The FT ran a report on Monday that said:
Non-bank lenders have overtaken US banks to grab a record slice of government-backed mortgages, after regulatory curbs on risk-taking and billions of dollars in fines forced mainstream providers to retreat from the $9.8tn home loan market.
So-called shadow banks such as Quicken Loans, PHH and loanDepot.com accounted for 53 per cent of government-backed mortgages originated in April – almost double their share in April 2013.
They explained as follows:
Shadow banks perform banklike functions such as lending but are subject to lighter supervision because they are funded by professional investors rather than retail depositors protected by government insurance schemes.
This is deeply worrying. As a new Working Paper for the Bank of England, published in the last few days, has shown the idea that banks are intermediaries between savers and borrowers is just wrong, in which case the idea that some banks are funded by retail depositors and others by professional investors is also just wrong. As the Bank of England paper says (my emphasis added):
In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.
In other words, the whole model of bank intermediation on which the UDS regulatory model is based is wrong: there is no such thing as intermediary banking. In the real world all bank loans are created out of thin air and are dependent upon there being confidence that the bank will be able to meet its obligation to others when call is made upon the funds created in the course of this process.
Official recognition of this reality, which some of us have talked about for a long time, has been slow in coming, and was only officially recognised by the Bank of England in 2014. It is high time that regulators caught up with it: regulation based on a completely false model of how banks work can never be effective. But, the sting is also in the tail of the above comment from the Bank of England working paper: the reality is that a true understanding of our banking model shows just how vulnerable it is there any loss of confidence because there is nothing else that backs it. If confidence disappears money can vaporise remarkably quickly, as we saw in 2008.
Positive Money suggest that the appropriate response to this is to remove bank's capacity to create money, and to transfer it entirely to the Bank of England. I am aware that this has quite a lot of positive support amongst left of centre think tanks, but I have my reservations, as does Ann Pettifor. No one who reads this blog can doubt that I believe the state has an enormous capacity to do good work on behalf of the people of the UK, but I also think that there are many occasions when this must be undertaken through positive partnerships with business. What I mean by a positive partnership is one in which each party recognises the importance of their role, and respect that of the other, and works together as a consequence to achieve a common goal.
In the case of money creation it is my belief that this requires the recognition that all money creation is, effectively, the responsibility of the state, which is the only authority with the eventual legal and practical capacity to define the legal tender of a jurisdiction. However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy. This means that I do not think the total money supply can be rationed by a central committee which is a proposal at the core of Positive Money's suggestions. The right to lend does, instead, have to be given to banks but be subject considerably more direct regulation than at present where such blunt, and ineffective, instruments as interest rates are used in a vague attempt to regulate the process with some of the disastrous outcomes that we have seen in the past.
I admit that it amazes me that the Bank of England's recognition that bank intermediation does not exist has not, already, given rise to such suggestions which are the obvious consequence of that realisation. I can only presume that the reality of banking has yet to permeate the Treasury. It is high time that they did because until action on this issue is taken the risk that we face in the next financial crisis (which on balance of probabilities must happen within the next few years) will be greatly increased.
When that understanding is matched by the correct awareness that tax is not about revenue raising, but is in fact the process of reclaiming the money that the government has created and spent into the economy we will also be in a considerably better place. After all, the processes are linked: just as we got almost everything about banking wrong by thinking that banks lent other people's money when in fact they create all the money they lend out of thin air, so have we got taxation wrong. Precisely because the government is, and always has been, the effective banker of last resort and creator of the national currency it has always had the ability to spend before it is had revenue precisely because money can be created out of thin air, and it has the power to do that. Taxation is, then, as Modern Monetary Theory suggests, the process of reclaiming money from the national economy for three fundamental reasons.
The first is to prevent inflation from excess money printing.
The second is to validate the national currency by requiring that tax be settled using it. This does, of course, give the government effective control of its domestic economy which could otherwise use any currency it so chose.
Thirdly, the aim is to regulate the economy: by withdrawing more or less money from the economy than the government has spent fiscal control is achieved.
