Wednesday, November 21, 2012

IMF: Abolish the Debt!

Not exactly; you have to read between the lines a little.

People are talking about this new thing from the IMF, reviving the 1930s-era "Chicago plan" for 100% reserve banking. Red meat for the end-the-Fed crowd. The paper shares a coauthor, Michael Kumhof, with that other notable recent piece of IMF rabble-rousing, on how inequality is responsible for financial crises. Anyway, the Chicago plan. It was the brainchild of Herbert Simon Henry Simons and Irving Fisher:
The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.  
Fisher (1936) claimed four major advantages for this plan. First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations. Second, 100% reserve backing would completely eliminate bank runs. Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt. Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.
Kumhof and his coauthor Jaromir Benes run through how such a thing would be implemented today, and then estimate its effects on output and prices in a DSGE model. (I don't care about that second part.) My opinion: I don't think this makes sense practically as a practical policy proposal or strategically as a political focal point. But it's not crazy. I think it's a useful thought experiment to clarify what we do and don't need banks for, and I'm glad that some people around Occupy seem to be noticing and talking about it.


Though Kumhof and Benes don't quite say so, this proposal should really be understood as addressing two distinct and separate problems:

1. Stabilization via monetary policy is constrained by the fact that its traditional tools have less purchase on private credit creation than they are imagined to or they used to, and not just at the ZLB. (As discussed repeatedly on this blog, e.g. these posts and this one.) So if the state wants to continue relying on monetary policy as its main countercyclical tool, we need to think about institutional changes that would strengthen the transmission mechanism.

2. If government liabilities are more liquid than the liabilities of even the biggest banks, as they certainly seem to be, then the banking system plays no function with respect to federal borrowing. The banks that hold federal debt are providing "anti-intermediation" -- they are replacing more liquid assets with less liquid ones. In this sense, whatever income banks get from holding federal debt and providing means of payment are pure rents - it would be more efficient for federal liabilities to serve as means of payment directly.

The Chicago plan is the stone that is supposed to kill both these birds. I think it misses both, but in an intellectually productive way. In other words, it's fun to think about.

The goal of the plan is to, in effect, collapse the categories of inside money, outside money and government debt by eliminating the first and turning the third into the second. Equivalently, it's an attempt to legislate the economy into functioning the way monetarists (and some MMTers) say it already does, with a fixed money supply set by policy. You could think of it as another intervention in the centuries-old Currency School vs. Banking School debate -- except that unlike most Currency School advocates over the past two centuries, Kumhof and Benes acknowledge that the Banking School is right about how existing financial systems operate, and that 100% reserves is not a return to some "natural" arrangement but a radical and far-reaching reform.

Why wouldn't it work?

On the first goal, improving the reliability of stabilization policy, it's important to recognize that deposits are not where the action is, and haven't been for a long time. So 100% reserve backing of deposits is really the smallest piece of this thing. In effect, it's a proposal to tighten the Fed's handle on the narrow money supply -- M1, in the jargon. but most means of payment in the economy aren't captured by M1 -- they don't take the form of deposits, and haven't for a long time. (In this respect things have really changed since 1936.) So it wouldn't be enough to tighten the rules on deposit creation; you'd have to abolish (or impose the same reserve requirements on) all the other assets that serve as means of payment (and are more or less captured in M2 and formerly in M3), and prevent the financial system from developing new ones.

The proposal does do this, but it's pretty draconian -- under Kumhof and Benes' plan "there is no lending at all between private agents." As soon as you relax that restriction, the plan's advantages in terms of stabilization go away. An absolute legal prohibition on IOUs might please Ezra Pound, but it's hard to see it playing well among any of the IMF's other constituencies. And the reality is if anything worse than that, because, as the Islamic world has been finding for 1,400 years now, it is very hard to legally distinguish debt contracts from other kinds of private contracts. So in practice you'd need an almost Soviet level of control over economic activity to realize something like this.

