Why?

Second, hope against hope that someone has had the wisdom to print a lot of £100 and £1,000 notes that can be time limited in circulation. This is the big innovation I suggest to deal with panic. What do I mean by it? Simply that if anyone really fancies staging a run on a bank I suggest that notes be made available so that they can be paid in cash without having to offer the type of bank guarantees that crippled Ireland. And time delimited notes mean that they have to be deposited again within, say, a month when order has been re-established. And if they are not they are cancelled so that they cannot be used for crime. Their deposit in a bank outside the UK should also be barred: no bank should be able to claim settlement on them if they are. I am not sure such a technique has been tried before, but so what? What is required is short term liquidity. But the demand for short term liquidity should not create a long term difficulty as it did in 2008. Time delimited bank notes meet that need: the government will promise to pay, but only for a limited period after which redepositing has to occur. Confidence in being able to extract money from an institution is established. The demand for cash is then likely to fall. And the crisis has to pass in a short period.

What is the point of this? The central bank already promises to provide unlimited liquidity to solvent institutions.

And this is hilarious:

Fifth, legislation to stop capital flight must be passed: tax withholding at an emergency rate would be appropriate. This might be variable to match demand: the rate would rise if demand increased. This would not apply to settlement of trade liabilities.

If things get bad we’ll steal your money. Thus things get bad right now as everyone takes their money away before it is stolen.

Seventh, certain types of stock trading should be suspended. Stock lending should be barred. Short selling would also need to be barred. And if in consequence derivative positions are incapable of settlement emergency clearance should be arranged so that compensation in terms of margins made or lost could be settled instead of principal sums, where possible (although I stress, this idea needs development and is not my area of greatest expertise, and I admit it). The risks inherent in seeking to resolve such situations are noted to be high: any institution requiring emergency funding as a result would be subject to automatic nationalisation without compensation. Directors of such institutions would face unlimited liability with regard to losses.

You ban certain financial activities, then make directors personally liable for the losses from your ban on those activities?

Is this Mussolini or Alice in Wonderland here?

Eighth, emergency legislation with substantial criminal and asset confiscation penalties must be passed to prevent anyone seeking to profit from trades with a regulated financial institution of any sort requiring emergency funding. This would also apply to non-financial institutions applying for emergency credit to survive.

We’ll jail you if you buy shares in a bank that gets liquidity assistance?

Or how about this: bank needs liquidity, I do a repo maybe, possibly actually buy gilts from them, a purchase on which I make a (entirely normal) profit turn of 10 basis points and I go to jail?

What the fuck’s he been smoking?

47 thoughts on “Why?”

  1. It’s the thin end of the wedge. Start by printing one-month notes; then soon you’re printing about one-year notes, ten-year notes, and so on. The endgame is always control of the printing presses.

  2. “… legislation to stop capital flight must be passed: tax withholding at an emergency rate would be appropriate.”

    It has a precedent. The Germans did this in the 1930s

  3. And time delimited notes mean that they have to be deposited again within, say, a month when order has been re-established. And if they are not they are cancelled

    Wouldn’t that just spread the run to the currently-liquid banks? Surely the first thing that anyone would do on receiving a time-limited note would be to change it for a real note, as soon as possible.

    And I don’t see it helping the illiquid bank suffering the run either. If my bank was forced to give out time-limited notes, then I would immediately empty my accounts and deposit them in banks that weren’t about to fail – thereby hastening the failure of the bank with the problem.

    But then I’m not even 0.2 of an economist, so what do I know?

  4. Actually BiW has a point.

    Instead of time limited notes, allow people to take out £x in real £ and £amount-x in not-until-time notes.

    You can deposit those notes in your other bank but they won’t appear on your balance (or be processed through the cash clearing system) until the date on the note.

    Sort of a zero-interest government backed security with a short end-date.

    I’m sure there are problems and the system might be trivially game-able (you could get a reasonable secondary market in the special notes for money now) but it should work for bank runs.

    Seems over complicated to me as well compared to the current method as well.

  5. any institution requiring emergency funding as a result would be subject to automatic nationalisation without compensation.