It is about time that these realities are understood, and respected. Precisely because they are not we have the absurd situation that at present it is supposedly illegal for a central bank to lend to a government under EU law, even though such loans have always been the basis of the effective functioning of any national economy. It is true that the quantitative easing process seeks to get round this constraint, but only by forced use of an intermediation process which is wholly artificial, and unnecessary, and which is solely designed to benefit the banking system, unjustly.
It really is time that new economic understanding informed the management of our economy: then we might have a chance of making real progress.
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I was a keen advocate of PM when I first read about the campaign, going so far as to sign the various petitions and wrote a letter to my MP when the Money Creation debate was due in the HoC. I’ve since, however, changed my mind somewhat after reading more about economics and banking, particularly in Bill Mitchell’s blog on MMT!
The worrying thing about the misunderstanding on banking, tax and money creation is it has given the Government free reign to engage in a destructive austerity campaign designed to shrink the state, right when the economy needs more, not less, government intervention and spending, especially in the areas where the strongest attacks are taking place (social security, health and education). It’s notable that corporate welfare remains virtually untouched in this time of austerity…
Yep me too. Been there, done that, moved on.
PM are well meaning, but way too simplistic vs MMT and the likes of Ann Pettifor on this.
This Dirk Bezemer quote (via Yves Smith) is spot on…
“A quarter of GDP runs on trade credit. Much of the rest is car loans, students loans, supermarket credit, … If official money is constrained the public invents new forms. Neither central banks nor commercial banks control the money quantity. Effective “100%” money would require additional regulation to stop and strangle all that. But even in the USSR that was not possible — the was a huge grey economy. It would be a regulator’s nightmare.
Also, how would 100% reserves work? The central bank must provide reserves on demand if the system is short, unless it is happy to see interbank rates shoot to infinity. So the market leads reserves, not the other way round. Positive Money say the central bank would determinine quantity but the market would determine allocation. The distinction is a fallacy. If the market sends 90% of it to mortgages, is the central bank going to sit on its hand and let nonfiancial business starve of credit? Of course not. So again, market allocation leads the central bank to provide funds.
Positive Money promotes a fantasy.”
http://www.nakedcapitalism.com/2014/06/randy-wray-rise-monetary-cranks-fixing-aint-broke.html
My fear is that running money on the lines of a central tractor factory is not going to work
PM have spotted the issue
The solution is wrong
Dirk’s piece is full of errors and hyperbole.
Dirk: “A quarter of GDP runs on trade credit.”
Almost none of which involves money creation by banks. Banks do have a role in underwriting some trade credit, but there’s no reason why this requires newly created money. If underwriting trade credit is profitable (which it is) there is plenty of existing funding out there that can finance this activity.
Dirk: “Much of the rest is car loans, students loans, supermarket credit, … If official money is constrained the public invents new forms.”
Why would ‘official’ money be constrained? The point is not to constrain money creation, but have it done by the state rather than by private banks, and to direct it towards the real economy rather than property bubbles. And the idea that, if bank lending for mortgages is constrained, the public will invent a new form of money and house sellers will accept this new form of (unguaranteed) money is completely unrealistic.
Dirk: “Also, how would 100% reserves work?”
Is it too much to ask people to read the proposals before they write the critique?
Dirk: “The central bank must provide reserves on demand if the system is short, unless it is happy to see interbank rates shoot to infinity. So the market leads reserves, not the other way round. Positive Money say the central bank would determinine quantity but the market would determine allocation. The distinction is a fallacy. If the market sends 90% of it to mortgages, is the central bank going to sit on its hand and let nonfiancial business starve of credit? Of course not. So again, market allocation leads the central bank to provide funds.”
The central bank wouldn’t be trying to limit the money supply at a set number. It’s working to achieve a monetary policy target (probably inflation of two percent, if it’s following the status quo). So if it has to create more money to allow that to take place, then that’s part of the process, not a case of losing control. And if the market (i.e. banks) does direct 90% of credit to mortgages, that requires other forms of regulation (as Richard suggests above).
