So both John Cochrane and Martin Wolf are advocating 100% reserve banking. If these two agree on anything, it’s worth taking seriously!House of Debt
100% Reserve Banking — The History
Atif Mian And Amir Sufi
Sell also the comments.
GERARD CAPRIO ON APRIL 26, 2014 AT 4:11 PMI
A seductive idea, until you recall that (a) the entire history of banking has been a move away from this extreme; and (b) the boundary problem in finance. The implication is that as funds leave a narrow banking sector in search of higher yields, the non-bank financial sector will grow vastly larger. The likelihood is that a larger NBFI sector would be rescued — in other words, along with the funds that would migrate from the banking sector, would come the government guarantees. We were not ready to let GM or AIG fail, and the same would be the case for an AMEX that would be many times its present size. So, an attractive solution in a model, but not in the real world.
ERIC L ON APRIL 26, 2014 AT 5:43 PMI
So then where do debts come from? Loans can still be financed by selling their income streams as securities. Finance would look the way it was increasingly looking when the crisis hit. It’s not clear to me why that would be better. At least within the fractional reserve banking system there is a limit to the total allowed leverage, whereas the economy can become arbitrarily leveraged through other forms of finance. And the fact is the danger to fractional reserve depositors proved non-existent. The problems were for debtors and for non-fractional-reserve financiers. If any form of banking is to be banned, we should prohibit lending from anything other than fractional reserve banking.
The Center of the Universe
Comments on Martin Wolf’s banking article
Warren Mosler
Ralphonomics
Warren Mosler tries to criticise full reserve
Ralph Musgrave
I am with Warren on this one. 100% backing of lending would just mean that we would just retreat to a 100% shadow banking system.
ReplyDeleteAnd then what happens? The shadow banking system blows up, and then the central bank has to extend lender-of-last-resort facilities to the shadow banks, and we end up exactly where we started from,
The only way of stopping the shadow banking system from doing this is to suspend the entire legal system, and revert to a "what is not expressly permitted is forbidden" legal principle.
Right, bank money is just negotiable private debt that happens to be widely accepted. If banks are prohibited from issuing that debt unless they already posses sufficient government-issued dollars to redeem all of it on demand, then other institutions will step in to meet the demand.
ReplyDeleteThese guys are trying to solve the depression-era problem of bank runs, a problem that was solved back in the 30's by the didn't happen during the financial crisis. Also, it is all based on the monetarist theory that you can control the supply and demand for credit by controlling the money supply.
just when you think Marin Wolf has a brain ...
ReplyDeleteA bank is just a licensed agent that RECORDS and tracks matching credits/debits created by citizens?
Public purpose is to self-regulate the process, not ban it. For Pete's sake.
The whole purpose of "fiat" currency is to unleash the dynamic transaction chains that large populations are capable of, so that any & all ADAPTIVE transactions can be denominated on-demand, by the distributed parties making those transactions.
What on Earth does Martin Wolf think would happen if banking functions were ceased? We'd all carry around our own ledger books, showing who owes whom what? Or we'd all carry precious IOUs, carrying the thumb prints of everyone involved?
Courts would be bogged down. Lawyers would be the new bankers.
Conclusion? Either Martin Wolf is senile. Or he was always this misinformed.
How does he keep his title as financial columnist if he doesn't know the definitions of money or currency?
None of these people seems to recognize that fractional reserve banking only exists in a fixed-Fx / commodity-pegged regime (e.g., gold std).
ReplyDeleteIn a fiat system, we're loaning out fractions of public initiative, credited to it's distributed self. What's a fraction of a limitless, nominal quantity?
Doesn't matter if the fraction is less than or greater than 100% .... of instantaneous public initiative.
Our grandkids will always have even more than we can imagine ... or evolution will have stopped working.
The blog links to an article on full-reserve banking, which article links to the Fisher et al 1939 Program for Monetary Reform.
ReplyDeleteI have to ask.
Did any commenter read either the full article, or the Fisher proposal on which it is based? No sign of the latter, for sure.
Please use the link in the article and understand for yourself Fisher’s 100 Percent Money proposal, as advanced in 1939.
Dan agrees with Brian, with Brian saying he agrees with Warren. Must we not?
What about Warren's egregious error basing all his threat of spiraling deflationary chaos on the mistaken claim that either the Chicago Plan or Fisher's full-reserve proposals had anything at all to do with "a fixed fx/gold reserve standard"
Do Brian and/or Dan agree with Warren's basic premise for his prognostications?
Brian says that with money-backed lending "we would retreat to a 100 percent shadow banking system."
Well, that ain't a gold standard, and was never mentioned by Warren.
A newly found wrinkle perhaps.
Unless you consider wildcat banking as equivalent to Fisher's full-reserve banking, how could it be a 'retreat'? Or does the ‘retreat’ assume an 'advance' with fractional reserve banking?
