The FT included two articles yesterday (the second is here) on a new report from the Bank for International Settlements (BIS) - which is the body that effectively represents the world's central bankers. Both related to a report from the BIS that effectively said that central banks should be very wary about setting up their own crypto currencies - as the central bank of Sweden has, for example, proposed doing - because if they did there was a real risk that in the event that there was a crisis of confidence in banking everyone would flee from private banks and their bank created money into the central bank and its crypto created currency.
The reporting is fascinating - and I should make clear that I have simply not had time to read the BIS and if anyone else has and can comment on it then that would be really useful. The implications are threefold.
The first is that it is entirely possible for a central bank to create such a currency. This is hardly a surprise. All fiat currency is essentially central bank money backed by the promise to pay from the government of a country that will accept the currency in question in settlement of tax.
The second is that such a currency may well prove more popular than that created by private banks now, acting under licence from the central bank. The argument is presented that because of this the crypto currency should not be created because this would reduce the role of private banks in the economy.
The third is that the reason why this role should be retained by private banks is, according to the BIS, that they might be better allocators of capital than central banks that might otherwise have to assume this role if it was apparent that the central bank was really the currency creator.
I do, of course, simplify the argument.
And I do, of course, put my spin on it.
But, assuming I have summarised appropriately (and I think I have) then there are some pretty obvious implications.
The first is that there is only room for one currency in a country, and government created money will always be preferred.
The second is that the current role of private banking in money creation is wholly dependent on central bank support: by themselves they do not create this value.
Third, the value of banks is not then in loan creation: it is at best in loan portfolio management.
And fourth, depositors see this as an activity of little consequence to them when seeking security for their money. Income generation is, for them, vastly less important than asset security, which ultimately only the state can provide.
I am sure other points could be added. But the questions all this begs then are also numerous. Another list is needed.
First, why do we permit private banks such an important role in the economy in this case?
Second, why aren't we taxing the seigniorage that they enjoy now but which is very clearly not theirs?
Third, how do we know that the state might not be a better allocator of capital when there is little evidence in a country like the UK that banks do this at all well?
Fourth, this implies that there may be more to the Positive Money role for banks as allocators of capital provided to them by a central bank in the future than I might have expected. Thoughts?
Fifth, should we really shape policy on an issue as key as this purely on the basis of providing support to the private banking sector when it may well be that the ultimate arbiter on this issue - the cash holding public - think they are suboptimal?
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“…..there was a real risk that in the event that there was a crisis of confidence in banking everyone would flee from private banks and their bank created money into the central bank …..”
That’s a problem ?
No
But they think it is
And I think that deeply revealing
“…according to the BIS, that [Private Banks] might be better allocators of capital than central banks….”
That may depend on the interpretation of ‘better’ in this context. I wonder how BIS justify the status quo position ?
The general tenor of on-going commentary on this blog suggests a lot of us don’t think current allocations are very constructive to economic health presently.
“First, why do we permit private banks such an important role in the economy in this case?”
Because the golden rule states that he who has the gold makes the rules. And the great banking swindle is that bankers have conned governments into believing that it is the banks who own the money (?)
The bigger the lie the better it works. One of Goebbels’ mantras, I think.
Crypto currency; surely this is the key proof of MMT.
One moment it did not exist, then it did. Where did it come from?
A magic money tree?
The bitcoin mines of Knotty Ash?
Mined by Diddy Men?
“Mined by Diddy Men?”
With the great Dodd gone you’d expect a crash, but the markets don’t seem to have responded.
How is a central bank supposed to get to know people in the provinces and reasonably ascertain their credit needs? It’s a ridiculous proposition in my opinion. I don’t understand how cryptocurrency is supposed to help.
More broadly just because the system at present is stupidly corrupt and totally ineffective at supporting the real economy doesn’t mean the underlying logic of the system is flawed. Rather I think a potentially good system is being twisted to suit the sociopathic needs of a power hungry minority.