Perhaps I'm exaggerating the practical difficulties faced by the plan, but even if you could overcome them, it would only solve half the problem. The proposal only strengthens contractionary policy, not expansionary policy. It might have prevented the acceleration in credit creation in the 1980s and 1990s, but wouldn't have done anything to boost credit creation and real activity in the past few years. It's true that it would prevent the specific dynamic that Fisher (and later Friedman) blamed for the Depression, a positive feedback in a downturn between bank failures and a falling money supply. But that dynamic no longer exists, given deposit insurance and active countercyclical monetary policy, altho I suppose one could imagine it reappearing again in the future...

Part of the issue is whether you think lack of effective demand = lack of nominal effective demand = excess demand for money, by definition. This is the standard New Keynesian view, borrowed from monetarism. In this view a recession necessarily involves an insufficient money supply. But I don't accept this. And once you accept that recessions involve multiple equilibria or coordination failures, there is no reason to think that increasing the supply of money must logically be a reliable way to get out of one, and lots of empirical evidence that it isn't.

But even if the "Chicago plan" is not a workable solution to the breakdown of the monetary policy transmission mechanism, it's a useful exercise. At the least, it calls attention to the fact that there is a breakdown -- in a monetarist world, reforming the financial system to allow the central bank to control the money supply would be like legislating the law of gravity. Kumhof and Benes are clear that this proposal is only meaningful because under current arrangements, money is fully endogenous:
The critical feature of our theoretical model is that it exhibits the key function of banks in modern economies, which is not their largely incidental function as financial intermediaries between depositors and borrowers, but rather their central function as creators and destroyers of money. A realistic model needs to reflect the fact that under the present system banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries.
(As a footnote tartly notes, that includes Kumhof, a former banker.)

So while the proposal doesn't describe something you could actually do, it does help illuminate the current system of credit creation, via a sharply contrasting ideal alternative.

How about the second goal, eliminating the value-subtracting activity of banks "financing" government debt? Here I think they are onto something important. Interest is a payment for liquidity, as we've known since Keynes. So there is no economic reason for the government to pay interest to financial intermediaries when its own liabilities are the most liquid there are.

The problem here is, it's not clear why, once you recognize this, you would stop at splitting of the payment system from credit creation. Why doesn't the state provide means of payment directly? Whatever arguments there were for a state monopoly on money issue presumably don't go away when money becomes electronic, so why isn't there a public debit card just like there is federal currency? (This becomes really obvious when you look at the outright scams that happen when private businesses manage EBT cards, etc.) Of course there are people who want private currencies, but they are crazy libertarians. And yet without anyone accepting their arguments, we've implicitly gone along with them as the economy has moved toward electronic means of payment -- every time you pay with a debit or credit card, some financial parasite takes their cut. The obvious solution is to end the private monopoly on means of payment. (What do want? Postal savings and a public payment system! When do we want them? Now!) Benes and Kumhof don't go all the way there, but their plan is at least a step in that direction.

There's a broader point here. Axel Leijonhufvud (among others) suggests that the fundamental reason there is a term premium (and at least part of the reason there is a liquidity premium) is that there is a chronic excess of long-term, illiquid assets in the form of physical capital, because of the technical superiority of roundabout production processes. That is, the time to maturity of the representative asset is longer than the horizon of the typical asset-holder. Thus the "constitutional weakness" (Hicks) at the long end of the credit market.

But if a larger proportion of the private economy's outside assets are made up of government debt rather than physical capital, (and if a larger proportion of saving is done by institutions rather than households, tho that's iffier) then this constitutional weakness goes away, and there's no reason to have anyone collecting a fee for maturity transformation. Ashwin at Macroeconomic Resilience has written some very smart stuff about this.

Banks came into existence, in other words, in a world where most savers had a very high demand for liquidity, and most liabilities were risky and illiquid. So you needed someone to stand between, to intermediate. But today most saving is via institutional investors with long horizons -- pensions etc. -- or internal to the firm, while a very large proportion of borrowing is by sovereign governments, and so less risky/more liquid than anything banks can issue. In this world there's no need for intermediaries in the old sense; they're just rent-collecting parasites. This is not the way the "Chicago plan" is motivated but it seems like a not-bad way of making the point.