Ben
Sorry, if you do not understand that trade credit is credit, not banking, and is not subject to credit charge, you’re not even on the page
But it is capable of replacing money creation if banks had that role taken from them – because anyone can create credit, which is the point you ignore
And by taking that function from banks – as the intermediation process you propose does – you open the possibility to a much wider credit creation base that may be impossible to regulate
I’d rather regulate banks, thanks
And banks we must have – and not intermediaries whose limitations Dirk accurately describes – because they can only lend what they are given. And that’s the flaw in the PM argument
The fact is if we don’t have banks people will reinvent them. You ignore that and that’s the flaw in your case
Richard – I’m well aware of what trade credit is. I was highlighting the point that trade credit does not involve money creation by banks, and if occasionally banks are involved in facilitating the provision of trade credit by say, discounting invoices, then that activity can be done just as easily by firms that use pre-existing money.
Regarding the statement “anyone can create credit” – sure, any entity with a balance sheet that can issue liabilities on itself can create credit. But it’s a bigger challenge to turn that credit into a means of payment. Try to get people to exchange it 1:1 for cash (as happens with bank deposits) without any discount or haircut. Or to use it to pay their rent or buy a house. The reality is that only a very small amount of ‘credit’ i.e. the form of credit that exists as liabilities on the balance sheets of banks – functions as money. So the general statement that “anyone can create credit” says nothing of any real significance.
And following on from the point, the argument that “if you ban banks, they’ll be re-invented elsewhere” is an assertion that keeps coming up. For the reasons I mentioned above, it’s harder than you’d think. We’ve been doing some work on this, and on the risk of money creation taking place in the shadow banking sector, but there’s still some more work to do. But we haven’t ignored that risk.
Incidentally, to the extent that this argument holds, it applies equally to the regulation that you’re hoping for. If the regulation is successful in constraining a certain activity, that activity moves outside the regulation.
Anyway, we can agree to disagree.
But the point you won’t answer Ben is that you are abolishing banks
You can’t say you will keep them when all you will allow are intermediaries – and intermediaries are not banks
That is the problem with your proposal and the issue you are not answering
Well said Richard.
Don’t know if you caught Bill Mitchell’s critique of Positive Money too?…
http://bilbo.economicoutlook.net/blog/?p=30827
Bill is good
Recommended
All I see is a ruse to ensure that only private banks get to create money in the form of debt for which people will be forced to pay handsomely through interest rates. In other words, the creation of sovereign fiat money is being used by the private sector to make loads of money for themselves as it it released into the economy.
It also means that a lot of this money goes into the creation of yet more loans for property and also helps to ensure the ongoing highly inflated values for homes – feeding more hot loan capacity into the housing hot air balloon to keep it floating.
The result of this is less money being spent in other areas of the economy – such investment in cancer treatments or the NHS or other innovations and small businesses.
It is a total misappropriation of the money supply in my view by the markets.
Meanwhile the Governemnt is not meant to get its hands on any new money and is also going to be constrained by the creation of lower taxes and increases in tax avoidance. Unless of course it is called upon to bail out the banks – again.
Check out Warren Mosler and his 7 Deadly Economic Sins.
Mark,
Agree on private banks fuelling speculation (e.g. property booms), whilst not supporting solid investment in industry etc.
However creating “money in the form of debt” is not in itself a bad thing. In fact that portrayal is only half the story: under the skin ‘money’ is just an IOU, which, by definition, makes it BOTH a debt (of the issuer – the ‘IO’ bit) and a credit (of the recipient – the ‘OU’ bit).
There is also nothing inherently bad about banks charging (a reasonable) interest for the service they provide.
Yes the banks need reforming, but at heart they provide society with a really valuable service. See this from leading MMTer Randy Wray on ‘fixing what aint broke’…
http://www.nakedcapitalism.com/2014/06/randy-wray-rise-monetary-cranks-fixing-aint-broke.html
This is my point
We do need banks
Getting rid of them as PM suggests, by making them intermediaries, denies reality and need
I heard on Radio 4 this morning that the OECD(?) have ‘warned’ Osbourne to think again about further cuts to benefits because of the impact it will have on the poor.
£12 billion less money in the economy will surely help economic activity stall.
Will he listen?
