An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Pretty good stuff. At least SRW has the perspicacity and frankness to call out what a basket case Greece is. There are no heroes in Europe right now. The sick man of Europe is pretty much the whole continent.
And Greece will remain a basket case until it has the money to restructure.
What this entire episode has shown is that the 'politically independent' structures are anything but, and that the powerful rule those even more easily than elected parliaments and congresses.
The Greek crisis nicely illustrates the flaws in fractional reserve banking. Fractional reserve banks are prone to collapse at the best of times. Reason is that if the value of their assets fall by just a small amount, they’re bust. Which is why the Fed had to lend $13trillion at sweetheart rates of interest to private banks recently. If governments make an explicit or implicit promise to banks that loans to irresponsible sovereign borrowers won’t be allowed to go wrong because governments will make sure than neither banks nor those borrowers will fail, then obviously banks will lend like there’s no tomorrow.
In contrast, under full reserve, anyone wanting their money lending on via a bank automatically gets a big haircut when loans go wrong. So irresponsible loans don’t get made in the first place. And if they are made, taxpayers don’t need to come to the rescue.
"So irresponsible loans don’t get made in the first place. And if they are made, taxpayers don’t need to come to the rescue."
Because these loans are fully backed by reserves in the first place? What that means is that they are fully backed by government IOU-s (that we usually call "taxpayers money"). Does your full reserve banking idea involve central banks providing reserves on demand and the overnight rate is exogenous?
"Greek governments — not the current, much maligned Syriza, but decades of its predecessors — treated the state like a teat from which clients and friends of electoral victors might suck. The Greek state has been a shady, opportunistic borrower, no doubt, the kind of character no one would lend money to with any great expectation of seeing it back."
This could have been written by the most vile form of libertarian scum 'fiscal conservative' here in the US...
"Spanish banks lent into overpriced real estate, and German banks lent to a state they knew to be weak. Current account imbalances within the Eurozone — persistent and unlikely to reverse without policy attention — implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality."
Whaaaaaaatttt???????
Its the other way around dope... those imbalances (in flow) imply that there will not be sufficient domestic income to service/pay the loans.... even so-called "good loans"... not establish the loans in the first place moron...
I think SRW gets way more right than he gets wrong. Yes, he is stuck in some....... incomplete and incongruous paradigms with regards to credit/debt and macro finance but he is light years better than the monetarists/neoliberals. There is hope for him I think.
@Dan Kervick
Isn't all of Europe and the US too a corrupt mess?! Not disagreeing with you but Im beginning to dislike the use of the corruption card. Tell me precisely how they are corrupt and how they are different in type of corruption than any of their critics. Not just degree, but type. From my seat I see Greek corruption as no different than ours, Germanys, Frances, UKs, Russias, Chinas. Using a murder analogy, Greece may be guilty of killing thousands with premeditation but their critics have killed thousands by non benign neglect...... still thousands have been killed by both.
Dan I agree 100% with you that there is probably "mis-management" over there... failed leadership, etc..
But within the NIA framework how can you earmark a EUR for "corruption" and another EUR for perhaps "legitimate" public purposes?
Here in the US we hear about "wasteful spending" (midnight basketball?) all the time around the deficit discussion and its just as wrong here... and he even uses the same metaphors as these idiots here in the US, "tits", etc...
If they run a deficit they have to issue bonds ... so what... yes banks can buy the bonds just like anyone else... so what...
Banks don't look at the national accounts when deciding on whether to make a loan ... they look at collateral, etc... so when he says here " implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality." This is silly...
The takeaway from the "math" (within the NIA framework) is that the imbalances leave insufficient domestic income to service the domestic liabilities ... NOT that "bad loans" will somehow be encouraged ... please...
This guy doenst get it from a technocratic perspective and never has...
And like we need another person to express indignation in sight of all of this... "from his grandfathers villa on the Black Sea blah, blah, blah...."
yeah there is a real shortage of those unhelpful useless people...
a bunch of unqualified/incompetent people built a bridge with a hole in the middle... so I am standing there looking at people driving over in both directions innocently driving into the hole and plunging into the river chasm below...
So then I eavesdrop on a conversation being held by fellow horrified on-lookers like idiot Walderman here and they are saying: "who's idea was it to build this bridge in the first place and what were their motivations and incentives?"
Yeah Tom lets cut the balls off a mom & pop Greek restaurant holding back some VAT because they are trying to support a multi-generational family with the meager profits results under domestic austerity driven by insane policy of impossible NIA outcome goals..
