Tuesday, January 20, 2015

Dirk Niepelt — Reserves for everyone – towards a new monetary regime?

Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Reserves for everyone – towards a new monetary regime?
Dirk Niepelt | Director, Study Center Gerzensee; Professor, University of Bern

1 comment:

Ralph Musgrave said...

Neipelt is pretty much advocating full reserve banking without realising he’s doing so. FR aims to restrict money creation to the central bank, i.e. “reserves” are the only form of money: a form of money which, as Neipelt rightly says, is as near totally safe as it’s possible to get (unless you’re talking about Zimbabwe).

Re his claim that a “reserve only” system “could undermine deposit-financed credit creation..” that’s a popular and flawed objection to FR. Under FR, anyone is free to have their money loaned on to whoever they wish (NINJA mortgagors, safe mortgagors, or whatever). The big difference as compared to the existing system is that those making the latter choice carry ALL THE RISKS, as opposed to the existing system where the taxpayer carries some of the risk (e.g. via TBTF).

FR certainly increases costs for borrowers, but only because the latter subsidy of lenders is removed. What’s wrong with that?

Re his claim that “As a byproduct, public ‘insurance’ of bank deposits could be scaled down..”, actually “public insurance” of banks can be removed altogether. At least if lending entities are funded just by shares rather than by money (which for a bank is a liability that is fixed in value, inflation apart), then it’s impossible for lending entities / banks to go insolvent. Thought the value of their shares can decline to the point where they become takeover targets.