God, I hope so.
See blog just out….
Hi Richard,
I’m confused by a few of the points you made about Positive Money’s proposals here.
“RM: In the case of money creation it is my belief that this requires the recognition that all money creation is, effectively, the responsibility of the state, which is the only authority with the eventual legal and practical capacity to define the legal tender of a jurisdiction.”
We agree on this point.
RM: “However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy.”
In the Positive Money proposals decision-making on loan creation remains with the banks, so we’ve already recognised this point. If you think that we’re suggesting the central bank will be deciding who will be making the lending decisions, then please take the time to read the actual proposal…
It’s perfectly possible to separate the process of issuing loans from the process of creating money, which is what the PM proposals do. (I don’t really understand why people have difficulty understanding this point. There are plenty of financial firms that make loans without creating money; it’s only banks that have this special ability to create money, whilst being underwritten by the state.)
RM: “This means that I do not think the total money supply can be rationed by a central committee which is a proposal at the core of Positive Money’s suggestions. The right to lend does, instead, have to be given to banks but be subject considerably more direct regulation than at present where such blunt, and ineffective, instruments as interest rates are used in a vague attempt to regulate the process with some of the disastrous outcomes that we have seen in the past.”
But what you’re effectively saying is, you don’t want a central committee to ‘ration total money supply’, but you do want a central committee of regulators to effectively direct the way that banks lend. This actually implies more central control over loan creation than PM is suggesting. (We agree that interest rates are a useless tool to influence or manage the economy).
So there seems to be a few contradictions there.
Ben
Ben
I think I have read you correctly
That’s why I make the distinctions
But I am aware PM has been refining its position – have I missed a change?
Richard
Hi Richard,
We’ve never suggested that the Bank of England should be responsible for making lending decisions to the whole economy, although a number of people have made this misconception. In terms of where it seems you may have misread us, you said:
“The right to lend does, *instead*, have to be given to banks”
But we’ve never proposed taking the right to lend away from banks. We’ve only proposed requiring them to lend money which is first created by the central bank, which the bank then borrows from their customers. The banks still lend (and decide who to lend to) but the process would not create new money (in the form of immediately spendable bank deposits which function as money). I can elaborate on the accounting if it’s not clear how that would work.
Which is why I made the point that “lending” and “creating money” can be separate processes.
You retain the right to lend – but remove the status of being bank
It’s the latter that’s the problem
The fact is if we understand tax and money properly and regulate appropriately we could then manage the banks in what they have to do
Getting rid of the banks and creating lending agents for the BoE is a very long way from the same thing
Richard,
Positive money do not advocate any centralised decision making as far as loans are concerned. Under their proposals that is still a decision for private banks. They advocate the allocation of new sovereign money to the government to spend into the productive economy.
I am aware PM have had a rewrite – has the tune changed?
I think that the Positive Money proposals have been mischaracterised in this article.
Consider the following extract from the article: “it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy”
The suggestion is that this is contrary to Positive Money’s proposals.
However PM recommends that private banks continue to make loans but without the power to create the money for those loans – they should function as financial intermediaries loaning pre-existing money, and that money can only be created by the sovreign state.
To quote from the PM paper “Would a sovreign money system be flexible enough?” ( http://www.positivemoney.org/our-proposals/flexibility-in-sovereign-money-system/ ):
“the flexibility of money supply depends not on who creates the money, but on which criteria trigger the creation of new money. By changing the criteria that trigger the creation of new money, we can choose between monetary systems that range from being completely inflexible through to extremely flexible”
The PM paper goes on to explain “the full range of possible criteria used to trigger money creation” from those more inflexible than the current system in a recession, to those more flexible than the current system in a boom.
The PM paper finishes with some recommendations: “We advocate a hybrid system in which the bulk of the money supply would be created according to the “target-based” regime, whilst a smaller amount would be created to finance lending to businesses outside the FIRE sector.” Those recommendations are explained in more detail in the paper.