Under full reserve, the bank industry is split in two. Where anyone wants their money to be totally safe, they put it in the safe half where money is lodged in a genuinely safe manner, e.g. just lodged at the central bank where they get little nor no interest. Though as suggested by Milton Friedman, some of that money could perhaps also be invested in short term government debt (that’s your own government, not Greece’s)
As to those who want a better rate of interest by having their money loaned out to mortgagors, businesses, dodgy foreign governments etc, they buy shares in the second half of the bank industry. I.e. loans are not funded or backed by reserves: they’re funded by shares.
Net result is that it’s near impossible for banks to fail, though shares in the lending half can fall in value when they make silly loans. As for countries where government is corrupt, then clearly deposits in the safe half are not entirely safe. But in that scenario, no form of bank system is entirely safe.
Greek banks prepare plan to raid deposits to avert collapse
Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.
The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.
The above headline is on all the Greek tv stations. My 75-yr-old mother, who is watching the Greek news via satellite from Montreal, just called to ask me what 8.000 means exactly as she is used to the comma as a separator for the thousands. Big sigh from here once I explained it. You see, my parents sold a small piece of property in Greece a few months ago and the proceeds (c. 30,000) were deposited in a Greek bank. She was planning to transfer the funds later this month when she visited Greece :(
Way to scare the people of Greece with such headlines prior to tomorrow's referendum. Hell, you're damned if you vote YES and damned if you don't. "Nice."
Yeah Tom lets cut the balls off a mom & pop Greek restaurant holding back some VAT because they are trying to support a multi-generational family with the meager profits results under domestic austerity driven by insane policy of impossible NIA outcome goals..
Not the mom & pop shops. Are you aware that the billionaire shipping magnates are exempted from taxation in Greece. This isn't even illegal.
"loans are not funded or backed by reserves: they’re funded by shares"
So it is not exactly "full reserve banking". Banks loan out pre-existing money only (issued by government I suppose), lenders become bank shareholders? Interest rate is endogenous, determined by market forces? Money supply is exogenous, determined by government? How does the payment system operate in such a system? Central bank cannot smooth it out with loans or oderdraft I suppose? Is there central bank at all? Credit creation in between regular companies is allowed I suppose, just they cannot accept deposits and central bank is not providing liquidity?
"Net result is that it’s near impossible for banks to fail,"
Which is of course utter rubbish. Banks fail when they run out of capital or liquidity. Having half the money in 'national savings' just means that the central bank has to put money directly into the banks itself to make sure there is enough lending in the system.
That is taking the system *as it is now* - which relies entirely upon private bank lending for monetary expansion, and certainly would be the model for the Eurozone.
There is a one to one relationship between full reserve and fractional reserve - because they are merely accounting representations of precisely the same thing.
Anybody who suggests otherwise is simply hard of accounting. Banks are always fully funded in the current system.
A Full reserve system 'in specie' system simply has bigger balance sheet totals than an insured (Fractional Reserve) system. The running of the ELA mechanism was slowly turning the Greek banks into full reserve as everybody put their money under the mattress and the Greek central bank backed off the loans the banks had already made.
Greek has failed because the source of money decided to bail out the shareholders in the Greek banks and then refused to clear the transfers at a later date. So you have a maturity match issue which will cause deposits to be locked under any banking arrangement.
There are no additional control points in a full reserve banking system. It's a complete illusion
Pretty good stuff. At least SRW has the perspicacity and frankness to call out what a basket case Greece is. There are no heroes in Europe right now. The sick man of Europe is pretty much the whole continent.
ReplyDeleteAnd Greece will remain a basket case until it has the money to restructure.
ReplyDeleteWhat this entire episode has shown is that the 'politically independent' structures are anything but, and that the powerful rule those even more easily than elected parliaments and congresses.
The Greek crisis nicely illustrates the flaws in fractional reserve banking. Fractional reserve banks are prone to collapse at the best of times. Reason is that if the value of their assets fall by just a small amount, they’re bust. Which is why the Fed had to lend $13trillion at sweetheart rates of interest to private banks recently. If governments make an explicit or implicit promise to banks that loans to irresponsible sovereign borrowers won’t be allowed to go wrong because governments will make sure than neither banks nor those borrowers will fail, then obviously banks will lend like there’s no tomorrow.
ReplyDeleteIn contrast, under full reserve, anyone wanting their money lending on via a bank automatically gets a big haircut when loans go wrong. So irresponsible loans don’t get made in the first place. And if they are made, taxpayers don’t need to come to the rescue.
