holding those deposits is made open and explicit: they cease to be money and instead become a stake in the above mentioned loans. Put another way, those deposits become in effect a shareholding in the relevant bank.
In contrast to those risky “shareholdings”, under a Huber / Kotlikoff regime, if depositors want real money, then government supplies them with monetary base, but no risks whatever are taken with that money: e.g. it’s simply lodged at the central bank.
That way commercial banks cannot suddenly fail, so there are no more bank runs or credit crunches. Plus the TBTF subsidy disappears. What more do you want?
For more on this see this WSJ article by John Cochrane or this Bloomberg article by Matthew Klein:
I don’t see why MMT takes care of banks which make silly loans or investments, any more than it takes care of car dealers or restaurants which are run badly. MMTers are clued up as regards keeping aggregate demand as high as possible. But within that “optimum aggregate demand economy” there will always be firms that fail.
Failing car dealers and restaurants don’t matter. But when a bank fails, depositors lose their money. And when big banks fail there are systemic effects. Those are serious effects.
I think the argument for backing up the banking system is best viewed as a necessary evil. If the formal banking system is too constrained, it will be replaced by nonbank finance (shadow banking). Pretty well all business transactions are credit intermediated (accounts payable and receivable), so it's not easy to stop this.
And if the shadow banking sector grows, it will become necessary to save it for the good of the overall economy anyway. This is despite there being no formal fractional reserve system in place. Thus policymakers need to be proactive and regulate behavior before the crisis strikes.
I agree that every business lends to other businesses, but that’s not the same as creating money or “lending money into existence” as some people have put it. (I.e. loans create deposits).
To create money you have to issue a liability that is so widely accepted that it gets used to pay for goods and services. That’s the definition of money: anything widely accepted in payment for goods and services.
And that’s not easy for a small organisation, like a small shadow bank. Minsky said “anyone can create money; the problem is in getting it accepted”. So I think if the bigger banks, including the larger shadow banks have to obey the rules of full reserve (or any other set of rules), that more or less controls the banking industry.
Ralph we can argue the case between MMT and other positions only if the debate is based on fact and not strawmen. Huber completely misses the basis of 1) the MMT position concerning the present system and how to make it work without changing it substantially, and 2) the MMT proposals for reforming the system by changing it substantially.
But in the end, the argument is over whether the government alone, the private sector alone, or some combination of the two is best suited to operating the money-credit system.
Statists argue for government alone, and Libertarians for the private sector alone. But many people don't trust either government alone or the private sector alone to be making these decisions and favor a split system.
In any event, there is going to be credit and who makes the risk management decisions on what basis is at issue, along with controls that prevent gaming the system .
WHEN THE STATE TAKES BACK THE POWER TO CREATE FIAT DIGITAL MONEY FROM THE PRIVATE BANKS THE INTEREST INCOME OF THE TOP TEN PERCENT WEALTHY WOULD DECLINE. THIS IS A QUESTIONS OF POWER. I THINK HUBER IS RIGHT TO REMINT MMT THAT MUCH OF THE STATES SEIGNORAGE IS LOST BY PRIVATE BANKS. SO WE GET AN ALLIANCE OF MMT NCT AND GREENBACKERS?
ok Tom, a private banking system needs Federal Credit Insurance to function. ok perhaps private bank are better in finding good borrowers - perhaps they can do that better than a STATE agency but there is still Hubers issue about the seignorage gains that the private banks take away from the public. There should be a compensation tax on banks or on receivers of lange unseserved interst gains. So we get an Lockian liberal argument for the state getting back some of its currency monopoly powers.
for Huber there a two big loses that the public has to suffer because the private banks make credits out out fiat money (with little fractiona reseve) 1stly i think Huber is right when he says that banks should not gain from money creation but is he 2ndy right that the state should create the anual money growth ( or even all money for public purpose) itself instead of borrowing from private banks ? MMT says that state borrowing is not for funding the public budget - but still seignorage is lost and intersts a payed.
He doesn't appear to have gotten a single thing right about MMT. Asserting its founders don't recognize the need for serious reforms and "like" the current arrangements between CB, Treasury and banking system shows he has read very little in the literature, as does his claim they are supportive of fractional reserve banking when in fact they are ambivalent regarding reserve requirements of any kind.
ReplyDeleteIt takes real intellectual myopia to get a subject so incredibly wrong.
Huber’s ideas aren’t from “la-la land”. He is in full agreement with one of the basic MMT ideas, namely that in a recession the government / central bank should create new money and spend it into the economy (and/or cut taxes).
ReplyDeleteWhere he differs from MMT is that (like me) he is a strong critic of fractional reserve banking, whereas most MMTers don’t pay much attention to the flaws in fractional reserve.
The basic flaw in fractional reserve is closely related to the complete failure of the authorities in the US and elsewhere to get rid of the TBTF subsidy, and for the following reasons.
Fractional reserve lets commercial banks lend money into existence (i.e. loans create deposits). But those deposits are not 100% safe, so government makes them safe by underwriting them with billions of taxpayers’ money. And that’s a nonsense: banking shouldn’t be subsidised.
Under the reform advocated by Huber (and other opponents of fractional reserve like Laurence Kotlikoff), the risk involved in holding those deposits is made open and explicit: they cease to be money and instead become a stake in the above mentioned loans. Put another way, those deposits become in effect a shareholding in the relevant bank.