Warren Mosler and other MMTers suggest that private banks be recognised for the state/private partnerships they are and restricted by law to serving the public good. This isn’t remotely difficult from a technical perspective (politically it’s hard). Government should simply specify exactly what banks are allowed to do and decree that anything not precisely matching the list of legal activity is defacto illegal.
That removes the ongoing regulatory headache of defining what’s illegal about newly invented activity. Quite simply if it’s new it’s illegal. The burden of proof should be on the inventor to prove that their new idea is in the public interest and should therefore go on the list of legally permissible banking activity.
It should not be up to the regulator to prove activity is deleterious to the public interest before it can be banned. This is so extremely obvious that the very fact it’s the wrong way around at the moment is evidence enough that some idiot has allowed the foxes in to guard the hen house.
I think Warren Mosler and Bill Mitchell believe over 90% of current private bank activity is not in the public interest and should just be banned. The starting point of a new regulatory regime should not be the status quo. A new regime should start with only the 2-10% of existing bank activity that’s in the public interest. Everything else should go overnight and everyone involved in it made redundant.
Those newly redundant people previously engaged in the useless/damaging activity can then turn their talents towards some actually socially beneficial endeavours rather than trying to steal the machinery of state from the people. This is a very clear example of a non-taxation based approach to freeing real resources so the state can redirect them to other activity via spending without risking inflation.
MMT is also very dismissive of Labour’s (and others’) plans for so called “public investment banks”. Why, they ask, invent a new entity when actually this is precisely what normal banks are supposed to be doing in the first place: providing credit for worthwhile real investments in the real economy?
MMT is pretty clear on this: don’t reinvent the wheel, just fix the ones you’ve already got so they’re running true and then you can more quickly focus on moving forwards.
I agree
Ann Pettifor also says the same thing
I think we need banks and I have no problem with them having a role in the economy
BUT when 85% of bank lending is property backed in the U.K. something is wrong
I am not saying mortgages are wrong: supply has however undoubedtly fuelled hose price increases and so inequality and that is anti-social banking
How to regulate then? The required ratios that banks are permitted is the first thing to change
Absolutely, current mortgage lending practices are effectively cancerous. It is a sick joke. It is particularly funny that the elite who supposedly oh so hate inflation actually quite like it when it’s inflation in the price of assets they hold in abundance.
From the elites’ perspective: if real wages are held down (or falling), prices of everyday items are flat or slowly increasing, price of land is rising rapidly and you own all the land then it is exactly the same outcome as getting away with forcing repeated and massive paycuts on your employees.
The fact normal workers’ house values have gone up provides political cover but only because normal people are ignorant of the realities of the game. in reality the value of their own house increasing doesn’t benefit them at all. They need the house to live in so its value is pretty irrelevant. You have to own capital IN ADDITION to your main residence before you can count yourself a capitalist and benefit from rapidly escalating asset prices. That is unless you intend becoming a nomadic capitalist who operates from a tent.
In addition when another crash inevitably occurs it’s only normal workers who will suffer. The elite actually benefits from a crash in prices because they have cash reserves and can ALWAYS access credit. Overly indebted workers go bankrupt and lose their real assets to members of the elite at knockdown prices. It’s almost as if the debt cycle is deliberately engineered to achieve this outcome…
Rinse and repeat till the elite own all the real assets and every square inch of land under our feet. It’s the same story as has been going on since the dawn of civilisation. If the majority haven’t learned how the game works by now I suspect they never will, unfortunately.
History sadly shows that societies rarely come back from corruption on this scale. Usually what puts an end to it is the end of the society itself via conquest or ecological collapse.
I just hope that because information to this effect is so abundant and easily accessible today that this time it will be different. Fingers crossed!
In terms of how to regulate – as a layman I have no idea of the specifics.
