I've never been entirely sure why banks confuse people so much. They really are very simple creatures. They make loans and back those up with deposits and other borrowings, charge a margin for one over the other in return for making an underwriting decision, and undertake to swap their liabilities around in various manners to maintain their liquidity.
And that's about it really. In fact all the problems start happening when you let lending banks do anything much more than this.…3spoken
On the Nature of Banks - 'Insured' vs. 'In Specie'
Neil Wilson
Neil says, “Insured Deposits are those covered by the country's deposit insurance scheme (here in the UK it is 100% of the first £85,000 per person).” The glaringly obvious problem there is that that “insurance” (paid for as it is by taxpayers) amounts to a SUBSIDY of the banking industry. In the US, the TBTF subsidy comes to the same thing. And subsidies, as it explains in the introductory economics text books, misallocate resources, i.e. they reduce GDP.
ReplyDeletePut another way, those subsidies are all part of the “socialism for the rich” movement, which most politicians and ordinary citizens seem quite happy with, for some bizarre reason. I.e. banksters have got politicians and ordinary citizens suckered.
As to the actual size of the subsidy, the total amount of subsidised loans made available to banks in the recent crisis (in the US and Europe) came to $29trillion according to Randy Wray (see link below). That’s about double US GDP. As for any reader who’s jaw doesn’t drop on reading that figure, all I can say is there’s something wrong with their jaw.
http://neweconomicperspectives.org/2014/06/something-rotten-state-denmark-rise-monetary-cranks-fixing-aint-broke.html#more-8377
You will have a similar 'subsidy' under any other system - because they are *operationally identical*. (How many more times do I have to say that).
ReplyDeleteYou really do need to get over the obvious hang up here. The country needs a certain amount of lending to happen given the other policy settings within government (primarily the supremacy of monetary policy over fiscal policy) - or there will be a depression.
So *given those policy settings* the central bank has to make sure that the banks are funded with money at the correct price to get that level of lending. (And yes they are funded under the current system - banks can only lend to the extent that they can backfill with deposits).
Don't forget that in the UK there is always National Savings, which attracts away deposits at an interest rate. The Banks are competing with that drain all the time to attract funding.
So it is completely pointless getting angry about something that is simply a direct result of the policy settings that the elected government have implemented.
Instead change the government to one that has different policy settings that has less reliance on pushing private debt.
No need to change the system - just those who hold the tiller.
Neil,
ReplyDeleteYou’ve completely failed to explain where the subsidy is under full reserve. I assume your “explanation” lies in some sort of hidden and implicit way in the following passage of yours:
“The country needs a certain amount of lending to happen . . . or there will be a depression. So *given those policy settings* the central bank has to make sure that the banks are funded with money at the correct price to get that level of lending.”
The first flaw there is it is totally unnecessary for a “certain amount of lending to happen in order to avoid a depression”. Reason is that if, given a cut in lending, the AD reducing effect is compensated for by an increased amount of non-lending based economic activity, then no depression will occur.
To say that a “certain amount of lending must happen” is a bit like saying “a certain number of cars must be bought in order to avoid a depression”. That’s nonsense: if people spend $X less on cars and $X more on other stuff, then there’ll be no “depression” effect.
Next, under Kotlikoff and Friedman’s full reserve, the central bank makes NO EFFORT whatsoever to “make sure banks are funded”. All that happens is that government and central bank feed enough base money into the economy to give us full employment. As to WHAT PROPORTION of that money is used for lending, that’s left to the free market, and quite right in my view. And a free market is a scenario where by definition, there is are no subsidies.
Positive Money, in contrast does leave open the possibility that the central bank should interfere with market forces and possibly subsidise commercial bank lending, but I don’t approve of subsidies. In other words I agree with the standard view in economics namely that subsidies are not justified unless market failure can be demonstrated or some very good social reason can be found for the subsidy.
Also the idea that central bank bureaucrats or politicians have a better idea as to what the optimum amount of lending is than the free market, is a joke.
So my question, to repeat, is: exactly where is the subsidy under full reserve (the above Positive Money idea apart)?
This comment has been removed by the author.
ReplyDelete"Reason is that if, given a cut in lending, the AD reducing effect is compensated for by an increased amount of non-lending based economic activity, then no depression will occur."
ReplyDeleteWhy isn't that happening now then? Because it doesn't happen in reality. If the price of money gets too high aggregate demand drops unless the state steps in to offset it.
Your views on aggregate demand are way off beam, completely incompatible with Keynes and empirically false.
There is no magic in full reserve for the same reason there is no magic in government bonds.
All the active components of the proposed changes are policy changes that could just as easily be applied to the current system.
Until you get the difference between the two, there is little point debating with you.