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The fact of forcing money market funds to break the buck, which Marshall deals with, is actually a move towards full reserve banking, though I’m not sure whether the authorities realise that.
MMFs which claim they are not going to break the buck will now have to invest in ultra safe stuff like short term Treasuries, and that’s full reserve writ large.
Under full reserve, any bank or lending entity that invests in anything the least bit risky (like mortgages or loans to businesses) cannot promise depositors they’ll get $X back for every $X they deposit. Instead, those funding such lenders invest in shares (or stakes in the bank which are effectively shares). Hence their money is not entirely safe.
As to those who want total safety, they place their money with entities or in accounts where sums deposited are simply lodged at the central bank or perhaps invested in short term government debt.
"(Spain and Greece)collect taxes in euros, spend in euros and borrow in euros, but do not create euros. Only the European Central Bank can do that." (Marshall Auerback)
This is correct as far as the monetary base is concerned.
The banking systems of Spain and Greece, however, can create bank deposits in euros - promises to pay in euro currency.
And said promises are generally accepted as means of payment throughout the eurozone.
Thus, if the national banks keep lending to their sovereign, creating (government) euro deposits in the process, and always roll over their loans there should be no problem for government financing.
The governments of Greece and Spain could simply make a public-private partnership deal with their banking sectors (no need to publicize it, it might attract the undesirable attention of austerians), where banks would function as an automatic lender to the government in order to safely capture the spread between the rates for medium and long-term government debt and the lower rates prevailing for ECB and NCB advances to commercial banks.
Why should governmments have to care about issuing currency if the commercial banks can create for them all the deposits that they need?
I think the answer to the question at the end of your comment is that commercial banks in the EZ are much like commercial banks anywhere else: they cannot expand the amount they lend faster than other banks else they run out of reserves, i.e. central bank money. The problem countries in the EZ are the ones with balance of payments deficits, i.e. they’re bleeding money to elsewhere. If a commercial bank in on of those countries expanded the amount it loaned to its government or whoever, that money would end up as deposits in other EZ banks, and the latter would want genuine ECB base money in payment. The “fast expanding” bank just wouldn’t have the necessary base money.
That would not constitute a problem for the commercial banks - because the ECB would always provide the necessary reserves to them, on demand.
Here is how Willem Buiter and Ebrahim Rahbari put it, in a paper published in 2012:
"The ECB controls an interest rate in the euro area. The stock of base money (currency plus central bank overnight credit to eligible banks) and the stock of central bank credit are then determined endogenously, i.e. demand-determined by commercial banks."
4 comments:
The fact of forcing money market funds to break the buck, which Marshall deals with, is actually a move towards full reserve banking, though I’m not sure whether the authorities realise that.
MMFs which claim they are not going to break the buck will now have to invest in ultra safe stuff like short term Treasuries, and that’s full reserve writ large.
Under full reserve, any bank or lending entity that invests in anything the least bit risky (like mortgages or loans to businesses) cannot promise depositors they’ll get $X back for every $X they deposit. Instead, those funding such lenders invest in shares (or stakes in the bank which are effectively shares). Hence their money is not entirely safe.
As to those who want total safety, they place their money with entities or in accounts where sums deposited are simply lodged at the central bank or perhaps invested in short term government debt.
"(Spain and Greece)collect taxes in euros, spend in euros and borrow in euros, but do not create euros. Only the European Central Bank can do that." (Marshall Auerback)
This is correct as far as the monetary base is concerned.
The banking systems of Spain and Greece, however, can create bank deposits in euros - promises to pay in euro currency.
And said promises are generally accepted as means of payment throughout the eurozone.
Thus, if the national banks keep lending to their sovereign, creating (government) euro deposits in the process, and always roll over their loans there should be no problem for government financing.
The governments of Greece and Spain could simply make a public-private partnership deal with their banking sectors (no need to publicize it, it might attract the undesirable attention of austerians), where banks would function as an automatic lender to the government in order to safely capture the spread between the rates for medium and long-term government debt and the lower rates prevailing for ECB and NCB advances to commercial banks.
Why should governmments have to care about issuing currency if the commercial banks can create for them all the deposits that they need?
Jose,
I think the answer to the question at the end of your comment is that commercial banks in the EZ are much like commercial banks anywhere else: they cannot expand the amount they lend faster than other banks else they run out of reserves, i.e. central bank money. The problem countries in the EZ are the ones with balance of payments deficits, i.e. they’re bleeding money to elsewhere. If a commercial bank in on of those countries expanded the amount it loaned to its government or whoever, that money would end up as deposits in other EZ banks, and the latter would want genuine ECB base money in payment. The “fast expanding” bank just wouldn’t have the necessary base money.
Ralph,
That would not constitute a problem for the commercial banks - because the ECB would always provide the necessary reserves to them, on demand.
Here is how Willem Buiter and Ebrahim Rahbari put it, in a paper published in 2012:
"The ECB controls an interest rate in the euro area. The stock of base money (currency plus central bank overnight credit to eligible banks) and the stock of central bank credit are then determined endogenously, i.e. demand-determined by commercial banks."
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