In general, FWIW, I’d suggest we look at how the monetarists/neoliberals engineered the finance Big Bang in the first place and think how to engineer a Big Banking Crunch in the same manner. However, that’s probably looking at the problem the wrong way around…
What occurs to me is that the Big Bang was popular with the people it most directly affected, for obvious reasons. The removal of power from other industries and sectors was, by comparison,much more gradual and is still ongoing. It’s obviously easier to give people what they want than take things people want away from them.
Perhaps the progressive left should try a similar strategy. I realise this runs counter to my angry missive above but we can still have a total overhaul of the banking system’s regulation as an end goal and it can be mapped out from the start. We just need to build up some other sector first so that there’s already somewhere fun, challenging and rewarding for former bankers to go.
I’d suggest something like this:
Government uses functional finance principles to build up the hi-tech research and development sector with a particular focus on renewable energy, energy storage, energy efficiency, electric vehicles, zero carbon passive-house construction, artificial technology, robotics, automation, new materials, biotechnology, permaculture food production, and ecosystems protection.
Invest in researching and planning a new organisational and land use paradigm that seeks to cut the need to transport material and energy around the country by focussing on situating new productive capacity and energy generation where people already live and making better use of telecommunications.
Invest in excellent education and training in all this new technology and organisational practice.
Pretty much the Green New Deal.
This Big Bang of sustainable economic development will be popular with the people involved for the same reasons the finance Big Bang was popular with bankers. Allow the existing banking system to invest in it alongside government. Encourage them to do so with subsidies and tax breaks. Encourage fossil fuel companies and the manufacturing industry to do likewise.
This acts as a sort of divide-and-rule attack on the establishment. Nothing wrong with using your opponents’ tactics if they are effective.
Once that’s all in place and growing you set about using tax and regulatory powers to cut back finance and fossil fuel industries in a stepwise fashion. Pick off the weakest bits first and retrain those made redundant so they can rapidly join the sustainable tech boom.
Repeat the process, each time picking off bigger and more powerful targets as they become weaker and see their former colleagues getting ahead in sustainable tech. At the appropriate time implement root and branch regulatory change and do away with all the other stuff that’s not in the public interest.
This can also fit nicely in a post Brexit world where some will be clamouring to turn the UK into an export led economy. I’m generally against the stupidity of net-exporting as a strategy but if it helps get potential opponents on board it may be something where the ends justifies the means. It’s worth noting that if this isn’t done soon the financial sector is only going to grow more powerful after Brexit. If it’s given long enough it will become by far and away our biggest export and it’ll be nearly impossible to reign it back in once our other industries have died back further.
There’s also a moral case to be made that a former imperial power like Britain actually owes the rest of the world for the dire situation we all now find ourselves in largely as a result of economic forces that Britain unleashed on the world. I would dearly love to see Britain become the leading exporter of green-tech that might just save us all from the coming apocalypse.
There’s no practical reason we couldn’t do this. Just a lot of political hurdles to jump. The first step would be a truly progressive party that speaks the truth about economics loud and clear so that normal people learn that they can ask for what they actually want and expect to get it. A landslide election win is required for this sort of programme to get off the ground.
Adam
Please dream
I mean that
I happen to think it works – all change starts that way
Richard
@Adam
The issues you highlight can only be addressed by wealth taxes. Otherwise capital accumulates more power driving instability.
True
Charles,
Those issues can also be addressed by tax reform as demonstrated by the negative gearing issue (among others).
Richard,
“Please dream”
I did enjoy being uncharacteristically optimistic for a while and allowing my limited imagination to wander on the theme of bank regulation!
What you say is very true though. People need a dream that seems at least remotely possible before they can even start demanding change.
We see it so often in the street and on the doorstep – many, many people, of all political persuasions, are fed up and angry with the way things are but they don’t know why it is this way and they don’t believe change is possible.
Too many people have given up dreaming and it’s crushing our optimism and our confidence.
Compare the present day to 1945. My grandparents’ generation had just suffered and survived some of humanity’s darkest days, millions were dead, huge amounts of infrastructure destroyed and nuclear weapons had just become the nightmare they still are today.
