Monday, September 17, 2018

Barkley Rosser — The Minsky Moment Ten Years After

… as Neil Schirmer in The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a fullout global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet. These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities. This was the save the Fed pulled off at the worst moment of the Minsky Moment. The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.
I did not know this, did you?

Econospeak
The Minsky Moment Ten Years After
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

35 comments:

John said...

I'm surprised that you didn't know. I remember watching many Tea Partyers and Libertarians complaining about the Fed making these swaps available to the ECB and "bailing out" European banks. It was a short-sighted complaint, but it was nevertheless one based on fact. True to form, the ever shameless neoliberalistas decried what was being said as "scaremongering" and as a "conspiracy theory". The Tea Party and Libertarian crowd made the usual error by hysterically screaming that taxpayers money was being used to bail out European banks, but they seemed to be the only ones who were bringing this stuff up in public.

I'm not really sure what else the Fed could have done. It was staring into the abyss, and it saved the day with a few electronic entries. The issue is not what should be done when there is a crisis (it has no choice but to use its immense power as the lender of last resort), but what should be done to ensure a crisis never gets any momentum in the first place. For that, the entire financial system needs to be overhauled, and the economy definancialised.

Tom Hickey said...

Yes, I knew that but I did not know the detail of the Fed taking 600B onto their balance sheet in the process. I assumed that the the Fed was only providing swaps for liquidity. I did not realize that they were also laundering assets.

IIRC, it was not reported widely in the US. I suspect that there would have been more of an outcry if this was public knowledge at the time.

John said...

Ah, I see. Sorry. However, I'm sure I saw something like that reported somewhere in the UK press (the Peter Schiffers are all over the place), not that at the time I could make head or tail of any of it. I was a mere boy and believed all the stuff about hyperinflation and impending bankruptcy.

The whole story of the crisis has yet to be written. There's probably quite a lot that is still hidden and we have yet to learn, which will only come out excruciatingly slowly.

Andrew Anderson said...

... but what should be done to ensure a crisis never gets any momentum in the first place. John

I suggest that genuine, as opposed to sham, bank liabilities, like genuine negative feedback, are necessary for system stability, not to mention basic honesty.

Progressive pragmatism and scorn for ethical fiat and credit creation have been tried and have failed.

John said...

Andrew, what exactly is it that you wish to institute? A 100% gold standard? State money only? Libertarian-style money? Tell us. Then we can have a debate about the merits or otherwise of your proposal, but writing as you do that the current fiat money arrangement is a sham and dishonest doesn't get us anywhere. After all, there are various forms of fiat money. For instance, local non-profit publicly owned bank money versus for-profit private bank money. I'm for the former, not the latter. The latter is morally unacceptable and economically disastrous.

What is wrong with a new financial architecture which does away with banking as we know it, and replaces it with non-profit local publicly owned banks?

Andrew Anderson said...

Andrew, what exactly is it that you wish to institute? John

By a curious coincidence (Divine Providence?), Bill Mitchell made a new comment today to one of his articles where my own comments should answer your question to a large extent. Here's the link: http://bilbo.economicoutlook.net/blog/?p=4006

But I'll field the following question one here too since I answered it just yesterday:

What is wrong with a new financial architecture which does away with banking as we know it, and replaces it with non-profit local publicly owned banks? John

http://mikenormaneconomics.blogspot.com/2018/09/ellen-brown-central-banks-have-gone.html?showComment=1537117087947#c6066927392688900687

Andrew Anderson said...

ooops! Bad link: Try this instead: http://bilbo.economicoutlook.net/blog/?p=40064

John said...

Andrew,

To the extent that I was able to fully comprehend what you wrote, you should have no issue supporting almost all of the existing MMT proposals. But how about going one step further with the following:

