John Redwood (of all people) has been fooled by banksters.

I do like the first comment after this post by John Redwood, the Conservative politician. The comment points to the various crimes committed by banks. JR then replies “If a bank has committed the kind of errors you allege then these need to be reported with evidence to the authorities. Unless and until this bad conduct is established with evidence the banks are not guilty.”

Errors? Excuse me. We’re talking about CRIMES here. And anyone who goes on about a “need to report” crimes is years out of date. For the benefit of John Redwood and other delusional politicians, banks HAVE BEEN FOUND GUILTY!!  Lloyds alone is having to fork out about £2bn for PPI. HSBC has been fined $2bn in the US for money laundering. And J.P.Morgan has been fined TEN TIMES that figure.

But of course when the heads of those criminal organisations turn up on Capitol Hill or the House of Commons, politicians are all smiles. As Simon Johnson, former chief economist at the IMF put it recently, “Politicians continue to defer to the supposed wisdom of these individuals.”

And John Redwood is one of the few British politicians with a brain. So the rest must be pushover for bankers.  

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P.S. (4^th Feb). In case anyone is wondering why I didn’t answer John Redwood’s points on his own blog, the answer is that he is very reluctant to publish anything that suggests that politicians like himself hob nob with big time white collar criminals, and that politicians like himself have been suckered by those criminals.

 

Credit creation by commercial banks should be banned.

The phrase “credit creation” is NOT used here to refer to one of the services performed by commercial banks, namely intermediating between borrowers and lenders. The phrase refers to something else that the commercial bank system does, namely the creation of what is essentially new money out of thin air (much in the same way as central banks do).

That is, the commercial bank system can and does extend loans even where there is so to speak no depositors’ money in the piggy bank to “intermediate”. Those loans of course quickly end up as deposits.

The reason why the latter practice is undesirable is as follows.

A simple economy.

Assume a simple economy where there is a central bank (CB) but no commercial banks. I.e. everyone banks at the CB.

The CB issues just enough fiat money to induce households, firms, etc to spend at a rate that brings full employment.

Households, firms, etc lend direct to each other, as in the real world, and the going rate for a near risk free loan is X%. Plus the central bank lends, i.e. “intermediates”.  And to keep things simple, let’s ignore the CB’s administration costs, plus we’ll assume the CB makes no profit. Those assumptions are relaxed later.

The above assumptions on costs and profit would mean the CB also charges X% for near risk free loans. Plus anyone depositing money for a significant period in a term account at the CB would get X%.

Obviously there’s a spread (above X%) for riskier loans, as in the real world.

The $64k question.

Now for the big question: is there any reason to suppose the above scenario would not lead to an optimum allocation of resources? Put another way, is there any reason to suppose GDP is not being maximised? Not that I can see.

Commercial banks enter the stage.

Then commercial banks enter the stage. We’ll assume commercial banks also have zero administration costs.

Now comes a crucial and very important point: a commercial bank and those it lends to do not need to obtain a commercial return on capital, that is X% for a near risk free investment. In fact any return above zero will do. A commercial bank can simply produce money from thin air and lend it out. Of course that money is liable to be deposited at other commercial banks, which means the first commercial bank is indebted to the other commercial banks.

But let’s assume that each commercial bank extends loans in proportion to its size. That would mean that no commercial bank becomes indebted to any other.

The net effect is that money is being created and loaned out at below the optimum X% rate. Or as Huber and Robertson in their work“Creating New Money” put it, “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.”

However, Huber and Robertson seem to miss the point that competitive forces would sooner or later whittle away that “special profit”, with the result that borrowers would get loans at below X%.

Inflation.

Moreover, the extra demand stemming from spending that “below optimum” money would be inflationary.

Indeed George Selgin describes the latter inflationary process: introducing commercial banks to a hypothetical economy where there is initially just a CB. That’s in an articleentitled “Is Fractional-Reserve Banking Inflationary?” He comes the same conclusion, namely that the effect is inflationary, at least initially.

He actually argues that that inflation ceases when commercial banks have reduced the real value of the monetary base to just enough to enable them to settle up between themselves. Personally I don’t agree: reason is that commercial banks do not need base money to settle up. They can and do use anything: property, shares, jewellery, bonds, you name it to settle up. Thus it strikes me that an economy dominated by commercial banks would suffer constant and excess inflation. But that’s a minor technical disagreement between me and Selgin.

To summarise so far, the introduction of commercial banks means, first that lending and borrowing takes place at a below optimum rate, and second, inflation ensues. In fact (and relaxing the assumption about banks having zero costs and making no profit) commercial banks will lend at rate that just covers administration costs and gives the bank a commercial return on capital. And as to the inflation caused by that, why should commercial banks or those to whom they lend care? Inflation suits borrowers down to the ground.

Now the scenario set out above (loans at below the optimum X% rate and inflation) doesn’t sound to me like an optimum allocation of resources: i.e. it’s hard to argue that GDP will be maximised in that scenario.

Why no hyperinflation in the 1800s?

Having claimed that commercial banking has inflation written into it, it’s legitimate to ask why there was no hyperinflation in the 1800s and earlier. Simple: the gold standard. And since abandonment of the gold standard, governments and CBs have had a difficult job controlling inflation.

The real world.

Anyway, let’s be generous to the obviously defective commercial bank system and consider whether, having introduced commercial banks and having government and CBs attempt to control the resulting inflation, the net result is something better than the “CB only” scenario with which we started above.

