Saturday, January 8, 2011

This is better than Dennis Kucinich’s bill.

Positive Money’s ideas on bank reform are better than Dennis Kucinich’s.

Positive Money’s only mistake is that they make a concession to their opponents they don’t need to make. That is, they suggest their proposals will lead to a reduced bank lending – and the suggestion (implicit rather than explicit) seems to be that this is a weakness in their proposals. I beg to differ for the following reasons.

1. Bank assets and liabilities have increased by a staggering amount in the last 30 years (by a factor of around ten, relative to GDP, I seem to remember). This has brought with it some lending which is clearly on a massive and irresponsible scale, e.g. NINJA mortgages. Thus any idea that a reduction in bank lending is necessarily harmful is positively hilarious.

Put another way, the size of the role that banks play in an economy is very variable for given GDP.

One knee jerk reaction to the idea that we have higher interest rates and less lending is the fewer poor people will be able to buy their own houses. My answer to that is that while having a roof over one’s head is a basic human right, actually owning a house is not. Indeed, the WEALTHIEST country in Europe (Germany) has the LOWEST rate of owner occupation!!!!

2. Positive Money’s suggestion that all bank accounts be split into two two types, “transaction” and “savings” is good, but the idea that 20% of savings accounts can then be withdraw more or less instantaneously is a mess. That 20% effectively then becomes “transaction money”. So I suggest just keep clean and simple: transaction accounts and savings accounts, and leave it at that.

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