Saturday, April 26, 2014

Ann Pettifor — Why I disagree with Martin Wolf and Positive Money

The Financial Times is hosting a major debate on whether the private banking system should be allowed to continue creating 97% of the credit or money circulating within the economy. Martin Wolf, its respected economics commentator, supports the ‘Chicago Plan’ that effectively calls for private banks to lend out only as much as they have in “reserves”. “Banks”, writes Wolf (FT 24th April), “could only loan money actually invested by customers.” Private banks would be prevented from creating money, and instead all money would be issued by the state. The quantity issued would be decided by an independent committee as argued by amongst others, the IMF’s Kumhof and Benes and Positive Money.

Because of the finance sector’s despotic power, about which I have been very vocal, many readers would expect me to support a proposal that prevents private banks from creating money, and to enthusiastically back the nationalization of money issuance. I do not however, and want to explain why.
Prime Economics
Why I disagree with Martin Wolf and Positive Money
Ann Pettifor | Director of Policy Research in Macroeconomics (PRIME), Honorary Research Fellow at the Political Economy Research Centre at City University (CITYPERC) and a fellow of the New Economics Foundation, London


David said...

So, what about Ralph Musgraves' point about making up the "deflationary effects" of 100% reserve with the fiscal tools that every MMTer will agree that we have? Is Paul Meli not correct that NFA are only created by G spending and that bank credit cancels out except for the interest which must be obtained from the void? If he is then shouldn't we be looking to increase the ratio of G money to bank money?
I'm aware that part of the objection to RM's point is that many MMTers, like Ann Pettifor, don't trust the government or "committees." One can sympathize with that sentiment and perhaps agree that "such a committee would never be truly independent," but by the same logic it must also be granted that we'll never effectively regulate banks by any means whatsoever. I'm thinking that continuing to rely on bank money as the mainspring of the American economy is leading to the increasing "debt peonage" that Micahael Hudson talks about.
Ann Pettifor referenced the middle ages as suffering from a tight money policy which she compares to 100% reserve. Granting an element of truth to the analogy, perhaps, I don't think she understands the economy of the middle ages very well. Everyone had a place in it, be it the Church the guilds, the nobility or merchant class. The truly unfortunate were taken is as wards. There just wasn't the kind of pauperism that came with the Reformation (in England) and the subsequent enclosures. This pauperism is what created the modern wage worker and without it the term "unemployment" would have little meaning. The "poor laws" of the late 18th century were an acknowledgment that the pauper was entitled to compensation for the loss of the commons.
Until we can trust each other to restore the commons and learn to manage them effectively we will continue down Michael Hudson's version of the road to serfdom.

Jose Guilherme said...

The best way to reduce the high levels of household debt (the problem that seems to have led to the recent proposals for 100% reserve banking, presented as a "solution" to that problem) is by raising the level of wages and employment.

Better paid workers with full employment will have less need to contract debt in order to make ends meet - and will be more able to repay debts contracted in the past.

And a growing economy founded on higher wages will automatically lead to a lower private debt to GDP ratio.

Strangely, none of these would-be reformers of the monetary system is calling for higher wages - or for the higher deficit spending that we desperately need right now in order to attain full employment.

Instead, they are arguing for a Rube Goldberg scheme that would cancel the deposit creating power of commercial banks - and transfer extra powers to committees of experts accountable to no one.

We would be offered something like an ECB on steroids, run by "experts", at the very top of the monetary and political system - with its present powers fully maintained and extra powers gained in order to replace the prerogatives formerly attributed to commercial banks.

And who will be those "experts"?

A solid bunch of nice, neoliberal academics, plus some of the fugitives from the shrunken financial sector and a few representatives of the would-be reformers, perhaps?

I say - no, thank you.

Better stick to the present system of so-called fractional reserve - but with an adequate dose of deficit spending and a healthy policy of raising the labor share of aggregate income.

Roger Erickson said...

Fractional reserve? There is no fractional reserve lending on a fiat currency regime. What would banks be lending fractions of? Fiat? Public Initiative?

You're conflating Capital Requirements with "Banking Reserves" ?

Banks don't lend out "banking reserves" - but instead only report them to the CB THROUGH the Primary Dealer banks, which get accounting fees. As I understand it, "Banking Reserves" are mostly used by the CB for tracking active currency supply.

In fact, "Banking Reserves" strike me as a shadow accounting system, left over from fixed-Fx & gold-std days. A dozen or so countries don't even require parallel management of "banking reserves," and instead give all licensed banks & credit unions equal access to the CB?

In a fiat currency system, there's no point of maintaining "banking reserves." Bank regulation is maintained through Capital Requirements and outright process regulation.

Jose Guilherme said...

Well - I said "so-called fractional reserve" because I was already anticipating a possible reaction.

Reserves are commercial bank assets and central bank liabilities.

Banks make payments to one another in reserves. And they do lend reserves - to other banks, at the overnight rate.

But of course, they can't lend the reserves to non banks - reserves are deposited at the central bank, and only commercial banks are allowed to maintain those kinds of deposits.