1. No private commercial banks (whether national or international) may operate in the country. Their licenses or their deposit insurance will be revoked. Likewise, all national banks that currently operate overseas will lose any national backing, and they will be at the mercy of the country in which they operate. The present commercial banks will die a quick death because no one will want to keep their money in an institution without deposit insurance and will instead transfer their accounts to the new local non-profit public banks.
2. Local non-profit public banks and regional banks for bigger projects will be the only banks to be issued licenses. The board will be made up of locally elected people who would draw no pay, and do it as a public service.
3. Monetary and banking regulations that favour the poor, green projects, green development, and whatever else we as a community wish to see.
4. Regulations that ensures anyone working in the new banking system earns something approximately like the average wage. Banking would become a public service, not an occupation to become rich. The job would require little more than a school certificate/diploma because the job will be no more mentally taxing than working at a supermarket checkout.
5. Life imprisonment for any financial shenanigans.
6. Relating to the above, a financial authority and dedicated financial crime unit that is so invasive that it would be impossible to commit a crime.
6. No nonsense progressive taxation that will see the divide between rich and poor close dramatically.
7. Zero percent interest rates or thereabout. That gets rid of corporate welfare.
8. No bonds to be issued with maturities longer than, perhaps, one day. The longest for longer than, say, one day. This will automatically get rid of most derivatives. All other derivatives may or may not be banned depending on their usefulness and cost.
9. A job guarantee.
10. Since monetary policy would have become largely irrelevant by virtue of the above proposals, fiscal policy would exclusively dominate all public policy.
11. The central bank can be closed, and turned into something far more useful like a museum or a prison. The new "central bank", whose main concern would now become clearing operations, will be situated in a small room somewhere in the treasury, operated by a small workforce of computer technicians to keep the computerised clearing operations running smoothly.
12. There is nothing wrong with deposit insurance, and there should be no limit on deposit insurance for local non-profit public banks. This will ensure that a bank run will never occur. In any case, given the new financial architecture, regulations, monitoring and fiscal policy, a bank run would become impossible.
13. Whether investment banks should be given a license is something to be debated. Since they will be legally obliged to work without deposit insurance, they may see a collapse in investors.
14. Depending on the effects it will have on the economy, citizens who wish to save for retirement may avail themselves of a national savings certificate or some other similar scheme.
15. State pensions will be much higher than they are now. Hopefully, that should deal a death blow to private retirement plans, which have a tendency to go bankrupt, leaving the lifelong saver penniless. It would also mean aggregate demand would be higher: people would then be able to spend their money into the economy rather than save it and drain aggregate demand.

All these policies will be subject to review. They probably would work, but if they didn't then should be repealed.

I think that should get rid of almost all of our problems. Will this do? I'd like to know if you find this adequate. If not, what proposals do you think would be useful?

Andrew Anderson said...

John,

Your proposals are ad-hoc and largely unprincipled, i.e. the ends do not justify the means.

What I propose is 100% private banks with 100% voluntary depositors. Who dare oppose that? Few do, in my experience, and not for long unless they resort to under-handed means such as banning (Looking at you, Yves Smith.)

But unprincipled solutions invite all kinds of opposition - some of it quite just.

And yes, let's have generous welfare but as grants, not loans, since need, merit or simply equality protection under the law should be the basis of government aid - not the ability to repay.

John said...

Andrew, what's ad-hoc about them? They're based on what we know about how banks have operated in the past, as well as monetary and financial history! In any case, most laws are ad-hoc in that they respond to the issues. There is little point having laws based solely on principle if they don't work and/or lead to total disaster. Many laws are necessarily pragmatic and for the public good. Anti-trust is one such case. Few may oppose what you suggest because they have not heard the counterarguments. It's child's play to win an argument by presenting one side. I certainly oppose your suggestion because it's as good as a libertarian fantasy and will lead to an unspeakable financial, and therefore economic, calamity.

As for 100% private banks, no one has a right to a banking license. And why should the people not be offered a public option as they are for health and education? You're arguing against a public option as a matter of principle. Why don't we ask the people?

Furthermore, just as no business has a right to operate a nuclear power station or a prison, no business should have a right to operate a bank. The issue is too grave to be thought of solely in terms of intellectual principle or morals. In fact, I'd go one further and say banking should be treated like the armed forces or the police: it is far too important to be left to private enterprise. The only solutions that are acceptable are libertarian free banking, 100% state money or non-profit local public banking. The first option is ludicrous, for any number of reasons. The second option simply will not work. The third option works perfectly, as can be seen in Germany, but that is precisely the reason it is opposed here and elsewhere, and if proposed today, wouldn't have a snowball's chance in hell in Germany had it not become a national fixture.