"So irresponsible loans don’t get made in the first place. And if they are made, taxpayers don’t need to come to the rescue."
ReplyDeleteBecause these loans are fully backed by reserves in the first place? What that means is that they are fully backed by government IOU-s (that we usually call "taxpayers money"). Does your full reserve banking idea involve central banks providing reserves on demand and the overnight rate is exogenous?
"Greek governments — not the current, much maligned Syriza, but decades of its predecessors — treated the state like a teat from which clients and friends of electoral victors might suck. The Greek state has been a shady, opportunistic borrower, no doubt, the kind of character no one would lend money to with any great expectation of seeing it back."
ReplyDeleteThis could have been written by the most vile form of libertarian scum 'fiscal conservative' here in the US...
this guy doenst get it and never will...
Here:
ReplyDelete"Spanish banks lent into overpriced real estate, and German banks lent to a state they knew to be weak. Current account imbalances within the Eurozone — persistent and unlikely to reverse without policy attention — implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality."
Whaaaaaaatttt???????
Its the other way around dope... those imbalances (in flow) imply that there will not be sufficient domestic income to service/pay the loans.... even so-called "good loans"... not establish the loans in the first place moron...
Matt, he's right. Greece is a corrupt mess and has been for a long time.
ReplyDeleteHere's grandpa Al Simpleton with the same "teat" metaphor:
ReplyDelete"Alan Simpson: Social Security Is 'A Milk Cow With 310 Million Tits'
http://www.huffingtonpost.com/2010/08/24/alan_simpson_social_security_n_693277.html
"I am writing these words from my grandfather’s villa on the Romanian Black Sea"
Do us a favor and don't come back! Just stay there!!!
The MMT idiots have had this guy at Levy conferences...
Hey idiot Levy people, why not get Al Simpson to present next time too!!!
"And Greece will remain a basket case until it has the money to restructure."
ReplyDeleteIt will need more than money - including half a clue about what to spend that money on.
@Matt
ReplyDeleteI think SRW gets way more right than he gets wrong. Yes, he is stuck in some....... incomplete and incongruous paradigms with regards to credit/debt and macro finance but he is light years better than the monetarists/neoliberals. There is hope for him I think.
@Dan Kervick
Isn't all of Europe and the US too a corrupt mess?! Not disagreeing with you but Im beginning to dislike the use of the corruption card. Tell me precisely how they are corrupt and how they are different in type of corruption than any of their critics. Not just degree, but type. From my seat I see Greek corruption as no different than ours, Germanys, Frances, UKs, Russias, Chinas. Using a murder analogy, Greece may be guilty of killing thousands with premeditation but their critics have killed thousands by non benign neglect...... still thousands have been killed by both.
No clean hands on this planet.
Dan I agree 100% with you that there is probably "mis-management" over there... failed leadership, etc..
ReplyDeleteBut within the NIA framework how can you earmark a EUR for "corruption" and another EUR for perhaps "legitimate" public purposes?
Here in the US we hear about "wasteful spending" (midnight basketball?) all the time around the deficit discussion and its just as wrong here... and he even uses the same metaphors as these idiots here in the US, "tits", etc...
If they run a deficit they have to issue bonds ... so what... yes banks can buy the bonds just like anyone else... so what...
Banks don't look at the national accounts when deciding on whether to make a loan ... they look at collateral, etc... so when he says here " implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality." This is silly...
The takeaway from the "math" (within the NIA framework) is that the imbalances leave insufficient domestic income to service the domestic liabilities ... NOT that "bad loans" will somehow be encouraged ... please...
This guy doenst get it from a technocratic perspective and never has...
And like we need another person to express indignation in sight of all of this... "from his grandfathers villa on the Black Sea blah, blah, blah...."
yeah there is a real shortage of those unhelpful useless people...
http://www.international-economy.com/TIE_Sp10_Zoakos.pdf
ReplyDeleteThere's a Wikipedia article on Tax evasion and corruption in Greece.
ReplyDeleteSearch on "Corruption in Greece." There's a gaggle of stuff on it.
For example, according to Wikipedia tax avoidance has been endemic since Ottoman rule when it was considered patriotic resistance.
Dan this is what this is like for me anyway...
ReplyDeletea bunch of unqualified/incompetent people built a bridge with a hole in the middle... so I am standing there looking at people driving over in both directions innocently driving into the hole and plunging into the river chasm below...
