Ever since Martin Wolf recently put in a good word for full reserve banking, numerous self-appointed experts have come out of the woodwork to attack the idea: unfortunately most of them have little idea as to what full reserve banking actually consists of.
This Daily Telegraph article by Jeremy Warner is the latest example. His attempt to defend the existing banking system is a hoot. Of course the Telegraph is not exactly an intellectual’s newspaper: it’s a stout defender of the status quo and the conventional wisdom. Anyway, let’s run thru the article.
In his second paragraph, Warner says that what banks have done is “verging on the fraudulent”. Verging? OMG: banks have actually been found guilty of out and out fraud and on a HUGE scale. For example in the UK they tried to defraud their customers out of billions via the infamous “Payment Protection Insurance” scam. While in the US, J.P.Morgan has been fined £20bn (yes billion not million) for various crimes including laundering Mexican drug money. And other banks have been fined similar sums for the same and similar offences. And then there was Libor manipulation.
And Warner says “verging on the fraudulent”. Who does he think he’s fooling? Ah yes: Telegraph readers.
Warner the Luddite.
Later, in Warner’s second paragraph, he claims that banks were “mere conduits for much wider causes, in particular the propensity of Western governments to compensate for the jobs and wage growth being lost to technology….”. Wait a moment: the idea that machinery or improved machinery or technology destroys jobs is the old Luddite argument. I thought we disposed of that one about two centuries ago. But evidently Telegraph journalists still cling to the idea.
The transition to full reserve.
Next, Warner claims that full reserve banking is highly unlikely to be implemented because the “the transitional challenges would be too great”. Well Milton Friedman thought the “transitional challenges” would be a doddle. His actual words were: “There is no technical problem in achieving a transition from our present system to100% reserves easily, fairly speedily, and without any serious repercussions on financial or economic markets.” (That’s from Friedman’s book, “A Program for Monetary Stability”).
In view of the fact that Warner’s claim there conflicts with one of the world’s all time greatest economists, it would be nice if Warner went into the above point in more detail. But I doubt he’ll bother.
Probably the reason Warner thinks the “transition” would be a challenge is that he has not studied the subject: in particular, the only advocates of full reserve that he cites are Messers Benes and Kumhoff, the authors of an IMF paper on the subject. As I myself pointed out, that IMF paper is a long, complicated and not a brilliant piece of work.
The man of straw argument.
Next, Warner says full reserve advocates claim: “The iniquities of the credit cycle are abolished, governments become the only source of money creation, and the politicians can print money to their hearts’ content to wipe out public debt, pay for healthcare, fund infrastructure and all the other worthy public causes that private bankers are reluctant to finance.”
Yes, and Jeremy Warner thinks the Earth is flat, the Sun revolves round the Earth and two plus two makes five. Any old clot can attribute obviously daft ideas to others.
The boom-bust cycle.
And finally, Warner the clot claims “…it takes quite a leap to think governments likely to be better at monetary management than markets.” Well now that point has actually also been made by other opponents of full reserve and Warner’s point there contains a whapping great self-contradiction as follows.
The “monetary management” to which Warner refers aims (amongst other things) to control or ameliorate the boom-bust cycle. That is, full reservers like Positive Money advocate that during a recession or “bust”, government and central bank (GCB) should create and spend extra money into the economy. And conversely, during an inflationary boom they should do the opposite, namely withdraw money from the economy.
But Jeremy Warner himself (like 95% of economists) has no big objections to GCB trying to tone down the boom-bust cycle, e.g. by adjusting interest rates, fiscal stimulus, etc. But as soon as full reservers advocate that GCB try to tone down the cycle, Warner &Co object.
Even more hilarious is the fact that over the last two or three years, governments have ACTUALLY IMPLEMENTED exactly the anti cyclical policy advocated by full reservers. That is, governments have implemented fiscal stimulus and followed that by QE. And that of course comes to exactly the same thing as the “print and spend” policy advocated by full reservers (and indeed advocated by Keynes).