Guest Post: Ralph Musgrave — We're ruled by idiots like Larry Summers.

We're ruled by idiots, like Larry Summers.

Here's a sample of the idiocy: first, the Bank of England doesn't know what happened to the money it created so as to effect QE. Second, the drug and porn addicted head of the Co-op bank in the UK when asked what the total assets of his bank were, gave £3bn as the answer. In fact the correct figure was £47bn. Don't you just love it? Anyway, moving on to that supposedly important speech by Summers at the IMF a few days ago, he points out that the crises was caused by "imprudent lending". Yes, we all worked that out. But he doesn't tell us what the solution for that problem is. Though presumably he's not so totally dim as not to be aware of the solution: make banks hold more capital. But personally I prefer taking that further, as advocated by Laurence Kotlikoff, and as follows.

Kotlikoff's solution. Ban the blatantly fraudulent practice that banks have adopted for decades, namely making silly loans in the knowledge that the taxpayer will rescue banks (particularly the large ones) when the loans are silly enough. In other words adopt the system advocated by Kotlikoff under which depositors who want their bank to lend their money on so as to enable them to earn interest carry the full cost when loans go wrong. That would greatly concentrate the minds of depositor / lenders and lead to more responsible lending. Though those who particularly wanted to lend to risky borrowers would be free to do so, but they they'd carry the risk. Alternatively, under K's system, where a depositor wants 100% safety, then their money is kept in a 100% safe fashion: nothing is done with it, so it's not loaned on, and thus earns no interest. The result would be that it would be near impossible for a bank to suddenly fail, though it could perfectly well dwindle to nothing over a period of years. Plus any credit crunches would be far less volatile. But whether we impose bigger capital requirements on banks or take that further and go for K's solution, the effect would be deflationary: banks would lend less. So some sort of compensating and stimulatory measure would be required.

How do we impart stimulus? Let's scratch our heads. Well that's a big problem for Summers because he doesn't seem to know how to impart stimulus. As he puts it, "we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential." The jaw of most MMTers will drop at that statement. The great Larry Summers doesn't know how to impart stimulus when interest rates are near zero. Well Larry, if you're listening, here's how to do it. Create fiat and spend it (and/or cut taxes). The fact of government creating money and spending it means more jobs in the usual public sector areas: education, the military, infrastructure creation , etc. And as to tax cuts, that induces households to spend more. Moreover, the latter policy boosts the net liquid paper assets of the private sector, which induces the private sector to spend. What do people do when they win a lottery? Unless you're mentally retarded or a senior economist who hangs out inside the Washington beltway, you'll know that when people win a lottery, they tend to spend a fair proportion of their winnings. Revelation of the century that, wasn't it? As Dean Baker put it, "In elite Washington circles, ignorance is a credential".

Ralph Musgrave