Since banking is just about the most important industry in any country, it should be organised and regulated in a way that is beneficial to the public, and doesn't allow for the staggering amounts of assorted crimes that come with banking (for example, the hundreds of billions of dollars in drug money is laundered every year and all the other sleights of hand that allows organised crime to ruin whole nations).

Given that a public system would be a far better system, we should support that. But why don't we have both systems running? People can opt for a full deposit insurance no-profit public bank or a no deposit insurance for-profit private bank. That'll suit me just fine. I know which system people will opt for. Private banks don't want the competition of public banks, and for good reason. They'll go out of business. You may not realise it, and I do apologise if you are offended by this, but your suggestion is little more than a defence for the continuation of the worst types of money lenders. I'd like to see the end of the money lenders, although perhaps it won't be necessary to be violent in the way Jesus was. What is desperately required is the euthanasia of the money lenders. Money is a public good, and it must be run as such: no profits, no crime, for the poor, for socioeconomic development, for longterm projects (not gambling), for green technology and for a better and more just society. We will never achieve any of this with private money lenders.

As for generous welfare, I'm happy to entertain it, though I think a good job guarantee may be sufficient. Since that may not be the case in practice, I would gladly have a welfare state large enough to ensure all people have as good a standard of living as is possible.

Andrew Anderson said...

What is desperately required is the euthanasia of the money lenders. John

We can do that and in a way no one can object to such as abolishing deposit insurance properly and charging the banks for reserve storage at the Central Bank (negative interest).

And 100% private banks with 100% voluntary depositors has NEVER been tried so you can't say the idea is ludicrous.

And don't cite Germany as a success given the trouble the Euro is in and how Germany must squeeze Greece and other countries and its own citizens to survive.

"Ya can't cheat an honest man", John, and your lack of principle will come back to haunt you.

I hate the banks as much as anyone which is why I'm committed to reducing them to their proper role PERMANENTLY and that requires PRINCIPLE.

We're talking about a problem that is centuries old and which is not subject to facile solutions; we're dealing with the slimiest of snakes, John, and they will not be dealt with except with the most unimpeachable means.

John said...

Andrew, I said libertarian free banking (in which anyone and everyone could decide what money was and leave it to individuals to decide whether or not to accept it as money) was ludicrous, not your suggestion. I said that your suggestion would simply not work and would probably end in calamity. One of the reasons is because the executives and management who run banks do so in their own interests. As far as I know, investment banks do not have deposit insurance. Money market funds certainly don't. Neither do pension funds or hedge funds. Yet investment banks, knowing full well the risks they were taking, took the world economy down with it in 2008. The hedge fund Long Term Capital Management caused tremendous financial damage when it imploded. And on and on it goes.

I like the imagery of banks as the slimiest of snakes, and that's why they should be killed off, not caged in some fashion. Of course you can cheat an honest man! The banks do it every nanosecond of the day. The point about Germany was that some 70% of their commercial banking system is made up of local banks, and, according to Richard Werner (leading professor of banking and the man who coined "quantitative easing"), there is barely a case of financial trouble. I think we can do better than that with the proposals I set out above. The point I made about Germany has nothing to do with how they run the EU or their own fiscal policies; it has everything to do with the fact that its local public banking system is the safest in the world, the leat crime ridden and the most useful system yet devised to counteract housing bubbles. But as I say, we can do better.

100% private banking doesn't get rid of the issue. The issue is that any form of private banking is the issue. Tinkering won't do it, no matter how radical the tinkering. I'm for taking the banking industry out the back and shooting its head full of holes. The private money lenders are the problem, not what kind of private money lenders they are. I don't know why you say my proposals are facile. Many of the MMT proposals and some of the more radical ones like mine kill the problem. You're for constraining the private banking industry, which has never worked. There is only one solution for a creature this diabolically evil, and that is death.

I'd happily go along with your proposal if I thought it would have the desired effect, but it simply wouldn't. We have to be far more radical with an industry such as this. Only the most radical and extreme position has any possibility of working: and what is more radical than not allowing it to even exist? Constraining a vampire isn't enough. You have to shoot it full of silver bullets, put it's body through a meat grinder, cover the resulting ground meat with layers of garlic, burn the damn thing in a nuclear reactor, and whatever waste results needs to be launched into space for its final destination slap bang in the middle of the sun. Only then will we be partially free. After that, the merchants of death who call themselves "the defence industry" need similar treatment, although the garlic may not be necessary in their case. As does every demonic piece of excrement who has voted for war and supporting the many despotisms whose actions are turning the world into a zombie paradise.