So then I eavesdrop on a conversation being held by fellow horrified on-lookers like idiot Walderman here and they are saying: "who's idea was it to build this bridge in the first place and what were their motivations and incentives?"
????????
I just don't get it....
Yeah Tom lets cut the balls off a mom & pop Greek restaurant holding back some VAT because they are trying to support a multi-generational family with the meager profits results under domestic austerity driven by insane policy of impossible NIA outcome goals..
ReplyDeletegood idea!
Krisjan,
ReplyDeleteUnder full reserve, the bank industry is split in two. Where anyone wants their money to be totally safe, they put it in the safe half where money is lodged in a genuinely safe manner, e.g. just lodged at the central bank where they get little nor no interest. Though as suggested by Milton Friedman, some of that money could perhaps also be invested in short term government debt (that’s your own government, not Greece’s)
As to those who want a better rate of interest by having their money loaned out to mortgagors, businesses, dodgy foreign governments etc, they buy shares in the second half of the bank industry. I.e. loans are not funded or backed by reserves: they’re funded by shares.
Net result is that it’s near impossible for banks to fail, though shares in the lending half can fall in value when they make silly loans. As for countries where government is corrupt, then clearly deposits in the safe half are not entirely safe. But in that scenario, no form of bank system is entirely safe.
This comment has been removed by the author.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteFrom the Financial Times:
ReplyDeleteGreek banks prepare plan to raid deposits to avert collapse
Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.
The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.
The above headline is on all the Greek tv stations. My 75-yr-old mother, who is watching the Greek news via satellite from Montreal, just called to ask me what 8.000 means exactly as she is used to the comma as a separator for the thousands. Big sigh from here once I explained it. You see, my parents sold a small piece of property in Greece a few months ago and the proceeds (c. 30,000) were deposited in a Greek bank. She was planning to transfer the funds later this month when she visited Greece :(
Way to scare the people of Greece with such headlines prior to tomorrow's referendum. Hell, you're damned if you vote YES and damned if you don't. "Nice."
Yeah Tom lets cut the balls off a mom & pop Greek restaurant holding back some VAT because they are trying to support a multi-generational family with the meager profits results under domestic austerity driven by insane policy of impossible NIA outcome goals..
ReplyDeleteNot the mom & pop shops. Are you aware that the billionaire shipping magnates are exempted from taxation in Greece. This isn't even illegal.
@ lastgreek
ReplyDeleteFUD = fear, uncertainty, doubt.
These are the standard tools of influence, motivation, PR, especially media propaganda used to keep "the little people" in line.
In advertising it is FEGGA = fear , exclusivity, greed, guilt and approval.
People should know that this is SOP in the field of influence and therefore be on the look out for them.
Another big one is the stated agenda versus the hidden agenda. Neoliberals and neoconservatives are really good at this one.
ReplyDeleteRalph
ReplyDelete"loans are not funded or backed by reserves: they’re funded by shares"
So it is not exactly "full reserve banking". Banks loan out pre-existing money only (issued by government I suppose), lenders become bank shareholders? Interest rate is endogenous, determined by market forces? Money supply is exogenous, determined by government? How does the payment system operate in such a system? Central bank cannot smooth it out with loans or oderdraft I suppose? Is there central bank at all? Credit creation in between regular companies is allowed I suppose, just they cannot accept deposits and central bank is not providing liquidity?
"Net result is that it’s near impossible for banks to fail,"
ReplyDeleteWhich is of course utter rubbish. Banks fail when they run out of capital or liquidity. Having half the money in 'national savings' just means that the central bank has to put money directly into the banks itself to make sure there is enough lending in the system.
That is taking the system *as it is now* - which relies entirely upon private bank lending for monetary expansion, and certainly would be the model for the Eurozone.
There is a one to one relationship between full reserve and fractional reserve - because they are merely accounting representations of precisely the same thing.
Anybody who suggests otherwise is simply hard of accounting. Banks are always fully funded in the current system.
A Full reserve system 'in specie' system simply has bigger balance sheet totals than an insured (Fractional Reserve) system. The running of the ELA mechanism was slowly turning the Greek banks into full reserve as everybody put their money under the mattress and the Greek central bank backed off the loans the banks had already made.
Greek has failed because the source of money decided to bail out the shareholders in the Greek banks and then refused to clear the transfers at a later date. So you have a maturity match issue which will cause deposits to be locked under any banking arrangement.
There are no additional control points in a full reserve banking system. It's a complete illusion
" the hidden agenda"
ReplyDeleteYou might as well believe we descended from worms by random chance....