Intermediaries are not banks: they’re agents for the bank which would be BoE
And they could not make a loan without seeking a deposit from the central bank
So my characterisation is right
We need banks: but we need to understand money and tax and when we do we can regulate banks properly
I don’t think it would work that way. The gov would spend the money into existence on things that society wants. The money would then enter general circulation and flow into the hands of the public. The banks would seek deposits from the public and compete against each other for those deposits. Those deposits would then finance the loans they make.
But that is not how banking works
And it not how it will ever work on a large scale
You are wanting a model of banking most thought existed, which has now been shown not to exost and which you want to restore nonetheless
I don’t get it
Richard -I don’t think PM’s tune has changed-here’s a quote from the PM book of 2013:
‘This ability to make funds available for lending to business should not be used as a tool to manage the economy; it should be used to ensure the economy does not suffer due to a lack of credit for businesses. banks will still be responsible for deciding which businesses they lend to. This means that the BoE is never put in the position of picking winners.’
Can’t see how this is a ‘stranglehold’ as Bezemer suggests.
It’s a stranglehold because they can only lend what they are given – they are intermediaries
So the BoE would have to in effect approve all loans
Or shadow markets would proliferate
Is that really correct?–Overall amounts would be approved but not the loans themselves -that would be a banking decision wouldn’t it?
Advancing loans out of amounts provided is not banking
It’s an admin function within it
Very different indeed
Under the proposals banks will be able to lend existing money from investment accounts. Remember we are not starting from a position of zero pounds in the economy. Positive money describe the transition in chapter 8 of the book Modernising Money.
So this decision will have nothing to do with BoE.
I am sorry: you seem to think there is money to be lent
And you seem to think that banks do that
Wrong: banks are not intermediaries
Banks create money by lending
What you are describing is something loan brokering, but it is not banking
Let’s not confuse the two
Richard, Positive Money were never suggesting state control over where money is lent. It’s tune has always been that banks should be the intermediaries between lenders and borrowers that much of the public assume they are.
I’ve seen the criticism of PM a few times that their proposals are too simplistic for a complex system. This seems false to me, Complex systems should be built from simple bases. PM are talking about the foundations of the system and the over complication of the current foundation is linked to it’s instability and skewed markets.
But you can argue that banks be intermediaries and in the process you have no banks
Banks are not intermediaries
That’s the definition of a bank
So the question is, do we want an economy without banks?
Richard The definition of a bank is “A financial institution licensed as a receiver of deposits”. That’s receiver, not creator.
I’d happily abolish the right to create money/deposits of any private, profit driven company. The company doesn’t have to be abolished and neither does the label bank.
If your question is rephrased as..
do we want an economy where private, profit driven companies are not allowed to create money?
Then my answer is yes. I think you’re playing fast and loose with the definition of a bank.
Ben
Let’s stop being silly: that may be the legal definition but we also know it’s wrong economically. Banks are actually defined by the ability to create money in practice
You are playing fast and loose, not me
You can have a central committee decide on all credit, but I will simply say that’s deeply and even profoundly unwise. Or you can keep banks, properly regulate them and tax their ability to make money appropriately. I really do think the latter preferable
But please don’t play with silly definitions: the issue is too important for that
Just to clarify, Richard-you are saying that the nature of a bank IS to create the money supply but within regulatory limits?
Yes
I’m not playing with definitions, I’m adhering to them.
You seem to be intent on saying that the power of money creation is so intrinsic to what a bank is that if we remove that one aspect then we remove the whole thing. That is simply not true, Banks have changed aspects of their behavior and powers countless times and we all still consider them to be banks.
It’s a power issue really, The people/organisations who have the power to create money/deposits have the power to affect which parts of the economy are flooded with liquidity and which parts are starved of it. Banks are incentivised to use this power in their own interests, not in the public interest. Are you really suggesting this is the best way this system could be devised?
We know this system is complicit in flooding money into housing and financial markets while people, businesses and even governments are starved of the liquidity they need.
PM are offering a viable alternative. We can’t know every consequence of implementing their proposals without trying it but better the devil you know arguments when the devil we know is causing ecological destruction, transfer of wealth from the poor to the rich, rising poverty, perpetual debt and pro-cyclical purchasing power it is time to make real changes.