Third piece, the transition. How do you go to a 100%-reserve world without a huge contraction of credit and activity? Here their solution is kind of clever. If you look at US nonfinancial debt, they observe, total business and home mortgage debt together come to about $20 trillion, and total government and non-mortgage household debt also come to about $20 trillion. Only the former, which finances investment, is socially productive, they figure. Under the Chicago Plan, banks would need $20 trillion in new reserves to avoid reducing the investment-financing part of their lending. Where do those new reserves come from? By the central bank buying up and extinguishing the other, non-productive half of the debt. It's the best-credentialed jubilee proposal you're likely to see.

Of course banks are worse off because half their interest-earning assets are replaced with sterile reserves. But in the logic of the proposal, there's no social cost to that, since the lost interest income was for value-substracting "anti-intermediation" (my phrase, not theirs) activity; it was the banks' fee for substituting less liquid for more liquid assets. Strictly speaking,though, this only applies to government debt. It's not clear what's supposed to happen with the stuff the non-mortgage household debt was paying for. Some of it, like credit card debt, was incurred just incidentally to making payments, and would no longer be needed in a world with separate payment and credit systems. As for the rest, they don't say. It would be logical to see it as mostly for essentials that are better provide publicly, financed by continued reserve issuance. But that would be, as somebody said, not just reading between the lines, but off the edge of the page.

Overall, I like it. A lot. Not because I think it's a good policy proposal or even (probably) a useful focal point for political mobilization. In general, I think that one should avoid, even for rhetorical purposes, the presumption that economic policy is set by a benevolent philosopher-king (an assumption baked into standard macro models). Agreeing on how the banking system "should" function under some more or less implicit set of constraints will not get us a bit closer to a society fit for human beings. But politically, having paper from the IMF suggesting, even in this rather artificial way, that the simplest solution to excessive debt is just to abolish it, has got to be useful in the coming rising of the debtors. Intellectually, meanwhile, what I like about this is that it puts in sharp relief how little the existing financial system can be explained, as it usually is, as the solution to the economic problems of intermediation and liquidity provision. If the functions banks are supposedly performing could be performed much more efficiently and easily without them, then banks must really be for something else.

EDIT: Oh and also, I've got to quote this bit:

Any debate on the origins of money is not of merely academic interest, because it leads directly to a debate on the nature of money, which in turn has a critical bearing on arguments as to who should control the issuance of money. ... Since the thirteenth century [the] precious-metals-based system has, in Europe, been accompanied, and increasingly supplanted, by the private issuance of bank money, more properly called credit. On the other hand, the historically and anthropologically correct state/institutional story for the origins of money is one of the arguments supporting the government issuance and control of money under the rule of law. In practice this has mainly taken the form of interest-free issuance of notes or coins, although it could equally take the form of electronic deposits. 
There is another issue that tends to get confused with the much more fundamental debate concerning the control over the issuance of money, namely the debate over “real” precious-metals-backed money versus fiat money. ... this debate is mostly a diversion, because even during historical regimes based on precious metals the main reason for the high relative value of precious metals was ... government fiat and not the intrinsic qualities of the metals.These matters are especially confused in Smith (1776), who takes a primitive commodity view of money... 
The historical debate concerning the nature and control of money is the subject of Zarlenga (2002), a masterful work that traces this debate back to ancient Mesopotamia, Greece and Rome. Like Graeber (2011), he shows that private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts. Zarlenga does not adopt the common but simplistic definition of usury as the charging of “excessive interest”, but rather as “taking something for nothing” through the calculated misuse of a nation’s money system for private gain.
This is a really smart passage for a bunch of reasons. But what I really like about it is that it vindicates my position in the great Graeber debate on about three different levels. Take that, Mike Beggs!