Andrew Anderson said...

There is only one solution for a creature this diabolically evil, and that is death. John

Except you'd replace them with public money lenders - conceding the point that money lending is essential and worse cheating poor, non-creditworthy savers in the process.

And having conceded that government or government-backed credit creation is essential, then the banks or would be private bankers will point to inevitable waste or political cronyism and say "We can do better only regulate us better."

And seriously John, to ask, as you did earlier, if I'm in favor of a gold standard betrays such ignorance of what I've proposed that I must protest you've not done your homework enough to criticize my proposals. You're quick to judge, John, as when you lumped me in with young Earth Creationists.

Radical? You bet. But my proposals have a solid backing in principle such as individual citizens have an inherent right to use their Nation's fiat FOR FREE and banks DON'T!

Bob Roddis said...

No private commercial banks (whether national or international) may operate in the country.

Violence violence violence. Your solution to everything is more violence.

Oh, and funny money loans lead to the boom/bust cycle. Too bad your entire gang of knuckleheads is afraid to think about that.

https://www.nobelprize.org/prizes/economics/1974/hayek/lecture/

Matt Franko said...

“Yes, I knew that but I did not know the detail of the Fed taking 600B onto their balance sheet”

Dont you read this blog Tom?

Matt Franko said...

Tom,

What effect did this transaction have on the Leverage Ratio of the US banks?

LR= capital/total assets

(Hint: total assets increase by 600b in one day....)

Show your work....

Matt Franko said...

This is funny because the guy thinks the one transaction that caused the crash was somehow helpful....

John said...

Part 1.

Andrew: "And seriously John, to ask, as you did earlier, if I'm in favor of a gold standard betrays such ignorance of what I've proposed that I must protest you've not done your homework enough to criticize my proposals. You're quick to judge, John, as when you lumped me in with young Earth Creationists."

Are you being serious? I only asked what it was you were proposing. You may or may not be for a gold standard or something backing the money. It's not inconceivable that your proposal would include that. There's nothing unreasonable about that. Why so touchy about a gold standard? It's not like I mockingly presumed you to be proposing a marshmallow standard or a wooden spoon standard. A gold standard isn't intrinsically a bad idea unlike free banking. It sounds perfectly reasonable, but its effects are calamitous. Am I meant to scour threads to find out the *FULLNESS* of your proposal? It's simply easier to ask. I did that, and in the process I brought up the gold standard. I also brought up as an alternative 100% state money, as the Positive Money people do. You didn't complain about me mentioning 100% state money.

As for the young earth creationist accusation, I said no such thing. I replied that there are Christians (and others) who do believe this. I added that their claim is that a lot of the scientific evidence has been planted by God to test our faith. I then wrote: "Perhaps you're not one of them [that is, a person who claims that God plants evidence to test our faith], but the standards asked of science by fundamentalist Christians, Jews, Muslim and others are not scientific standards. They're omniscient standards, and that's a capability humans do not have, no matter what Dawkins and Dennett may say."

As you can see, I was saying the exact opposite of what you accuse me of. The issue, as you well know, is exactly what I wrote: the scientific standards that fundamentalists of all religious persuasions demand are NOT scientific ones. They know full well that you don't need to supply a "missing link" for every evolutionary change. They know full well that fossil evidence is hard to come by. They know full well that, nevertheless, the fossil evidence does just that very well. They know full well that DNA evidence is far more exact than the fossil evidence, yet they still bang on about "missing links". They demand impossible standards: infinitely many missing links, proving negatives and all the other tomfoolery they get up to.

John said...

Part 2.