I’ve read what you’re saying with interest but what I seem to be reading is a straw-man of what PM are proposing and a straw-man of what a bank is. You say in your blog
“In the case of money creation it is my belief that this requires the recognition that all money creation is, effectively, the responsibility of the state, which is the only authority with the eventual legal and practical capacity to define the legal tender of a jurisdiction. However, it also requires recognition that decision-making on loan creation has to be devolved if it is to be effective to meet the needs of a modern economy.”
It sounds like your singing from the PM hymn sheet here and as far as I can see the only reason you stray away from it is due to a misreading of the positive money proposals. Your worries about banks having the power to loan money have been addressed, Your worry that this gives all the power to the BoE has been addressed.
The way I see it further regulation is like trying to add stabilizers to a wobbly bike. PM proposals are like replacing the wobbly bike with a shiny new one that’s actually built for purpose. Surely this is a superior way to affect positive change, tackle inequality and have an economic system that works for society instead of a society that works for an economic system.
Sorry Ben, but this is nonsense
I once sat on a board dispensing loans and grants for a local authority. That’s what banks will be in the PM model of banking. We weren’t a bank. Nor will banks, so called by PM be banks.
leaving the name in place will not make them banks. So let’s stop pretending they will be. The banking – the process of creating and destroying money – will be at the centre. What you are calling banks are credit committees at best, so let’s be candid about that because this error is really holding PM back and that’s a mistake
I want money and banking controlled. But I have no doubt that the economy needs banks – and will bank offshore if PM gets its way (which won’t ever happen)
So let’s talk seriously about how to control money (and tax) and banking by all means. But let’s not pretend that abolishing banking in the UK will ever achieve that because it won’t: as I say, people will simply move offshore for banking and there will be ready suippliers
Any specific bit you want to call nonsense?
It seems clear that we’ve found the crux of our disagreement.
You think the downfall of the PM proposal is that without banks creating money, money will not be available where it’s needed in the economy. I disagree with this conclusion and believe that PM have addressed this criticism in detail here.
http://www.positivemoney.org/our-proposals/flexibility-in-sovereign-money-system/
Furthermore I believe that the exact problem that your worried about occurring in a 100% reserve system already occurs under this system. Money isn’t available where it’s needed, it is instead pumped into asset bubbles. We have decades of empirical evidence showing that this results in a boom and bust business cycle where the money supply itself is pro cyclical. As a higher and higher percentage of the money supply is in the form of bank deposits our exposure to crises is worse. Debt free money which is not destroyed on repayment protects us from a contracting money supply and we have very little of this left.
You believe that in general the current system works but could do with a regulatory nudge. I would say that this thinking has already been tried and it has failed repeatedly.
I believe the existing system is in tatters and the current course of perpetually increasing public and private debt will result in another recession where the money supply will once again contract exactly when it’s needed most.
I’m happy to be convinced that I’m wrong about PM but it will require good evidence and reasoning, not just being told I’m talking nonsense.
I hope I have now addressed these issues
Interesting discussion here – as someone who has been spurred on to educate myself due to PM’s campaign and having read a bit of MMT as well this blog has now spurred me on to rethink the situation.
From a political perspective the 100% reserve solution tends to be favoured by the libertarian right (Steve Baker, Carswell) though not exclusively (Martin Wolff) whereas MMT tends to be a more left oriented group of economists though both MMT and PM define themselves as politically neutral. Perhaps MMT and PM need to converge?
I am happy for PM to adopt MMT
But at present they are stuck with a very economically incorrect view of what banking is and that harms their campaign
Simon,
MMT is not a campaigning organisation. PM is. The distinction is quite important.
For example PM endlessly assert that 97% of all money is created by banks. This eye-catching statistic certainly garners attention, but is actually a completely misleading metric that only counts government-created hard cash as the other 3%.
So you have to ask why do they completely ignore the vastly greater amount – billions upon billions of pounds worth – of government-created electronic money that gets entered every year into private bank reserve accounts at the BoE?
I think it comes down to PM having a story to tell (banks = bad) and a campaign to finance, so they end up pushing out highly disingenuous and deceptive information such as that 97% figure.