    Ah, the smell of a socialist advocating theft. It’s a common stench up here in the People’s Democratic Republic (not quite yet but soon) of Alba.

  6. This ‘do as we say or I’ll steal your money’ is a bit of a theme amongst his fans – here’s someone in the ‘weakness in demand’ thread.

    ‘If idle private savings are not put to productive uses to generate well paid jobs in the developed countries, then those idle savings should be taxed heavily or otherwise appropriated by the states that can put it to good use for the good of humanity and the planet’

  7. “Seventh, certain types of stock trading should be suspended. Stock lending should be barred. Short selling would also need to be barred.”

    Ritchie advocates the current approach of the Chinese government then. The rest of his proposals don’t look too far from that either.

    “So please don’t nit pick detail and stick to fundamentals”

    One of his students should write that at the top of their exam paper.

  8. Let’s see.
    “But the demand for short term liquidity should not create a long term difficulty as it did in 2008. Time delimited bank notes meet that need: the government will promise to pay, but only for a limited period after which redepositing has to occur.”

    This is nonsense. If a bank is solvent, if the BoE provides unlimited cash, there is no long term liability. If the bank is insolvent, time delimited cash does not help – the money lent to the insolvent bank becomes a liability. Given that the BoE does not lend to insolvent banks, someone else must pay (and if it were a central bank liability that would be a form of inflation tax). So the long term liability is created anyway. The money may be redeposited, but that does not resolve the problem of the first insolvent bank’s liability.

    Mr Murphy you receive 0/10 for this. A pathetic excuse for reasoning. City University should be embarrassed that this unbelievably stupid and ignorant individual is a member of their faculty even as an adjunct.

  9. Max,

    The point is that actually, almost all private savings are largely put to productive use. It’s just that they refuse to recognise the mechanism (bank accounts, pension funds, unit trusts, ISAs etc) by which they do so.

    Less, obviously, of the “well paid jobs in the developed countries” but, why morally, is that a problem. Compared, say to “suitably remunerated jobs in the developing world”?

  10. So, banks issue one month delimited notes. You have one month to spend it. Who is going to accept payment of money which will shortly become worthless?

    Three weeks have passed. The ‘crisis’ is still going on because idiots like Murphy is in charge. I doubt the BofE has printed fresh one-month delimited notes so is still issuing the old ones, except they now expire in six days. Sorry. Good luck buying anything with that.

    At which point we riot.

    So that confidence building exercise went well.

  11. Joke banknotes printed with disappearing ink?

    From the quote: “This is the big innovation I suggest to deal with panic.”

    From Tim: “What is the point of this? The central bank already promises to provide unlimited liquidity to solvent institutions.”

    The liquidity assistance would follow the deposits and goes to the receiving bank/business rather than to the failing bank? Customers will quickly redistribute their deposits around the rest of the banking sector or consumer economy.

  12. ‘If idle private savings are not put to productive uses to generate well paid jobs in the developed countries, then those idle savings should be taxed heavily or otherwise appropriated by the states that can put it to good use for the good of humanity and the planet’

    Cunt. There really is no other appropriate word, except perhaps ‘thief’.

    Stealing UK savings to give to foreigners. Brilliant. And he wonders why even McDonnell wouldn’t touch him with a barge pole.

  13. OK , I suck at poetry, but…

    As I sit in my tower of elbein and gold,
    I look upon the masses and make sure they’re told,
    that theft of creation,
    for the Good of the Nation,
    will be the new Fold.

  14. According to Murphy banks create money out of thin air, so why would there ever be a liquidity crisis? Just print more money.

  15. @rob

    Evil goblins steal the banks magical money powers at times of crisis.

    (This is as good an explanation as the bilge written by Mr Murphy)

  16. DBC Reed is going to explain money creation from thin air at any moment.

    Clearly, with the help of a viable producer/seller and a viable buyer/debtor the banks can create money from money.

    Which is great. My own mortgage rate is 0.79%, a rate which would not be remotely possible without fractional reserve magic.

    Evil goblins may have been involved at RBS though.