You may get your information from more reputable sources, and that's fine, but you can't claim that what I outlined doesn't exist and was precisely the way they made their arguments until relatively more sophisticated arguments were proposed by people who actually understood the science. Most but by no means all of the more sophisticated creationists have a disingenuous technique of tomfoolery than the televangelist-style of demagoguery that sees such knowingly mendacious diversions like: "Why don't chimpanzees turn into human beings?" They pose questions that they know full well are unreasonable in a way that appears reasonable. As I have pointed out some of the creationists are perfectly reasonable, although their hypercriticism is solely directed at scientific facts that dispute their scriptures. Most, in my experience, demand knowingly impossible standards. Others, who I know personally, are blind to the fact that they *UNKNOWINGLY* demand impossible standards - standards they don't apply elsewhere. To see how easy it is to do what many of them do, I could claim gravity is not an attractive force because not every object has ever been tested to see if it obeys the laws of gravity. Have they tested pink marshmallows? No! Ha! I'm the winner! Suppose they then tested pink marshmallows, I could assert that no test has been carried out on yellow marshmallows or squirrel tails or Egyptian mummies or the liver of Abraham Lincoln or the cornea of Humphrey Bogart's left eye. And I could go on forever in this line of total obfuscation and idiocy. Questions and demands like these are not scientific questions or ones that can be answered by science, and that is precisely why they demand answers to them. No, we cannot test for knowingly designed impossible to confirm tests. Scientists don't do that because they can't, and neither can anyone else. God can't do impossible things, so why demand it of humans? The answer is that they wish to obfuscate and mislead.

John said...

Bob: "Violence violence violence. Your solution to everything is more violence."

No, Bob, it is self-defence from violence. We should not allow a special class to hold such significant power over the rest of us because they have been given a license by another corrupt class to do so. No one has a right to a banking license. It's not a human right. One may have a right to, say, not be tortured, but the idea that it is somehow an act of "violence" to restrict other people to inflict violence on us is rich, to say the least.

Anyway, as a compromise I'd be content to allow the market choose. We should have a public system and a private system, and allow people to choose. You know full well what people will choose, and that is precisely why so many people are fundamentally against allowing people a choice.

Andrew Anderson said...

A gold standard isn't intrinsically a bad idea ... John

Yes it is in that fiat should be no more expensive than necessary to prevent things such as counterfeiting, theft, and accidental loss or destruction.

Gold and silver once served, in an expensive way, to prevent counterfeiting. That use is now obsolete. They also served, in a ludicrous way, to prevent the over-issue of fiat when the proper way was to allow all citizens to use fiat in account form so as to maximum the demand for fiat.

And gold and silver NEVER backed fiat; it was the taxation authority and power of government that backed gold and silver under a precious metals standard.

John said...

It seems we agree that fiat money is a good thing. The issue, then, is how fiat money should be regulated. You want it to be regulated by private banks for private profit and directing the money in ways that is in theory good for the bottom shareholders but is in practice only good for making management stinking rich. I'd like to see fiat money regulated by the local community through a local non-profit public bank directing the money that is solely in the interests of the community. Why not allow people a choice? Are people not to be afforded a choice, or even the right to make a mistake?

Perhaps I have misunderstood you, in which case please explain, but your solution seems to be that fiat money should be regulated by private banks in the mould of investment banks: no deposit insurance and anyone who puts their money into the bank is aware that the lot may vanish in an instant. This does not take into account the fact that private banks set up in this way can take down a national economy or, as in 2008, the world economy. Many of the banks that were bailed out in 2008 were exactly what you're proposing: private (investment) banks without deposit insurance. They may have been bailed out because of corruption and nepotism, but something like what was done was necessary (although the outcome could have been different: a rescue of the depositors so as to save the wider economy, but a liquidation the bank and resulting in total loss for the bondholders and shareholders): the balance sheets of far too many innocent industries, including pension funds and other financial firms, who weren't involved in the fraud that the big Wall Street and City financial institutions were involved in would have also gone down as a result. If there is a run on a crime ridden and guilty bank, you can be sure that there'll be runs on perfectly innocent and honest institutions. Then we have the issue of the debt deflation that will result. All this because of a dogmatic commitment to private banking. Where is it written that a private business has the right to create and/or regulate money?