  1. Ha - I have already quoted that exact passage about the origins of money in something I am working on - because it is a particularly blatant example of the genetic fallacy, which is so often just left implicit by those who go back to ancient Mesopotamia to say something about money. It seems to me that this is really an ahistorical or pseudohistorical treatment of money, because it works by collapsing any difference in social/institutional context between then and now. Nothing about the origin of money says anything on its own about what money is in later circumstances, because so much of what money is depends on its context.

    It's funny though that we have such a fundamental disagreement about this stuff, when I am in complete agreement with what you say about the rest of the paper.

    1. I don't think the historical stuff is really relevant here, either. (Though I do think it's cool to see it in an IMF document.) I was just having fun.

    2. It seems to me that the continuing institutional base of money is a fact of ongoing relevance. The formulation that says the value of fiat money is based on "nothing" is ignoring exactly this historical institutional basis of value.

      That the institutional basis of money value is more complex now than in Mesopotamia does nothing to change the institutional basis of the value. To my mind, but I'm just some schlub, the value of the dollar is the result of the sum of all the economic activity now denominated with it. Likewise the value of the Euro for that activity denominated with it, and the Yuan, Yen, Pound etc. And incidentally it is precisely the opaque capriciousness at the center of the Yuan system keeping it from really threatening the dollar for reserves status. And while Adam Smith did make a schmitzle schmazle of understanding money, the division of labor he did describe clearly along with all the institutions on which that depends are central to the value of all modern currencies.

      Graeber makes sense to me when he focuses on money first and foremost as a social relationship, but he writes in a pretty broad swath around the inherently coercive nature of monetary institutions necessary to sustain the complexity we now all rely on in our contemporary division of labor. With current demographics, that's not a problem that will go away, so its best not to pretend it doesn't matter.

  2. I think the biggest attraction of this proposal is political, not economic. You would essentially end up with two financial sectors: the "clean" one that is working as the paper laid out, and a "dirty" one that would consist of various attempts to work around the restrictions. A bit like the regular and the shadow banking sector today.

    They would clearly separated, since under this proposal "clean banks" would not be allowed to have any financial counterparties at all. So the shadow banking sector does not go away, but it would be easier for the govt to commit to never bail them out.

    While it is true that there would be no automatic response that would eliminate the 2008 downturn, I'm not so sure we would necessarily end up in that situation to begin with. Since demand policy would be separated from credit creation I think the run-up in debt could be avoided to begin with. In fact, I think a lot of the financialization that has happened is the direct result of recurring bond market interventions acting as a subsidy on "bank-like" behaviour.

    Replacing this with "helicopter drops" seems to me like it would be worthwhile, even if it fails to stabilize the broadest monetary aggregates.

    1. Well, yes and no.

      I agree with you that a logical outcome of the proposal would be a "shadow banking" system that functions similarly to the financial system as it exists now But that is not an explicit feature of the proposal; in fact, they are saying that there would be no such unbacked credit creation. So we can't take any of their conclusions as necessarily applying to a world with "dirty" banks working around the restrictions, even though that's what would undoubtedly happen in practice.

      In som ways, they're proposing to make the financial system work, on paper, exactly as it did work, on paper and to some extent in practice, in the postwar period. 100% or fractional reserve backing is really irrelevant; the important question is whether the reserve requirements bind -- whether fluctuations in credit are closely associated with fluctuations in the stock of base money. So the question really shouldn't be how such a system would function in principle, but what concrete institutional and/or political factors caused it to unravel historically.

  3. It seems to me 100% reserve banking is easy to analyze - it just replaces deposit insurance. The balance sheet of the central bank gets bigger, but so what? There's no seigniorage profit, assuming reserves pay interest. Debt levels don't change. The central bank's policy instrument is the same as today, interest on reserves.

    And 100% reserve in no way prevents banks from transforming illiquid assets into liquid assets. It's just that the liquid assets are bank bonds and shares, rather than deposits. (Which is not a change, banks already fund themselves that way, in addition to deposits).

    What am I missing?

    1. You are right, I think. I feel I sort of missed the point here a bit. (Though to be fair, I think their presentation conceals the real point of it too.)