  17. @JC No, I’m not because you always make out that from thin air money creation can be infinite when in fact it is limited by a formula as I repeatedly point out.The system as presently organised remains a fraud however as Murray Rothbard explains in his Fractional Reserve Banking essay (which I would add will, only become honest when money creation is nationalised by nationalising the banks).BTW Tim Worstall has declared that banks create money” out of thin air” 19th March 2014 on this blog.Are you setting yourself up as knowing more than he does about banking?

  18. Surreptitious Evil said:
    “The point is that actually, almost all private savings are largely put to productive use. It’s just that they refuse to recognise the mechanism (bank accounts, pension funds, unit trusts, ISAs etc) by which they do so.”

    But they believe that the banks can create money out of thin air, so depositing money in a bank doesn’t increase the amount available for productive use.

    It’s amazing how rational things can be when you start from a point of complete insanity.

  19. “@JC No, I’m not because you always make out that from thin air money creation can be infinite when in fact it is limited by a formula as I repeatedly point out.”

    That’s the wrong way around. It was me that pointed out the constraints to you.

    The fact is “thin air” is useful short-hand on occasion, but the constraints mean it isn’t from “thin air”.

    You may as well as say that farmers produce apples “from thin air”.

  20. DBC R,
    Anyway, so we agree on the constraints and what they are, pretty much.

    So what is your argument against this process? The potential risks are obvious, but a side issue. That’s about management. Why are you so angry about banks “creating” money in this way?

  21. I love that Murph says (in his diktat about short selling) that derivatives are not his “greatest area of expertise”.

    Suggests that he considers himself a derivatives expert, but that he’s even more expert in other areas.

    He is quite, quite mad.

  22. Bison’s law posits that the degree of lunacy in any Murphy theory increases in direct proportion to the value of ordinal numbers as tortured logic is heaped upon profound ignorance in paragraph after paragraph.

    The law was framed at a time when “seventh” was the maximum observed but this time he rings the bell on the “test-your-insanity” machine by reaching “tenth”.

  23. He hopes someone has printed lots of hundred and thousand pound notes. He’s expecting a bit of inflation then?

    What can you do with a thousand pound note? Time limited for a month? It would take a month to find a mug willing to accept it.

  24. “Confidence in being able to extract money from an institution is established.”

    For a certain value of “money”; that is to say, as long as you equate more-or-less worthless pieces of paper (for who is going to accept them as payment for anything?) as “money”.

    Not obvious what this would achieve, really.

  25. What does he mean by time-limited banknotes?

    I’ve got some money in a bank account. The bank’s solvency is in doubt, so I go to the bank and take the money out, and they pay me in time-limited £1000 notes. I take them to the solvent bank next door and put them in my account there. So what do I care about the time limit?

    This makes sense only if the bank next door won’t accept the notes at face value. And if the banks won’t take them, nor will anyone else. So they’re no good as currency, they’re just unsecured short-term debt.

  26. He is the sort of person who normally argues that large denomination banknotes are only welcomed by crooks and fraudsters. It is good to see yet more confirmation of the “stump” hypothesis.

  27. @SJW, others, I get the impression that the notes are expected to be redeposited at the wobbly bank within a month. Making them even less likely to be accepted by anyone except, perhaps, the utterly desperate/poor.

    It’s Murphy’s usual attempt bend logic and language to make it look like he has addressed a practical point without compromising his principles, in this case ‘never spend money on banks or other large companies’.

    “But the depositors can take their money out

    and will put it back once they see they can do so

    it’s the bank run hokey kokey, not neoliberal sophistry.”

  28. I’m struggling to parse this one, though:

    “Sixth, emergency credit to ensure businesses unable to meet UK liabilities because of non-payment in other currencies must be made available. This could be by way of tax deferral. If that is insufficient facilities must be made available from a National Investment Bank. If not repaid within six months these should be convertible into equity stakes in the businesses supported. The National Investment Bank must be supported by People’s QE. If the Maastricht conditions need to be ignored for timeliness, so be it. ”

    Is he saying that if some foreign business fails to pay it’s bills to a UK company, the NIB (the Swiss Army knife of banks) will provide credit, but take a chunk of equity as security? That’ll reassure the investors, knowing that their stake might get diluted in 6 months time.