Given that fiat money is one of the world's great inventions, and cannot be entrusted to private banks, it becomes a question as how the state should publicly organise it. Should it be done centrally or locally? A centralised organisation of fiat money is unlikely to work well, although that is not to say that the national government should not have a voice in the creation and regulation of credit/money. The national government would be in a position to warn the local banks of any issues that may arise from their creation of credit/money. The national government may institute a national investment bank for large projects like high speed rail or large scale renewable energy, or it may work in concert through the local banks to organise credit/money for such projects. There may need to be a little experimentation. There is a good deal to learn from how other countries have organised their credit/money creation and regulation process; there is much to learn from our own history in the UK: local banking was a British invention, but the private banks ensured that they were killed off by the corrupt and nepotistic state.

Tom Hickey said...

Dont you read this blog Tom?

I don't think I had discovered this blog at the time that occurred, Matt.

All I recall is that the Fed took on a lot of US dodgy assets, but I don't recall ever having seen the same for the European banks.

Tom Hickey said...

What effect did this transaction have on the Leverage Ratio of the US banks?

LR= capital/total assets

(Hint: total assets increase by 600b in one day....)

Show your work....


Did you know at the time about the European dodgy assets. The news I was aware of then was only about swaps to provide dollar liquidity.

But at the time I knew little of economics and finance, and I don't think I even discovered MMT until sometime later. It took me awhile to get the basics of econ and finance and to understand the basics of MMT after I encountered it through a comment that Ramanan made somewhere that I cannot now recall.

Tom Hickey said...

This is funny because the guy thinks the one transaction that caused the crash was somehow helpful....

The crash was already in progress when that occurred. Why else would they do it?

Tom Hickey said...

A monetary system is neither good nor bad intrinsically but only instrumentally, based on purpose and consequences.

There is disagreement over the purpose of a monetary system with respect to society, finance, and economics.

There are always tradeoffs.

Those who want a rigidly stable currency wrt to domestic price level and a stable exchange rate prefer a monetary system that is based on "sound finance," e.g., a metals standard.

Those who prefer greater ability of the issuer to fund public purpose prefer a looser system.

Andrew Anderson said...

The issue, then, is how fiat money should be regulated. You want it to be regulated by private banks for private profit ... John

I think you're confusing fiat with bank deposits:

Fiat exists in only two forms:
a) in physical form, bills and coins, aka "cash".
b) in account form at the Central Bank or perhaps at the Treasury.

Otoh, bank deposits are mere liabilities for fiat, not fiat itself.

I propose that individual citizens have an inherent right to use all forms of fiat, FOR FREE, up to reasonable limits on account size and transactions per month and that non-individual-citizens DO NOT and may properly be charged negative interest in the public interest for their use of fiat.

Andrew Anderson said...

A monetary system is neither good nor bad intrinsically ... Tom Hickey

i.e. Polluting the Amazon with mercury and cyanide is neither good nor bad intrinsically ...

i.e. Enriching private interests via the taxation and authority power of government is neither ...

i.e. Allowing risk-free profits from money hoarding is neither ...

Having despised ethical considerations, it would be poetic justice for those who do so to worship shiny metals instead.

Tom Hickey said...

Having despised ethical considerations, it would be poetic justice for those who do so to worship shiny metals instead.

You should read up on the millennia long controversies in ethics and value theory to understand the debate in terms of the Western intellectual tradition.

The debate is inconclusive.

People disagree.

What seems obvious to one party doesn't to the other and vice versa.

This is what politics is about.

The winners get to chose. The losers get to suck it up until they get to be the winners.

Andrew Anderson said...

... no deposit insurance and anyone who puts their money into the bank is aware that the lot may vanish in an instant. This does not take into account the fact that private banks set up in this way can take down a national economy or, as in 2008, the world economy. Many of the banks that were bailed out in 2008 were exactly what you're proposing: private (investment) banks without deposit insurance. They may have been bailed out because of corruption and nepotism, but something like what was done was necessary (although the outcome could have been different: a rescue of the depositors so as to save the wider economy, but a liquidation the bank and resulting in total loss for the bondholders and shareholders): the balance sheets of far too many innocent industries, including pension funds ... John

1) Government privileges for private credit creation preclude ordinary saving and drive people into taking risks. Not that unlimited risk-free saving should go unpenalized but SOME saving is certainly desirable for initial capital formation, needed liquidity, and emergencies.

2) The monetary sovereign should provide decent pensions for all citizens so that losses in investment banks are not a tragedy but the mere loss of luxury and perks in one's old age or disability.