Nevertheless, they dared to dream of a better tomorrow for themselves and their children. For a time that’s exactly what they managed to achieve and the older generations today still enjoy many of the good things our parents and grandparents fought to secure.
Shame on us that we dare not dream of ways to improve things and save the world we’ve enjoyed so our children can enjoy it too. Double shame on us for failing when we enjoy a position of such extreme wealth and security by comparison to the 1940s.
You gotta have a dream,
If you don’t have a dream
Howya gonna have a dream come true.?
When you say that 90% of people in private banking should be made redundant overnight
– can you quantify this in absolute numbers i.e. 200,000 or 300,000 or how many?
– who pays the redundancy monies?
– what about contracts etc.
– what ‘socially useful’ work would you have them do?
J A Rank,
I’m not sure what % of private bank employees are involved in the useless activity. There’s not necessarily a 1:1 ratio of staff to activity. I suspect the socially useful activity of assessing customers’ credit worthiness actually takes more man-hours than a lot of the speculative activity. Short answer is I have no idea but it’s easily something someone could work out. If it is lots of people them great, all the more hands to the pumps on the sustainable hi-tech industry front. Large numbers will just require a staged process of banking retrenchment so the alternative industries can be built up sufficiently to take the influx of new workers.
Obviously some banking staff could be redeployed from speculative activity to an expanded provincial credit-extending/deposit-taking service. Others would leave the industry and re-train in science, technology and engineering so they can contribute in the real economy. We’re talking very clever people here, many with science/engineering/mathematics degrees/masters/PhDs. I suspect they’d take to a new challenge readily and easily.
The UK establishment has long experience of forcing deindustrialization on large swathes of the population so won’t have any problems sorting out contracts and arranging suitable redundancy packages. However, I doubt they’d feel the need to be quite as harsh on their own as they were on miners and factory workers…
Adam Sawyer says:
“How is a central bank supposed to get to know people in the provinces and reasonably ascertain their credit needs?”
One might ask the same question of the private sector banks.
Perhaps CBs could establish local branch offices (with managers?) in the buildings that the Private banks are vacating ?
We’ve got two here they could choose from.
Andy,
I’m in favour of full nationalisation of all natural monopolies. I just don’t believe that providing credit to private customers for private projects is a natural monopoly.
I think that it is possible to achieve real competition between simple deposit-taking/credit-extending banks in a well regulated market and I believe it will do a more effective job than a centrally managed monopoly.
I tend to agree with that
As Peter May said earlier today, cutting private banks out of this loop seems deeply worrying
But they have to be regulated
I know Ann Pettifor agrees: we have discussed it, often
Adam says:
“I’m in favour of full nationalisation of all natural monopolies. I just don’t believe that providing credit to private customers for private projects is a natural monopoly.”
You may have a point, however the issuance of currency really is a natural monopoly, and a corollary to your point is that I don’t see the point of government saying it is offering startup business funding then farming it all out to private sector banks.
Or for that matter arranging student loans so that the principal beneficiaries are private banks. Or indeed farming damn near everything else on a plate to private sector businesses.
Sure there’s scope for private enterprise and I think government should encourage it. But if bankers want to run the country I think they should stand for election.
Andy,
I agree the currency is a monopoly and I agree many bankers are power hungry and anti democratic.
Still given money is a form of IOU and private citizens have always, since before states even existed, been free to offer personal IOUs to each other to facilitate exchange and economic development I think it is important to facilitate that process in a fully monetised economy otherwise it just can’t really happen (and I’d argue isn’t happening properly at present because of the warped nature of private banking).
You need state money if you want to have states but it shouldn’t smother all private activity and I fear that’s what having only centrally controlled money creation would do.
