With e-cash, any degree of privacy is an option, with any percentage of the system being allowed to operate with cash-like privacy an option, run by any degree of public/private mix. Maintaining physical notes and coins is an option.Check out Clint's site. There are many articles on MMT there.
Public access to reserves combined with peer-to-peer giro payments, regardless of the privacy aspect, makes the payments function of banks redundant.
Direct access to reserve accounts makes the savings function of banks and 100% safe treasury securities redundant. Holding reserve accounts with banks is a design option. Calling bank-loans “reserves” is an option. (A good overview of some issues: The Case for Digital Legal Tender 2017.)
The only thing banks do that is not made redundant with CBDC and that the government generally does not do is underwrite private loans. (“Government Sponsored Enterprise” being a large exception; the “quasi” status of GSEs, as we will see, is problematic.)….
Clint Ballinger
CBDC: The Power and the Profit
CBDC: The Power and the Profit
15 comments:
An important point missed by Clint Ballinger is that CBDC, once it’s in place, calls into question the reasons for government standing behind privately issued money (which governments do via deposit insurance and bank bail outs). I.e. if people can have a totally safe account with the central bank, why should taxpayers stand behind private banks’ home made “funny money”: i.e. why should taxpayers rescue Wall Street banksters when they c*ck it up? And of course there aren’t any good reasons. I.e. once CBDC is in place, there is then no possible excuse for retaining fractional reserve banking – i.e. full reserve can be implemented.
Dozens of economists have advocated abandoning fractional reserve over the last century, but CBDC will probably the final nail in its coffin.
Yanis Varoufakis published an article recently saying much the same as my above two paras:
https://www.yanisvaroufakis.eu/2021/08/02/a-central-bank-cryptocurrency-to-democratise-money-project-syndicate-jordan-times/?fbclid=IwAR04fchS0g-OHwZ0-S8XLOya-QFEiHNyKAsWIa3K1AgQElN4c0RF-1FPtnI
My latest article on full and fractional reserve is here:
https://mpra.ub.uni-muenchen.de/108488/1/MPRA_paper_108488.pdf
"if people can have a totally safe account with the central bank, why should taxpayers stand behind private banks’ home made “funny money”
Because they are regulated lenders that can only lend in the manner dictated by the central bank. And the best test of whether central bank regulation is working is for the central bank to be 'in the bank', ie own most of the liability side of the balance sheet with only a regulated level of capital. That way the central bank takes a hit if the regulated lender fails to lend appropriately and that loss then has to be reported to the legislature.
100% private capital means lenders can lend whatever they like, and they turn into fancy pawnbrokers rather than focussing on the capital development of the economy. That causes misallocation and waste of real resources in the economy and an increase in risk, which means less is lent at a higher risk cost. Since the cost of credit is folded into the total cost of all goods and services, that is an economic inefficiency that can be eliminated by using regulated bank over wild-west banks.
Varioufakis thinks the EU is a good idea. Given he is deluded on that, it's hardly surprising he's deluded on other matters he doesn't fully understand.
Private banks are agents of the central bank. Their job is to lend against good physical collateral on demand for the furtherance of the capital development of the economy. It's time to accept that is their role.
Trying to turn back the clock and convert banks into 1950s style building societies won't help. You can't close pandora's box.
NeilW says that having taxpayers liable for private banks co*ck ups makes sense because those banks “….are regulated lenders that can only lend in the manner dictated by the central bank.” Well that’s begging the question.
I.e. it’s obvious that banks at present lend to some extent in line with CB regulations, but the CRUCIAL question is whether that system makes sense, or whether it wouldn’t be better to let banks do what all other corporations are allowed to do: i.e. do absolutely anything, long as it isn't clearly illegal. And as for safety of depositors’ money, depositors can put their money in accounts which (as per full reserve) are 100% backed by reserves at the CB). I back the latter system.
Neil W then says “100% private capital means lenders can lend whatever they like, and they turn into fancy pawnbrokers rather than focussing on the capital development of the economy.” I assume he’s referring to the fact that under full reserve, loans are 100% funded via equity.