Stephen, this is an interesting question. As far as I understand it, MMT sees no distinction between bank money and public money, there are just flows of money backed by the state which needs to ‘steer’ or control the stock flows which gives it many options and challenges the myth that there is ‘not enough money’ or the gibberish about ‘living within our means.’ These are important insights.
I think PM’s campaign is vitally important and has contributed to great awareness raising which doesn’t mean it has the monopoly on any ‘truth’. There are , of course, many critics of MMT as well. The important thing is that ideas are exchanged but in the end you DO need a campaign of some sort as the issue of inequality, waste of human purpose are just to important to leave to a debating society. Richard is a campaigner and knows this. Sooner rather than later we need a political party that puts this forward, so far, the Greens in this country are the nearest to what we need.
Can I ask a question? When you say ” they completely ignore the vastly greater amount – billions upon billions of pounds worth – of government-created electronic money that gets entered every year into private bank reserve accounts at the BoE?” are you referring to QE (which is new money) or the daily exchange of bonds for reserves (repos) which latter are not new money (if I understand it correctly, which I may not). If the 97% created is a fiction then it needs to be looked at. We desperately need some from of unity (or near enough) on these issues-otherwise we are left with Babel.
Simon,
MMT does distinguish between bank and public money. For example it makes the point that the government will only accept its own money back in payment for a tax. Bank money, nor any other form of money (e.g. Tesco Vouchers), won’t do.
Also bank money can only be created when another private sector ‘borrower’ agrees to exchange exactly the same amount of his/her money with the bank (the latter’s is otherwise known as signing a loan agreement, but its still money). The truth of it is that you borrow from the bank and the bank borrows from you to exactly the same amount. The result is net zero financial assets. When the government spends money into existence, there is no such arrangement and as a result financial assets are created in the economy. Banks, nor anyone else, can do that.
Agree PM have raised awareness, but they are also muddying the water with confused statements such as ‘debt free money’, which is a bit like talking about ‘a food-free lunch’.
MMT is making inroads. Perhaps you heard that one its leading proponents (Prof. Stephanie Kelton) was recently appointed as Chief Economist of the US Senate Budget Committee?
Totally and completely agree that a political party needs to talk very loudly about this stuff. And the Greens are THE party that should be doing so. However, sadly, they have latched onto PM in some of their policies and that’s really unfortunate as PM are confused about how the system works. MMT isn’t.
On government-created electronic money I’m not referring just to QE – although how anyone thinks £375bn of public-created money is 3% of anything beats me. No, I’m talking about all of it. Every single brown penny of government spending is NEW money: none of it comes from taxation or government ‘borrowing’.
I agree with this
Bank of England Bulletin 2014 Q1 “Of the two types of broad money, bank deposits make up the vast majority – 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.” I wonder why the BOE “ignore the vastly greater amount — billions upon billions of pounds worth — of government-created electronic money that gets entered every year into private bank reserve accounts at the BoE “?
The reason why Central Bank reserves are not included in the 97% figure is because, can you or I make a payment with it? If not, why should it be considered part of the money stock?
Other than the fact PM conceptual standpoint differs from yours, I don’t understand what the big deal is here- “but they are also muddying the water with confused statements such as ‘debt free money’, which is a bit like talking about ‘a food-free lunch”. Firstly, creating money that is backed by zero coupon perpetual bonds is virtually the same as debt free money. Yes the government does promise to accept this money when taxes are paid, but that seem like a promise to me, not a debt…
Now there are many MMTers that back QE for the people and other types of QE for the real economy. When it was convenient for them, they never say anything about this not being debt free money etc. Moreover, while PM make this point so do the likes of Adair Turner, Simon Wren Lewis, Mark Blythe, and a host of non-PM advocates. Finally, despite the fact that you blow the significance of this issue completely out of proportion, the point is that money would not be created every-time a bank makes a loan.
PM are confused about how the system works and MMT isn’t…I always take pride in being a part of PM when I see such narrow minded statements. The truth is the staff at PM are much more open-minded, academically considerate as well as respectful than their critics…
Might we keep this respectful and to the point please?