Right Richard, on this topic I can refer you to:
– Mark Carney’s speech from the other week. He explained that while the BoE is leaving open the possibility of CBDC (Central Bank Digital Currency) for a number of reasons the BoE does not see it as ideal for exploration (although the BoE is working on enhancing the existing RTGS with features from distributed ledger systems), two arguments of note being i) Carney and the BoE do not want to be making decisions as to credit allocation and (ii) they do not want to have the assets on their balance sheet (they do not have a framework for addressing/dealing with).
https://www.bankofengland.co.uk/speech/2018/mark-carney-speech-to-the-inaugural-scottish-economics-conference
– FT Alphaville who addressed this issue specifically, quite a while before the BIS report. They tackle the credit allocation problem head on. Without the competition between the private sector banks, the risk is that credit will be allocated inefficiently. They cite the example of Gosbank in the Soviet Union. It was responsible for allocation of credit between enterprises and performed the job poorly.
“…But you can see where we’re going with this. Once you centralise the money-creation function you inadvertently create a captured market for a single type of monetary instrument. This removes the checks and balances associated with a competitive monetary system and leads directly to the second problematic issue we’ve identified: a single monetary authority’s ability to competently manage and re-invest the monetary float in a way which will defend its par value….If and when the central bank fails to do that – something ultimately determined by the quality of the assets or claims which back the reserves – then private sector alternatives, foreign national currencies or commodities will begin to circulate as money anyway (and will do so even if they’re less convenient).”
https://ftalphaville.ft.com/2016/07/29/2171233/cbank-digital-currencies-and-the-path-to-gosbankification/
And you think the market is doing this well?
It’s probably worth adding (and this was highlighted by Carney), that elements of the cryptocurrency space (in particular cryptocurrency exchanges) will be regulated and will be integrated with existing institutions. The report today that Barlcays has begun offering accounts to major exchange Coinbase hints at the direction of travel.
In which case it suggests distributed ledger technology may become part of the private banks before central banks consider deploying the technology.
I agree with Adam, we have bank regulation the wrong way round. But also we don’t actually have enough banks – we have a more concentrated banking sector than any other major country so I’m in favour of the creation co-operative regional banks with a social purpose as the RSA is starting to create https://www.thersa.org/discover/publications-and-articles/rsa-blogs/2017/10/building-community-wealth-in-the-banking-sector.
The existing banks don’t allocate capital properly because they’re over centralised, lend too much on property and they all think like each other. And they know that speculation is where the real money is made…
In the absence of a government willing to change banking regulations a set of new local banks will eventually influence the old banks outlook as they’ll have to compete.
Meanwhile a seigniorage tax is long overdue and, importantly, that’s what it should be called! so people have heard of it and know the privileges that go with it.
The Positive Money scheme of getting the BoE Monetary Policy Committee to dream up an amount of money that the private banks should be lending is, even if it were possible, not sensible. It makes even worse the existing problem of over centralisation. If we’re going for centralisation and we are a democracy Parliament should be in charge not a Central Bank.
I’m never entirely clear whether the Monetary Policy Committee is supposed to create all the money for the economy or just choose the amount to allocate to private banks, but we don’t want them anywhere near the status of the ultimate money creation department, because that would mean that if Parliament wanted more money, they really would have to raise taxes. So we’d be back to tax and spend. That’s why centralising additional powers in the hands of bankers is so insidious.
If you did choose to nationalise all money creation I think you would be even less likely than now to respond to demand. It would be more of a game changer if banking licences were granted only to co-operatives or not for profits – but that’s not going to be something for tomorrow or even next week. But with a wide variety of money creators — especially socially purposed not for profit banks – competition is likely to make for greater economic vibrancy.
While government money creation is, I suppose, necessarily centralised, private money creation needs to be much better devolved.
Much to agree with Peter
Richard, here is the BIS paper for discussion, for those who do not have access through the FT paywall.
https://www.bis.org/publ/qtrpdf/r_qt1709f.htm
These matters have been discussed by the Monetary Policy Committee. I think there is a fear of the use of crypto currencies because transactions can take place without banks’ monitoring activities and this controlling power equates to their wealth. At present BIS dictates which countries with whom we may or may not deal and all this stems back to WW2 and the raison d’etre for BIS. Also at present all new money is introduced as debt and this allows the banks to charge for their services.