      The important thing is not 100% backing. Nothing changes if that number is some fraction less than one (or greater for that matter) as long as it really binds. The reason 100% makes sense here has nothing whatsoever to do with stabilization. Rather, it makes sense because of the historical accident that investment and non-investment credit happen to be about equal right now. So the increase in bank liquidity from buying up all the noninvestment debt will be just about equal to the decrease in bank liquidity from imposing 100% reserve requirements, so both can be adopted together without any large effect on the quantity of productive credit.

      Yes, higher reserve requirements and interest on reserves are both tools to sop up excess bank liquidity. (In China reserve requirements are actively adjusted as a tool of monetary policy; probably elsewhere too.) The advantage of reserve requirements is that (1) they don't produce income for the banks, which are pure rents; and (2) they don't constrain the interest rate faced by private borrowers.

      I did't present it this way in the post; I should probably write a followup to clarify.

      The only thing you are definitely missing is that in their proposal, banks would not be able to issue bonds. (Nor would any other private businesses.) Equity and retained earnings are the only funding allowed.

    2. Why wouldn't firms be able to issue bonds?

    3. Why wouldn't firms be able to issue bonds?

      Because their plan prohibits it. As it has to -- if private non-bank units are free to make debt contracts, then the 100% reserve requirements become a dead letter.

  4. "It's true that it would prevent the specific dynamic that Fisher (and later Friedman) blamed for the Depression, a positive feedback in a downturn between bank failures and a falling money supply. But that dynamic no longer exists, given deposit insurance and active countercyclical monetary policy, altho I suppose one could imagine it reappearing again in the future"

    There's a quite reasonable argument by Gary Gorton on this point, that the shadow banking sector is actually prone to bank runs and failures since there's no FDIC inssurance but only the asset value backing secured liabilities in the repo and ABCP markets between shadow banking entities and depositors (such as MMMFs). The argument is a bit weaker today since all of the major dealers belong to bank holding companies and have access to the Fed discount window.

    " Interest is a payment for liquidity, as we've known since Keynes. So there is no economic reason for the government to pay interest to financial intermediaries when its own liabilities are the most liquid there are."

    I think it's a matter of monetary policy. If government liabilities did not pay interest but were zero coupon, there would not be any real reason for them not to be zero maturity as well. That's the equivalent of the Fed buying up all government debt held by the public in return for higher bank reserves balances. In order to be able to set an interbank rate, the Fed would have to pay interest on reserves just as it does today. So it's not clear how interest payments would be eliminated.

    1. That is the clever thing about this. Higher reserve requirements are a substitute for interest on reserves, since both are inducements for the banks to hold reserves. Part of their point here is that in a system in which binding reserve requirements were higher, the government would not have to pay interest on its liabilities.

  5. Josh, the main proponent was Henry Simons (not Herbert Simon!).

  6. Causality is now the "genetic fallacy"?

    1. Haha, yeah. I think at least we need a "history is bunk" or "immaculate conception" fallacy to balance it.

    2. Yeah, but I've hardly been arguing that position. The problem with the origin story is precisely that it implies causality when there isn't any. Money can only be understood as a historical phenomenon - path dependence is of major importance. The problem with the explanation from origin is that it skips the path between the origin and now.

      I mean, people would hardly claim that written language was essentially a thing of the state, and that the state has special powers of control over it, just because of how it first appeared in ancient Mesopotamia.

    3. Hey Mike-

      This is a genuinely difficult question. I agree with you in the specific way you make the argument here, but I worry that it's too easy to slip from the view that history isn't dispositive, to the view that history doesn't matter at all.

      If someone wanted to make a James Scott type argument that detailed records are necessary for, and often contribute to, the imposition of coercive state authority on recalcitrant subjects, I don't think that it would be irrelevant to bring up the fact that the first written records come with the first centralized states (if they do.) partly because, when we're dealing withh high-level social structures like this, the only way we get a reasonable number of data points is to look well back into the past; and partly because I do think that institutions are complex and often do have a character that can't be deduced from their current function, but is persistent over time.