It might also be good to know what the point was here
Barney @ June 5 2015 at 10:29 am,
PM claim that 97% of all money is bank-created: Having no axe to grind, the BoE, quite properly, take the time define what the number means. Contrast that openness, with PM’s stating it without any such qualification whatsoever. By seizing that number and using it for pure hyperbole, PM only serve to undermine their credibility.
Regarding exclusion of BoE reserves from the ‘money stock’. This might come as a shock, but government spending does actually reach us in the private sector. In the first instance via private bank reserve accounts at the BoE, then down to the individual bank accounts of the target government contractor, employee etc. (as bank money). PM again do themselves no favours in the credibility stakes by pretending that none of that spending power exists.
PM and ‘debt free’ money:
1. A debt is a liability. Why do you think a promise isn’t?
2. No MMT economist would subscribe to the fallacy of ‘debt free’ money. It breaks the very definition of money (money = IOU. If you think thats just an MMT point of view, then I suggest looking up the work of anthropologists such as David Graeber).
3. Would be very surprised if Adair Turner, Simon Wren-Lewis, Mark Blythe subscribe to the notion of ‘debt free’ money. Evidence?
PM advocates are well meaning, but anyone who is a supporter (and I used to be) should listen to those little alarm bells ringing every time PM use dodgy statistic and confused and confusing terminology in support their arguments.
That approach might make good marketing, but is neither academic nor respectful.
Agreed
I think confusion arises around the expression ‘debt free’ because it is being used in two different ways -a case of the unfortunate polysemic nature of language! I think PM means by debt free that the money is issued without any fee attached to it (interest) which would be the case with interest on a bank loan. So PM focuses on the issuance itself, of course money in action is credit/liability simultaneously. So I doubt PM/MMT really have a disagreement on this one just terminological inexactitude. This is what happens when different perceptual lenses are being used in a discussion -the concepts have to be shared.
Simon,
On your point about PM meaning by debt free that the money is issued without any interest. Randy Wray writes…
“When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks seem to hate payment of interest by government.”
NB: Randy explains he is using the term “‘crank’, in the endearing sense”.
The above quote is from a post entitled “DEBT-FREE MONEY: A NON-SEQUITUR IN SEARCH OF A POLICY”, which was prompted by the many comments in an earlier post from PM advocates objecting to his dislike of a centralized committee controlling money creation…
http://neweconomicperspectives.org/2014/07/debt-free-money-non-sequitur-search-policy.htmlhttp://neweconomicperspectives.org/2014/07/debt-free-money-non-sequitur-search-policy.html
I am astonished that you should think that,in order to be called a bank by users of the English language, there is some law somewhere that says it must create and rent out money. Words are defined by usage. The vast majority of the people who use the word “bank” already think it is an intermediary, taking in money and lending it on, earning a profit from the difference between interest paid on deposits and interest received on loans. This is ” what banking is about” according to my MP. If, in the Positive Money system , people decide that they want a new word for the business which manages their money, then no doubt a new word will emerge. Or they might carry on using the old one.
I am using the word and description for a precise technical reason in an argument where that is important
In other contexts the word may have a different meaning
So what? That’s not the context here
In that case you wholly miss the point
Richard, you are a hero! I enjoy your blog, and hugely admire your perseverance. I’ve enjoyed reading this debate. But a few last train observations:
You started by suggesting PM are proposing central decision-making on loans.
Not true. This strawman was ably deconstructed.
You then suggested the PM tune has changed.
Again, not the case. (see Ben, Simon comments..)
Your focus then changed to the definition of a bank.
Spurious. (I think Fran put it well).
Then I guess you went to bed. It is late.
But… If there’s a spectrum, I think you and PM are close – and together a long way from the mainstream narrative which doesn’t even get that banks create money.
We can debate the solutions, yes – and that’s healthy – but the big thing for me is we at least have a common and accurate understanding of the current setup.
The mainstream discourse is still a long way off this point.
At least we can jointly get people to base camp before racing to the top of the mountain, eh?
I hope I have now addressed these issues