Well there’s a teensy problem with the idea that there’d be some sort of “fancy pawn broker” disaster, which is that mutual funds and private pension funds are 100% funded via equity: i.e. if those funds make silly loans or investments, those with stakes in the fund lose out, just like equity holders in a corporation which c*cks it up lose out. If the hundreds of billions invested by those funds are some sort of “fancy pawn broker” disaster, that’s news to me and everyone else.
And finally NeilW claims that because Varoufakis backs the European Union, he must be “deluded on other matters”. Given that about half the population of the EU backs the EU do we take it that half the population of the EU are round the twist?
LOL the only time there are “banking crises” is when the CB adds too many reserve assets too fast and the banks have to cease providing credit…
“ The idea of operating it with only reserves”
Clint thinks Accounting abstractions are real…
It’s just the name given to LHS entry at the Depositories when CB purchases financial assets…
"If the hundreds of billions invested by those funds are some sort of “fancy pawn broker” disaster, that’s news to me and everyone else."
Come on Ralph. You know that pension funds have to hold liquid assets to fund pensions in payment. That's why indexed linked Gilts exist. And pension funds and insurance funds don't invest like banks. They purchase equity that already exists from others. It's too risky to do otherwise..
Banks do a different job to investment banks and investment funds, using a completely different instrument - the loan secured against physical collateral.
There's very little point turning banks into investment funds. We already have investment funds and they don't drive the capital development of the economy either.
State backed banks should fill that liquidity gap. Obviously 0% liabilities lead to cheaper loans than anything else. Since the limit is discountable physical collateral prepared to be put in play, why not offer cheap liquidity against it. That ensure the maximum amount of transactions that can take place will take place, and regulation ensures that what is discounted is sensible and for sensible reasons.
"Given that about half the population of the EU backs the EU do we take it that half the population of the EU are round the twist?" Pretty much. They also tend to wander around in masks too, which is useful as you can then avoid wasting your time trying to reason with them. You should never have a country guided by the gullible who believe what they are told.
Ralph: It seems you skimmed over the very first lines of the article! Not only did I not miss it- it is the very first thing I say :) It says "Public access to reserves combined with peer-to-peer giro payments, regardless of the privacy aspect, makes the payments function of banks redundant.
Direct access to reserve accounts makes the savings function of banks and 100% safe treasury securities redundant. Holding reserve accounts with banks is a design option."
Then the article goes on to discuss precisely what you mention- why the government should "stand" behind the key function of banks (lending). (Then it discusses the government saving system.)
Neil -
Can you expand on this?
"Banks do a different job to investment banks and investment funds, using a completely different instrument - the loan secured against physical collateral.
We already have investment funds and they don't drive the capital development of the economy either."
Not disagreeing- just would like more detail from you :)
Banks do provide some unsecured business loans; do you consider it negligible or...?
On investment funds- do you see any role by them in capital development? Any benefits at all?
"Banks do provide some unsecured business loans"
Banks 'unsecured' business loans are usually secured in disguise - likely by debenture or personal guarantee. Banks love personal guarantees that get around limited liability and normally insist on them anyway unless you are big enough to have banks coming to you rather that you going to them.
Venture funds have roles in capital development, however those are highly specialist investment structures.
Pension funds and insurance funds are usually 'out' mechanisms for investments that have succeeded - either via float or trade sale. They influence capital investment via back pressure - those doing initial investment need to know there is an 'out' somewhere down the line.
The job of a bank is different. It is to provide liquidity against illiquid assets the business holds - such as funding inventory or buildings - and avoid cash flow crunches. Systemically it is inefficient to try and do that via equity. Ideally you want all businesses running their liquidity on an overdraft.
The fact that NeilW thinks full reserve equals or is similar to old style UK building societies shows he has no idea what full reserve consists of. Building societies accepted deposits and loaned out money to mortgagors. That is EXACTLY WHAT banks are not allowed to do under full reserve. Or to be more exact, they are not allowed to accept deposits in the sense of "we guarantee depositors they'll get £X back for every £X deposited" while also lending to mortgagors, firms, etc.