  7. It is willfully untrue that "MMTers" think that the economy works with a fixed money supply controlled by the government. In fact, there whole point is that the government can't control the money supply.

    1. Nathan, I said "some" for a reason. But I think it's a pretty widespread position. You definitely can find people (like Dan Kervick in the post I link to) who identify themselves with MMT, and who argue that the important thing about government fiscal policy is that it changes the stock of money available to the private economy. I hate to say it, but you can also very clearly find this view in some of Randy Wray's stuff. The problem is that MMT wants to assert both a credit (endogenous) view of money, and a chartalist, state or tax driven view of money. But the two are not equivalent.

      For instance, read Wray's 2001 article on "Understanding Modern Money," which has to be one of the definitive statements of MMT. There, he says that "We would normally expect that the nongovernment sectors will want to accumulate some outside, or net wealth in the form of high-powered money, perhaps as a ratio to inside wealth, and/or as a ratio to income flows. ... Government deficit spending generates hoards of high-powered money to satisfy the nongovernment sector's desire to net save." I think my characterization of this as the basically monetarist view that the economy always works as if there were binding reserve requirements, is entirely fair. Note especially the suggestion that the private sector will likely want to hold outside money in a fixed proportion to income. This just is Milton Friedman's view that there is a stable, technologically determined velocity of money.

      Look, I like MMT. The last thing I want is to get into a fight with MMT proponents. (In part because I want a job, and they have a big presence at several of the places I'd like to work.) But let's be fair. MMT is a very productive research program, and it makes a number of true & important substantive claims about fiscal policy. But as a coherent, fully-worked out analysis of finance it is not there yet. In particular, IMO, the chartalist stuff really needs to go by the boards.

    2. Nathan, back when I was completely ignorant about macro and I first stumbled on MMT a couple of years ago that's what I thought Mosler, Wray, and Bill Mitchell were saying. They almost never talk about banks. They might not be aware of it but that's the impression they give.

    3. @JWM - "MMT wants to assert both a credit (endogenous) view of money, and a chartalist, state or tax driven view of money. But the two are not equivalent"

      No they aren't equivalent - but MMTers (at least Wray/Mosler etc) don't claim they are. They maintain a chartalist account of outside money, whilst subscribing to the classic PKE / endogenous account of inside money being driven by transactions between commercial banks and the non-bank private sector.

      So when you say in the post that MMT believes in a "fixed money supply set by policy", this is very misleading. MMTers are very forthright on the point that reserve requirements are not binding, since (a) they are adhered to after the fact, and (b) the central bank must lend any reserves demanded if the CB wants to retain control of the interbank rate.

      The passage from Wray you quoted sounds slightly uncharacteristic; normally when he refers to the non-government's desire to net save, he is referring not to HPM but to a wider concept of the entirety of the liabilities of the govt (consolidating the central bank), ie CB reserve balances + govt bonds + physical cash.


  8. Here's another really good chart that shows something about what is going on here behind the scenes. The differences in velocity between $$$ spent in locally-owned small business and nationally or internationally owned corporate business is an important factor to look at here. Some reports say up to 3x the difference for smaller businesses. The over-concentrated banking sector and their prerogatives that fractional-reserve money creation gives them to create credit-money loans for their over-concentrated corporate clients should be examined for cause and effect here. The finance lemmings pile in to flavor du jour, like gas fracking today, or fiber optics yesterday. Meanwhile, they over-finance a glut with these fractional reserve devices at their fingertips and then take it out of the rest of our hides for years to come.

