We know absolutely that the basic idea is entirely crap for this reason and this reason alone:
He was backed by the campaign group Positive Money and the New Economics Foundation.
If you\’ve got those two loons on board then you must be wrong.
From the paper itself:
control of credit growth would become much more straightforward because banks would
no longer be able, as they are today, to generate their own funding, deposits, in the act of
lending, an extraordinary privilege that is not enjoyed by any other type of business.
Rather, banks would become what many erroneously believe them to be today, pure
intermediaries that depend on obtaining outside funding before being able to lend. Having
to obtain outside funding rather than being able to create it themselves would much
reduce the ability of banks to cause business cycles due to potentially capricious changes
in their attitude towards credit risk.
Sigh. Banks do require outside funding.
It may well be true that they lend first then worry about how they\’re going to fund it. But they do indeed have to go and fund their loans. The banking system may well create credit. Sure, the deposit of one loan into another bank means the whole thing can spin another turn. But one individual bank does not create, ab nihilo, the funding for its own lending.
If banks did not require outside funding then Northern Rock would not have gone bust. Northern Rock did go bust. Therefore banks require outside funding. That logic isn\’t perfect. Yet. Except that Northern Rock went bust because it required outside funding of loans it had already made. Which makes that logical circle complete.
Banks do currently require outside funding therefore the argument being out forward here is rubbish.
The second advantage of the Chicago Plan is that having fully reserve-backed bank
deposits would completely eliminate bank runs,
At which point we kill maturity transformation. Bad idea.
Oh, by the way, the heterodox economists who love this and similar sorts of ideas. There\’s a real problem with the proof that this paper is trying to offer.
We study Fisher’s four claims by embedding a comprehensive and carefully calibrated
model of the U.S. financial system in a state-of-the-art monetary DSGE model of the U.S.
They\’re using as their proof exactly the DSGE models that you heterodox economists insist do not model the economy well: or even at all. You\’re not allowed to accept proof of your cherished theory via a method that you normally abhor.
And I\’ve a political point to make as well. Or a public choice point. Part of this system is that the government just creates the money. Then goes and spends it as a way of getting it out into the economy (this is MMT, the sort of thing that Anne Pettifor and Positive Money keep talking about). There is no requirement to tax or to borrow as a method of financing government expenditure. Because government is printing the money and actually has to go spend it in order to get it into the economy.
Which is lovely, state creation of credit, not private.
The function tax plays in this system is rather different. We all know that excessive creation of credit (or, in this case, government money) leads to inflation. Tax is the method by which this inflation doesn\’t happen. The government taxes only and exactly at the right level to ensure no (or perhaps that 2% that greases the wheels) inflation by reducing the money supply in collecting tax to offset the creation of money by spending.
Which again is lovely. And now look at the incentives on offer to politicians.
Under the current system they have to either tax or borrow in order to spend. And they\’re not really very good at matching up the tax and the spend thing as we can see from the borrowing. Under this new, MMT method, there is no correlation between how much they can spend and how much they need to tax. They can just print money in order to fund each and every one of their fantasies. The only reason to tax is to reduce or prevent inflation.
We are supposed to think that the incentives to politicians will be to reduce or prevent inflation here are we?
Hardy har har.
Inflation takes time to appear. 18 months to two years according to the monetarists. Which really is rather longer than the time horizon of a politician facing election, ain\’t it?
My prediction is that giving the politicians the control of the printing presses will lead to 5-10% inflation in no short order. With bursts of 20% or so just after elections. For that\’s the way the incentives would go.
Not a good system I\’m afraid.