Thanks
By the way has anyone else seen this yet?
“Google to ban cryptocurrency initial-coin offering ads in june”
https://www.bloomberg.com/news/articles/2018-03-14/google-to-ban-cryptocurrency-initial-coin-offering-ads-in-june
I am currently reading through the BIS document:
https://www.bis.org/cpmi/publ/d174.pdf
Having read the Executive Summary, Introduction and the sections on seigniorage and ‘Payment aspects’ it has become apparent that this is mainly about the substitution of physical cash and how a central bank digital payment system could by-pass the private banks’ current electronic payment systems.
The BIS notes that while there may not be much demand for that domestically (people are generally happy with EFTPOS etc.), a central bank digital currency (CBDC) would be hugely advantageous in cross-border payments where regular banks and facilities are currently ripping-off the general public.
Another theme that emerges is this one where the central banks are looking to reclaim seigniorage that is lost with the declining use of cash. Interestingly, however, they note that with the exception of a few places like Sweden, the demand for cash has not declined which is interesting in itself.
From what I can tell thus far this whole narrative about “loss of deposits” and “capital allocation” need not necessarily be an issue if CBDC is non-interest bearing (like cash) and private bank deposits are central bank guaranteed. If that were the case private bank deposits would be more attractive and just as secure as CBDC holdings.
There seem to be some fairly simple answers to potential threats that this might pose to private banks. There is no issue about a central bank “crypto-currency” or 2nd currency as the CBDC idea is simply a digital version of the usual currency and the BIS effectively suggests that it shouldn’t be anonymous.
More significantly there is the question of why central banks would bother with this (seigniorage aside) and one obvious answer, as I intitially expected, is that it is a soft way to smash the existing private crypto-currencies. After all who, apart from a criminal or speculator, would want a dodgy crypto-currency if they could get a central-bank version of digital ledger payment.
This how the BIS expresses that intention:
“In this context, one could also consider the implications of not issuing CBDC. One is the potential for private digital tokens to more widely displace central bank money in transactions. Retail customers could face more credit and liquidity risks, relative to central bank liabilities, from exposure to either private issuers of digital tokens or from a lack of issuer. At this time, their volatile valuations and inadequate investor and consumer protection make private digital tokens unsafe to rely on as a common means of payment and a stable store of value or unit of account” (page 8).
Of course they might also be thinking about the position of the state as as well as the consumer. Fair enough. I think that we can now assume that the CBDC’s will be coming in one form or another.
.
By the way, the original BIS article is a must-read for those that have a lot to say about monetary theory.
Thanks
MacLeod argues that in the 1742 Banking Act, it was intended to give the BofE the “exclusive monopoly in banking”. According to MacLeod the wording of the Act effectively defined ‘Banking’ as “the creation and issue of ‘Currency’”; and concludes that “to prohibit persons from creating currency was, in fact, to prohibit them from doing banking business”. The wording was considered foolproof, but within thirty years Bankers adopted a simple adjustment that changed their method of doing business; issuing “cheques” – a special case of Bills of Exchange, upon the banker, payable upon demand. This was not covered by the wording of the Act, the BofE applied to Parliament to stop it, but it was refused on the grounds that such monopolies were “out of fashion”. My explanation is much condensed. See HD MacLeod, “The Theory and Practice of Banking” (1856); Vol.I; Sect.IV, p.120-121 for the extracts quotations.
It is a curious history, and revealing about both the problem of matching the ‘statics’ of statute law to the ‘dynamics’ of economic activity; and the wholesale abandonment of conventional wisdom, and the adoption of different norms in the culture, without anyone really noticing.
This is fascinating
I would like to find the text of the 1742 Act
So far I have failed
Thanks