  29. NielsR: I’m struggling to parse this one, though:

    That way madness lies.

    Murphy needs to be appreciated on a metaphysical level and to attempt a deconstruction in literal and rational terms is folly.

    He sets up various straw problems and then deploys a pot pourri of his little inventions to solve them to the delighted applause of his claque.

    The underlying problem here is that his “best-before” thousand quid note simply isn’t fungible and the ensuing ten-layer game of mental (in every sense) patty-cake is as mysterious as the music of the spheres.

  30. If Murphy can find some way of forcing employers to keep paying people to work until the day they drop dead, then fine. In the real world, I have to build up a pile of “idle assets” now in order to be able to use them in the future to be able to pay to stay alive when I’m old and nobody’s prepared to pay me to work, and I’m incapable (even if I wanted) to work.

  31. Diogenes, I disagree, though only insofar as the ‘policies’ are designed to create jobs that offer the perception of control over vast swathes of national and international finance. The bank runs and mass emigration are purely incidental (and we’ll be lucky if it goes no further than that, tbh.)

    Bison, I look at it as a form of mental exercise, similar to crosswords. If a little less formal and a lot funnier. I wouldn’t dream of taking it any more serious than that.

  32. ‘Hot potato money’. Staggeringly stupid. Replace solid liabilities to depositors with a parallel, devaluing currency (whatever the specific mechanism that impairs it). You could call it something like ‘the drachma’. Someone needs to go back to school and learn MV=PQ again. Remind me how you get paid to talk this nonsense again?

  33. Oddly the last comment (currently) on the blog ‘talking to schools is a great thing to do’ is the most terrifying one on the thread – how can this bastard be allowed within ten miles of a secondary or primary education facility?

  34. Obviously the closest thing to a Murphyite state in existence, North Korea, continues to exist 60 years after its inception – who does Murphy envisage as the China equivalent for his particular Courageous State!

  35. He got up to at least ‘eighth’ on today’s list. He was on fire. The muse of manure was spraying like a good ‘un.

  36. Reading this post I could literally feel my blood pressure rising; seriously the tension in my body right now is not healthy. Is there anything that the loony left, and specifically this wanker, cannot solve with banning it and then banning anything that may circumvent that ban? I may go to fucking Norfolk and as this tosser if he has been looking at by beer.

  37. Looking at his NIB loan for non payment of foreign company with equity stake I could just imagine the sort of people involved in VAT carousel fraud positively salivating over this one.

  38. @JC
    My objections to the present system ,which you admit is fraudulent by calling it “a neat trick” , are that the government has to borrow of the banks which are just making the money up.Why can’t the Government make the money up for itself and save on interest payments? Why are the banks too big to fail when they don’t have any money? Why is everybody suffering just to keep history’s biggest con trick in being?
    No answer is there? (Well there is: Crash 2 is in the wings, strenuously ignored by the media/ruling class which are normally so quick to instil more fear in anybody who has to work for a living)

  39. No, the banks cannot and do not just make money up to buy government bonds with.

    There’s a common misconception about the meaning of “banks create money”. Banks create money supply when they make loans. They don’t create money for themselves.

    Governments can and do make money up for themselves – Quantitative Easing – and it’s a rational response to a fall in the velocity of circulation of money. But if they do it just to pay the bills the result is inflation and, if they continue, hyperinflation.

  40. @SJW
    Bollocks . Banks create a load of money and it isn’t inflationary:the State creates a lot of money and its is inflationary.Is that your argument?God almighty.
    Velocity of money has nothing to do with the quantity of money. Speeding up velocity (see velocity money in Alberta )is a way of keeping the quantity the same but making it do more work
    by making it change hands faster.

  41. Complicated phenomenon, inflation. Credit booms can be inflationary, government money printing need not be: it depends on the circumstances.

    I suggest you have a look at the equation of exchange. Perhaps you’ll perceive some reason why one might want to quantity of money to go up when its velocity of circulation falls.

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