    RE: Graeber and his focus on anthropology and moral ideas, he covers economic theory and received wisdom well on page 240-241. "Kautily was no different: the title of his book, the Arthusastra, is usually translated as "manual for statecraft", since it consists of advice to the legalists Kautilya emphasized the need to create a pretext that governance was a matter of morality and justice, but in addressing the rulers themselves he insisted that "war and peace are considered solely from the point of view of profit" -of amassing wealth to create a more effective army, of using the army to dominate markets and control resources to amass more wealth, and so on." He explains right there what economic theories are. Pretext for the military mercantilist complex that was the foundation covered up for plebeian consumption in Imperial Britain with a circumscribed two-prong controversy between "laissez-faire" and state mercantilism. Never mind that the "laissez-faire" advocates of "Manchesterism" based their entire textiles global supply-chain on slavery at one end, and occupation on the other, then later Jim Crow for decades to come. These are the sordid details about this military mercantilism all the economic theories coverup so nicely. The biggest advocates and funders of "laissez-faire" public opinion and legislation in the US are also the biggest beneficiaries of military coercion in supply-chains the world over. Their Keynesianism fad was only a temporary remedy they needed against the vicissitudes of fractional-reserve debt-money creation to enable the infrastructure for mass consumerism that came next. Meanwhile, over the last three decades they have all piled on quite nicely in China where such practices have also been the law of the land despite all their protestations for "laissez-faire" to the Plebes here in the US, UK, Australia, etc. all places now decimated once again by the vicissitudes of money creation in private hands. The sooner we can get our heads past the preoccupations we were taught at expensive schools about the operational details at Central Banks toward the pretexts they provide for a military mercantilist system that benefits a tiny few in ostensible democracies, the closer we will get toward real solutions to these current round of over-production and over-concentration problems.

  9. @JWM - "MMT wants to assert both a credit (endogenous) view of money, and a chartalist, state or tax driven view of money. But the two are not equivalent"

    No they aren't equivalent - but MMTers (at least Wray/Mosler etc) don't claim they are. They maintain a chartalist account of outside money, whilst subscribing to the classic PKE / endogenous account of inside money being driven by transactions between commercial banks and the non-bank private sector.

    Right, Wray and Mosler take the two positions you say. The problem from my point of view is that those two positions are substantively contradictory even if they are formally compatible. Because **the only reason outside money matters** is if there is a strong link from outside money to inside money (i.e. if bank money is not fully endogenous), or if bank money is not really money (i.e. there is an independet demand for outside money as such.) In the passage I quoted, Wray takes the second tactic. You cal that passage "uncharacteristic"; on the contrary, he's just spelling out the logical implications of the argument that he always makes. (Which, by the way, is a very good thing to do -- we should all wish to write as clearly as Randy does.)

    MMTers are very forthright on the point that reserve requirements are not binding, since (a) they are adhered to after the fact, and (b) the central bank must lend any reserves demanded if the CB wants to retain control of the interbank rate.

    They are indeed forthright on that point, and they are right. The problem is, they are *also* forthright on the point that government budgets matter because they change the quantity of outside money available to the private sector, and that macroeconomic instability is the result of the wrong quantity of outside money being supplied. This conflicts with the point you make above, but with due respect, this contradiction is a problem with MMT, not with me. I am just pointing it out. If I say that someone says X, and you say, "no, no, they say not-X," that's not a defense if my criticism is precisely that they are making two incompatible claims.

    If you want endogeneity, you've got to drop chartalism. There's no way for both to be true. Or rather, there's no way for both to be true **at the same time**. One of the things I like about Graeber is that he focuses our attention on the way both forms of money have existed at different times and places.

    I'm really going to have to write a post on this, aren't I?

  10. Yes! Please write that post.

    As I understand it when the Treasury spends and taxes it is involved in a chartalist exercise. Banks then take that chartalist money and do all kinds kinky and endogenous things with it accelerating its flow at times exponentially. When the endogenous bubble bursts, the system is left with its chartalist substrate and whatever else the Treasury has decided to save (everything but peoples homes in our most recent example).

    I liked Greaber because of his catholicism about money: it's always whatever most of us believe it is! I look forward to being debunked.

  11. JKH has a rather long, but excellent as usual, description of the Chicago Plan over at Modern Monetary Realism, in case anyone is interested:

  12. JW, one thing I don't know if I understand. I think you're comment re: shadow banking answers it, but to be sure:

    Under this proposal there would still be players (who don't accept retail deposits) who issue new loans, under what we might call a fractional-capital system. That right?