There is a VERY GOOD reason for banning that practice, namely that loaned out money is never entirely safe, ergo associated deposits cannot be totally safe, ergo the latter promise is fraudulent. Under full reserve, depositors can go for totally safe deposits, in which case their money is simply lodged at the central bank or put into short term gov debt. Alternatively they can have their money loaned out to mortgagors, corporations etc or invested in shares, in which case they have to foot the bill for any resultant losses.
Moreover, Neil Wilson will be devastated to learn that the US mutual fund industry has been forced to switch to full reserve: i.e. those putting money into those funds must choose between the latter two alternatives. Far as I know the sky has not fallen in as a result.
Neil Wilson’s claim that “indexed linked Gilts exist” specifically to enable “pension funds to have liquid assets to fund pensions…” is straight out of la-la land.
Index linked government bonds were introduced because they are obviously an attractive option for MANY TYPES OF saver/investor, not just pension funds. Moreover, a pension fund would need to have complete idiots running it if it couldn’t work out how to have enough cash to hand to pay next month’s pensions absent index linked bonds: all they need do is sell enough investments one week or month to make sure they have enough cash to pay pensions next week or month. Makes no difference whether those investments are index linked or not.
NeilW, Thanks for pointing out that “Banks do a different job to investment banks and investment funds”. Like almost everyone else, I am actually aware of that. However, there is a SIMILARITY (in the situation where bank loans are 100% funded via equity, which is what we are discussing here) namely that both are 100% funded via equity (to make a statement of the obvious).
Ergo if your claim that “100% private capital means lenders can lend whatever they like, and they turn into fancy pawnbrokers..” is correct, then that will apply to both banks and mutual funds!!!!
I am much amused by Neil Wilson’s claim that under the existing bank system, banks concentrate on “capital development of the economy”. Given the large proportion of bank loans that enable people to purchase existing houses compared to the amount banks lend to small and medium size firms, I have doubts about that “capital development” theory.
However, I don’t actually object to loans to purchase existing houses: far as I’m concerned, banks should be allowed to lend to whoever they want, i.e. whoever looks like being credit worthy.
"Building societies accepted deposits and loaned out money to mortgagors. "
Traditional Building Societies sell what is known as "Paid up Shares". Those are liabilities that are not transferrable except by being encashed at the desk. Hence why there were no payment facilities on them, and restricted daily withdrawals.
They are specifically not deposits in the way bank deposits are. Therefore a traditional building society worked on a full reserve basis with a cash buffer. Then the Halifax bought a computer, employed Chalkie to write a management system, and they worked around the alleged restrictions using clever monetary dynamics. The rest, as they say, is history - with Halifax becoming the biggest building society in the world because it could lend when others, with more static beliefs, couldn't.
The myth of full reserve has been debunked many times. In fact it is debunked every day since the 'full funding' regime of HM government is an attempt at full reserve. And as we've seen over the past year that hasn't restricted access to colossal sums of money one little bit.
The dynamics are easily worked around. As those who have worked in such an environment are well aware. It's another one of those interest rate manipulation ideas that should be left in the 1930s. It doesn't work. And it can't work.
Just like all other interest rate and volume restricting ideas. Financial people are just too clever.
Even regulating what banks can lend upon can only really be done by making certain loans unenforceable in a court, and only certain types guaranteed to be acceptable to a court. Then standard risk management does the trick.
"Index linked government bonds were introduced because they are obviously an attractive option for MANY TYPES OF saver/investor, not just pension funds."
"In the 1981 Budget, Chancellor Geoffrey Howe announced the first issuance of index-linked gilts (that is, government securities adjusted in line with movements in inflation), which were eligible for purchase by UK pension and life assurance companies."
http://oro.open.ac.uk/60077/8/60077.pdf
Pension Funds are big bidders now because they cover the mismatch between defined benefit liabilities and the income from assets and contributions.
Pension Funds are funded from contributions and income from investments, not generally by selling assets. The assets are 'sold' internally between pensions that are in accumulation phase and those in payment.
"The natural buyer of index linked gilts is a large pension fund, the trustees of whom need to match long-term index-linked liabilities. Such investors are prepared to give up a degree of performance in the security in return for a government-guaranteed hedge against inflation."
https://www.fixedincomeinvestor.co.uk/x/learnaboutbonds.html?id=206
There is a reason the redemption yield on linkers is negative.
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