All of the shadow-, non- and synthetic 'banking's financialization tools (varieties of $-denominated leveraging vehicles and facilities) would quickly become non-grata in a bank-lending-money environment, either full-reserve or non-reserve reforms.
Speculation through financial leveraging will soon cease to exist.
So, rather than become' shadow banking as we know it, it will 'end' shadow banking, by making real money cost real money.
Dan says that IF banks are prevented from creating all that 'debt', then other institutions will step in to meet credit demands.
First, banks are never prevented or constrained by anything except free market forces from making all the loans they want to make to creditworthy borrowers.
There is absolutely zero policy consideration to controlling the amount of credit and debt (who said there was?), only the amount of money in existence, which is important.
There will be more money than debt, and that will require bankers to use the market to make money loanable to themselves, by attracting depositors.
Not a problem for anyone, really.
There will be plenty of money available for lending through traditional investment banking systems, kind of like what existed along Glass-Steagall.
Proposed reforms of the money system make it illegal for anyone 'else' to step in and create anything that serves as money, so nobody will be threatened by others stepping in, except criminals.
Today's private fractured credit system is obviously a couple of $Trillion short, so public issuance cannot possibly do any worse, esp. when the only number they're controlling is the money supply.
You can also assume a lack of 'credit'. Much better talking points. Among ourselves.
But Kumhof and Yamaguchi found the opposite.
A read of Fisher's (et al) 1939 Program for Monetary Reform would show how well they planned to ensure adequate funds for bank loans, including LOLR, proving that with good public intent, it could happen quite elegantly with electronic money.
A read thereof would also show how egregious Warren's rhetoric is on the gold standard.
The reform proposal specifically calls for replacing the 'gold' standard with a new monetary Standard of Stable Buying Power.
To Eric L.
ReplyDelete(Since your post includes his comment)
'So then where do debts come from?'
Assuming you mean ‘loans’ that create assets and debts, if you actually read the document linked in the article, and on which the article is based, the Fisher, et. Al 1939 Program for Monetary Reform, you would know the answer.
While the Monetary Authority ensures adequate circulating media to achieve GDP-potential, financial intermediation here becomes the work of the bankers, offering competitive rates to term-depositors or other banks to acquire ‘reserves’ against lending capacity.
There would be no change to what can be financed by loans, but with the change in the lenders’ risk profile, income streams better come with better than a AAA rating.
Finance would look the opposite of the way it looked before the crisis; leverage replaced by equity and bonafide reserves of the government’s making.
With the exception of the lack of need for depositor insurance due to full-reserve backing, putting the risk on the lenders of the funds, your factoids on finance and leverage have no obvious connection to fully-reserved commercial banking. BTW, nobody ever claimed that the proposal was to help checking account depositors.
The ‘intent’ of the document was ””to eliminate one recognized cause of great depressions, the lawless variability in our supply of circulating medium.””
In other words…toward economic, financial and monetary stability.
Have you ever actually read the document that you are talking about?
@ joebhed
ReplyDeleteWithout asset side discipline, unlawful banking practices will still happen. Booms and boosts will still occur - regardless if you're on a metal standard, fixed exchange rate, full reserve banking, or under the present banking system (of free floating nonconvertible fiat).
Trouble happens when banks venture out of basic lending, pure and simple. Also, fiscal policy matters in determining if the private credit structure can sustain itself or not.
Glass-Steagall stated that there's an inherent conflict of interest between investment banks and commercial banks (depository) institutions, so it's strange to me that you find an institutional (lawful) use for investment banks, since you're obviously concerned about financial stability.
"There will be more money than debt."
All money is debt. All money is credit. Unless you're gonna have a parliament and a CB board of people who understand endogenous money and Chartalism, your 100 reserve proposal won't amount to anything. MMTers understand that endogenous money creation has always existed in one form or another - and the problem with it is not the means of endo creation, but the purpose of that endo-created money. Solution for it is not soviet command planning to keep the money supply fixed, but regulating endogenous money creation on the asset side - something the current system & previous systems lacked (almost entirely).
http://serbanvcenache.blogspot.ro/2014/11/banking-proposals-for-ez-la-warren.html
You need to read up on some history of pre & post war monetary policy:
http://www.cfeps.org/pubs/wp-pdf/WP21-Wray.pdf
Also, here's the composition of the Money Supply 11 countries in the 19th and 20th centuries (ps: the gold standard era is a myth)
-1885
http://1.bp.blogspot.com/-hYMea6Z1u0g/UUb4Hds7reI/AAAAAAAAAGY/sdC8ZkC1GRo/s480/Moneysupply1885chart.jpg
-1913
http://2.bp.blogspot.com/-i-UtK88jbA0/UUb4QZP79fI/AAAAAAAAAGg/x5wABR4FMp8/s480/MoneySupply1913chart.jpg