John said...

Andrew, quite right. That was an unspeakable blunder on my part to write that in the way I did and sow so much confusion. The only money you want available is state money, and the private banking system would use only that money. There would be no bank credit/money. But would this be the best solution in a state-only money system? Wouldn't a public system, or a private system running alongside a public system in the interests of choice, be a better system with state-only money? Your proposal is along the same lines as Positive Money's, and is also held and propounded by Martin Wolf, Adair Turner (I think), Frank Knight, Henry Simons, Milton Friedman, Laurence Kotlikoff and our own Ralph Musgrave. So you're certainly not in a minority when it comes to banking reform. Your probably in the majority camp.

The issue I have with this solution is that it leaves the private banking system alive, and from what we know a private banking system will always, no matter what restraints you put on it, escape and wreak havoc. There is no industry more ingeniously able to twist and distort laws and institutional arrangements into the exact opposite than the banking industry. That's my fear, and since the only thing the banking industry is incapable of twisting and distorting is death, my solution is death, and not because I hate private enterprise or anything like that. It's a question of kill or be killed. The private banking system is incapable of being anything other than what it is. It's in its very nature to be demonic. Your solution keeps them alive in some fashion, and, no matter how servile and pacific you think the beast has become, it is still a demonic beast and one that is addicted to the misery of the human race and the planet, not to put too fine a point on it.

As Tom points out. I support a more elastic and community-led money. This would be more economically beneficial. I don't think, however, that it would necessarily be more inflationary than even a metal-backed money. The most important thing I took away from Wray's "Understanding Modern Money" was that rather than causing inflation, a job guarantee may be the best way to restrain inflation. A public bank system would be more amenable to doing something about inflation than a private system whose only concern is making profits and is happy to inflate bubbles galore. Since asset bubbles serve no useful social or socioeconomic purpose, a public banking system would have every reason to ensure that this doesn't occur. I doubt whether it would even have to be institutionally obliged to bubble watch or desist from certain lending. A public system would be inherently anti-inflationary.

More than anything, I am prepared to experiment. I can't predict with certainty that my proposals are guaranteed to work, though I can't for the life of me see what's particularly unappealing about them. I am always prepared to admit that the world is a funny place and the contrary may in fact be true, so it's never a good idea to claim to have the solution. As Hyman Minsky wrote: "There is no final solution to the organizing of economic life". Although it's almost inconceivable, it's theoretically possible the Austrians could be right about everything and the Post-Keynesians and MMTers are wrong about everything. We need to have some humility and accept that things may not always be as they seem.

What we know from experience, however, is that the current system is as corrupt and crime-ridden as it is possible to be. Nevertheless, I'd be happy to let a thousand flowers bloom and see which works out best. What someone once said about capitalism is more true about the current banking arrangements, and so I hold my breath: I can more envision the end of the world than the end of private banking. I would add that one may cause the other.

Andrew Anderson said...

The only money you want available is state money, and the private banking system would use only that money. There would be no bank credit/money. John

100% private banks with 100% voluntary depositors should be able to create all the liabilities for fiat they dare and when they can't meet one - then ruthless foreclosure and a good laugh at their folly.

Andrew Anderson said...

However, by charging the banks negative interest on their reserves it's doubtful that banks would even desire to have depositors but instead serve as loan brokers between those who desire to lend and those who desire to borrow.

Negative interest on risk-free assets (i.e. the fiat and debt of a monetary sovereign) is ethical beyond reasonable exemptions for individual citizens and is a powerful concept with largely unexplored consequences, imo, such as with the balance of trade, limiting the power of banks and reversing wealth inequality is a just manner.

Matt Franko said...

“However, by charging the banks negative interest on their reserves it's doubtful that banks would even desire to have depositors“

Yo Reserve levels are set by the CB as policy...

Andrew Anderson said...

Central Banks have long espoused the value of negative interest as a policy option but have been stymied by the objection that the cost would be passed on to the captive depositors, including poor ones who should be saving risk-free, rather than increase their consumption or investing.

That objection goes away if all citizens, like they should be, are allowed FREE checking/debit accounts at the Central Bank itself that are negative-interest-free up to a reasonable limit on account size.