    But those loans would create deposits in deposit-taking banks, which would have to be backed by currency or Fed deposits ("reserves").

    How does the institutional machinery play out in this situation? JKH has promised a post on this over at the MMR blog, looking forward to seeing it...

    1. “Under this proposal there would still be players (who don't accept retail deposits) who issue new loans, under what we might call a fractional-capital system. That right?” Answer….

      Under full reserve, at least as proposed by Laurence Kotlikoff or Richard Werner, there would still be players who issue loans, but they are funded by “depositors” who are essentially shareholders. Kotlikoff actually argues that these players should be mutual funds (“unit trusts” in Britain). I.e. so called depositors send $X to a mutual fund and get a stake in the fund in return (i.e. – unlike a normal bank deposit – they lose their money). The fund then lends.

      The net result is that no money creation takes place. And money creation by private banks is the hall-mark of fractional reserve. Under full reserve, the only money creator is the central bank.

      For Werner, see:

      As to Kotlikoff, his ideas are spread of numerous of his publications, but see:

  13. They have rather different writing styles so I'm pretty sure this is wrong, but ever since Josh said he's looking for a job in academia I've kind of suspected he is the mysterious JKH.

  14. Slack wire asks: “How do you go to a 100%-reserve world without a huge contraction of credit and activity?”. Easy! Central banks can create infinite amounts of reserves at the press of a computer mouse. Alistair Darling (Britain’s finance minister at the height of the crises) created £60bn for the benefit of two banks RBS and HBOS that way.

    The only difference on introducing full reserve would be that instead of giving the money to incompetent fractional reserve banks, they money could be spend into the economy on all the usual stuff that governments spend money on: pensions, education, etc etc. Or they could just leave money in taxpayers’ pockets.

    As to the idea that Kumhof’s way of creating reserves is “kind of clever”, I beg to differ: his ideas are about the most absurd set of ideas I’ve ever seen.

    Slack wire is right to say that Kumhof and Benes propose creating the reserves via a massive debt jubilee. Now where is the justice in paying off two million dollar mortgages which wealthy folk have incurred so as the enable them to buy five or ten million dollar houses?

    Or take two people on average or slightly below average incomes. One decides to rent and the other to buy their accommodation with the help of a 100% mortgage. Along comes Kumhof and effectively gives a house to the latter. Meanwhile the renter is left no better off. Completely mad.

  15. Slack wire: thanks for alerting me to the fact that Kumhof and Benes think that “The third advantage of the Chicago Plan is a dramatic reduction of (net) government debt.” They’re talking hogwash.

    A monetarily sovereign country can reduce its debt level any time it wants simply by printing money and buying back the debt. K & B may not have noticed but many countries have been doing this over the last two years on MASSIVE scale under the guise of QE.

    As to a debt buy back under more normal circumstances, that would be equally easy, with the only slight problem being the inflationary consequences. But that’s easily dealt with by raising taxes. That might be politically difficult, but from the strict technical or economic point of view, there is no problem there at all.

    In short, the whole “debt buy back” issue is entirely independent of the full reserve / Chicago argument.

  16. A monetarily sovereign country can reduce its debt level any time it wants simply by printing money and buying back the debt.

    Yes, that is what the Kumhof plan calls for. It's the maximum possible QE. The twist is that they propose preventing an excessive extension of credit in response to this flood of liquidity by raising reserve requirements, and strictly regulating credit creation so that reserve requirements really bind. The logic of this is not clear in my post, at least in part because it's not clear in the paper itself; I'll be doing a followup which I hope will spell the logic out more directly.

    You are right that the jubilee side is independent of the new reserve requirement being exactly 100%. But they are logically connected in that if you want the central bank to buy up a great deal of relatively illiquid debt, then you have to do something to deal with the possibility that the influx of liquidity to the financial system will lead to an excessive expansion of credit. Raising reserve requirements is one of the things you can do.

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