CBs and governments control inflation by using legal means to make the state’s money (base money) the dominant form of money. That is, the law states for example that taxes can only be paid in base money, and base money is the only form of legal tender.

That means that a commercial bank issuing units that it claims to be worth a dollar each or a pound each has to ensure that they actually trade for par with CB money: that is, anyone with a hundred units of “Barclays bank money” can swap it at any time for CB money (e.g. in the form of physical cash).

That means CBs and governments can control inflation by limiting the supply of CB money.

But wait a moment . . . That’s exactly what they’d do in the “CB only” scenario we started with above. So letting commercial banks issue money is one big farce.

In effect it simply amounts to the CB letting commercial banks in on the money creation business, a privilege which commercial banks abuse (offering loans at a sub-optimum rate plus tending to cause inflation). Then the CB and government have to try to minimise those harmful effects by doing what they’d do anyway: limit the supply of CB money.

It’s a farce.

The commercial bank money creation process is in check mate.

Mark Weisbrot is clueless on Europe.

This article by Weisbrot has attracted attention, e.g. here and here. So let’s run thru Weisbrot’s article and see what it has to offer.

Weisbrot claims that allegedly wicked EZ “policy-makers” are trying to move Europe “as far as politically possible away from its social-democratic underpinnings” and in a “neo-liberal” direction.

Well “neo-liberalism” is bad, bad, bad in the eyes of all respectable lefties, so Weisbrot has pressed the right emotional button there. But what’s his evidence for thinking that “policy-makers” have the above agenda?

Well in the paragraph starting “It was not because…” he argues that when the ECB bought periphery bonds in volume, that “put an end to these crises in a matter of weeks”. And that fact, so he seems to argue, demonstrates that those wicked neo-liberal impositions on the periphery were unnecessary. (At least I think that’s what he’s arguing: though I’m not entirely clear, and he certainly isn't.)

But later in the article, he seems to claim that those wicked policy-makers are still trying to impose their neo-liberal agenda. And indeed that would be a logical thing for those policy-makers to do: I mean if you’re ideologically committed (neo-liberal or anything else) you don’t give up trying to impose your ideas just because you’ve found something that reduces the immediate need to impose those ideas.

Moreover, it’s a bit odd that those wicked “policy-makers” weren’t imposing their neo-liberal ideas before the recent crisis isn't it? I mean, I long to know when those policy-makers had their damascene conversion to neo-liberalism. Weisebrot doesn’t tell us, and for the very obvious reason that there WAS NO SUCH sudden conversion. That is, policy makers are imposing harsh conditions on the periphery not because they’ve been converted to neo-liberalism, but because due to the very nature of a common currency like the Euro, they haven’t much alternative to imposing harsh conditions.

Anyway, Weisbrot’s next bit of evidence for a neo-liberal plot is that IMF prescriptions for the periphery are neo-liberal in nature. True, they are. But that’s because the IMF is 100%, totally and completely clueless, as pointed out dozens of times by advocates of Modern Monetary Theory, e.g. Bill Mitchell.

That is, and to illustrate, the IMF adheres to the sort of economic howlers that the average politician adheres to, for example that a way of reducing a deficit is to cut public spending or increase taxes. And I’m 99% sure that the reason the latter point is a howler will be beyond Weisbrot’s comprehension.

Weisbrot then ends his article by saying in effect, “wouldn’t it be nice if Europe as a whole provided substantial assistance for the periphery so as to increase employment and raise living standards there?”

Absolute genius! Does Weisbrot seriously think no one has thought of that? The monster problem with that idea is that it amounts to saying German taxpayers should fork out even more for the periphery. Well German taxpayers just aren’t going to are they? So forget it.

But even if German taxpayers were generous to the same extent as US taxpayers are generous towards poorer areas in the US, or UK taxpayers are generous towards poorer areas in the UK, there is a limit to how much inefficiency in poor areas that the US or UK put up with. Likewise, if Germany WERE MORE generous towards the Euro periphery, it would doubtless still be putting pressure on the periphery to get its act together – or impose “neo-liberal” dogma on the periphery, if you want emotive, left of centre phraseology.

Mark Weisbrot is co-director, with Dean Baker, of the Center for Economic and Policy Research in Washington, D.C. I have a huge amount of respect of Dean Baker, and very little for Mark Weisbrot.

International cooperation on QE?

Frances Coppolaand Raghuram Rajanwant international cooperation on QE because of the destabilising effect that QE has on developing countries.

False logic there, I suggest.

The problems caused in developing countries by QE and its tapering or unwinding does not demonstrate a need for international cooperation: it demonstrates the flaws in QE and the merits in the form of stimulus advocated (I think) by most MMTers and Positive Money: that’s simply creating  fiat money and spending it (and/or cutting taxes).

QE shovels money into the pockets of the asset rich or investors. Their obvious response is to seek yield anywhere in the world, hence the flows of hot money into or out of developing countries. In contrast, if fiat money is simply created and paid to say pensioners, or spent on infrastructure or education etc within a given country instead of implementing QE, most of that money stays within that country. Same applies if the new fiat money is distributed via tax cuts for the average household in the relevant country.

Moreover, if QE really is a sensible way of implementing stimulus, the mind boggles at exactly what the above “cooperation” would consist of. E.g. country X wants to do QE, but country Y objects because it doesn’t need stimulus. Now what’s country X supposed to do: abstain from stimulus and endure excess unemployment?

Of course you COULD implement capital controls, but that involves bureaucracy, and the idea that bureaucrats are good judges of what capital investments make sense is a joke.