In contrast to those risky “shareholdings”, under a Huber / Kotlikoff regime, if depositors want real money, then government supplies them with monetary base, but no risks whatever are taken with that money: e.g. it’s simply lodged at the central bank.
That way commercial banks cannot suddenly fail, so there are no more bank runs or credit crunches. Plus the TBTF subsidy disappears. What more do you want?
For more on this see this WSJ article by John Cochrane or this Bloomberg article by Matthew Klein:
http://www.hoover.org/news/daily-report/150171
http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html
Ralph
ReplyDeleteHow can a bank be putting the taxpayers on the hook when MMT takes care of all that regardless of whether anyone knows it or not.
I thought MMT was trying to subsidized everything and everyone as soon as possible in order to spread the deficit to get it chunkier.
Besides you can do numismatic research and just mint a coin at the treasury to make all the bookkeeping go away ??
This comment has been removed by the author.
ReplyDeleteGoogleheim,
ReplyDeleteI don’t see why MMT takes care of banks which make silly loans or investments, any more than it takes care of car dealers or restaurants which are run badly. MMTers are clued up as regards keeping aggregate demand as high as possible. But within that “optimum aggregate demand economy” there will always be firms that fail.
Failing car dealers and restaurants don’t matter. But when a bank fails, depositors lose their money. And when big banks fail there are systemic effects. Those are serious effects.
I think the argument for backing up the banking system is best viewed as a necessary evil. If the formal banking system is too constrained, it will be replaced by nonbank finance (shadow banking). Pretty well all business transactions are credit intermediated (accounts payable and receivable), so it's not easy to stop this.
ReplyDeleteAnd if the shadow banking sector grows, it will become necessary to save it for the good of the overall economy anyway. This is despite there being no formal fractional reserve system in place. Thus policymakers need to be proactive and regulate behavior before the crisis strikes.
Brian,
ReplyDeleteI agree that every business lends to other businesses, but that’s not the same as creating money or “lending money into existence” as some people have put it. (I.e. loans create deposits).
To create money you have to issue a liability that is so widely accepted that it gets used to pay for goods and services. That’s the definition of money: anything widely accepted in payment for goods and services.
And that’s not easy for a small organisation, like a small shadow bank. Minsky said “anyone can create money; the problem is in getting it accepted”. So I think if the bigger banks, including the larger shadow banks have to obey the rules of full reserve (or any other set of rules), that more or less controls the banking industry.
Ralph we can argue the case between MMT and other positions only if the debate is based on fact and not strawmen. Huber completely misses the basis of 1) the MMT position concerning the present system and how to make it work without changing it substantially, and 2) the MMT proposals for reforming the system by changing it substantially.
ReplyDeleteBut in the end, the argument is over whether the government alone, the private sector alone, or some combination of the two is best suited to operating the money-credit system.
Statists argue for government alone, and Libertarians for the private sector alone. But many people don't trust either government alone or the private sector alone to be making these decisions and favor a split system.
In any event, there is going to be credit and who makes the risk management decisions on what basis is at issue, along with controls that prevent gaming the system .
Ralph,
ReplyDeleteIn a fiat currency system, how can banks hold fractional fiat?
They'd have to hold fractions of public initiative in reserve.
Fractional reserve in a fiat currency system isn't even a semantically complete concept.
You're conflating capital reserves & "banking reserves?"
May as well throw in moral reserves & complete the semantic nonsense.
WHEN THE STATE TAKES BACK THE POWER TO CREATE FIAT DIGITAL MONEY FROM THE PRIVATE BANKS THE INTEREST INCOME OF THE TOP TEN PERCENT WEALTHY WOULD DECLINE. THIS IS A QUESTIONS OF POWER. I THINK HUBER IS RIGHT TO REMINT MMT THAT MUCH OF THE STATES SEIGNORAGE IS LOST BY PRIVATE BANKS. SO WE GET AN ALLIANCE OF MMT NCT AND GREENBACKERS?
ReplyDeleteBoris, I think we have many of the same goals, but so far we disagree over the means to get there.
ReplyDeleteok Tom, a private banking system needs Federal Credit Insurance to function. ok perhaps private bank are better in finding good borrowers - perhaps they can do that better than a STATE agency but there is still Hubers issue about the seignorage gains that the private banks take away from the public. There should be a compensation tax on banks or on receivers of lange unseserved interst gains.
ReplyDeleteSo we get an Lockian liberal argument for the state getting back some of its currency monopoly powers.
for Huber there a two big loses that the public has to suffer because the private banks make credits out out fiat money (with little fractiona reseve)
ReplyDelete1stly i think Huber is right when he says that banks should not gain from money creation
but is he 2ndy right that the state should create the anual money growth ( or even all money for public purpose) itself instead of borrowing from private banks ?
MMT says that state borrowing is not for funding the public budget - but still seignorage is lost and intersts a payed.
Randy Wray has just posted on this, without addressing Huber directly, here.
ReplyDeleteYou can comment there and perhaps get an authoritative answer from one of the MMT economists.
Randy will also crosspost at New Economic Perspectives, but it's not up yet so no link available. There will be discussion in both places.