Friday, March 8, 2013

Richard Werner — Hitch-hiker’s guide to monetary infrastructure

The Financial Times published an excellent letter from Prof Richard Werner, Chair in International Banking, School of Management, University of Southampton, UK on March 5, 2013 entitled “Hitch-hiker’s guide to monetary infrastructure”.
Positive Money
FT: Hitch-hiker’s guide to monetary infrastructure

I am no longer linking directly to publications that charge for access, which includes the WSJ, NYT, and FT.

You can find the full letter here.


Kyle said...

Just a note: you can still access WSJ articles by Googling the article's full title and following the link. It bypasses the subscription.

STF said...

In his last paragraph he essentially argues that deficits with bond sales to banks are more stimulative than deficits with bond sales to dealers. Of course, many dealers are banks, and banks are the source of dealer funds to buy bonds at the margin. Not that it matters, as bonds actually enable more credit creation via repos, and nobody holding a bond is restrained in their spending. So he's schooling everyone on how banks work, while he doesn't understand how bond sales work. His view is a strange blend of endogenous money (the first half or so of his letter is completely correct) and loan able funds.

peterc said...

Tom, you've inspired me to stop linking to publications that charge a subscription fee (or user fee, for that matter). I am going to extend this rule to include academic journals.

geerussell said...

Another note on FT, with free registration you can get all their blogs and eight articles/month in the news content beyond that.

Tom Hickey said...

Kyle, I know there are work-arounds. I have decided to boycott firms whose business models and practices I don't agree with. In other words, I am drawing a line.

Dan Kervick said...

This seems like a funny way to describe the process of commercial bank money generation:

As Martin Wolf has pointed out, it is created by profit-oriented companies, the banks, when they do what is commonly referred to as “lending money”. But they don’t lend existing money. Instead, they newly invent the money that they lend, by pretending that the borrowers have deposited it and thus crediting their accounts without transferring any money there, by simply inputting the desired number.

I don't think the banks are "pretending" anything. When you borrow money from the bank, it is your option as to whether to deposit it in an account or not. You also have the option of taking cash or having the bank cut a check for you. If you want it in a checking account you can draw on, then you have the money on deposit. There is no pretense here.

Bob Roddis said...

The pretense is that it has always been an open air conspiracy. On purpose, most people are not taught that banks can create funny money loans out of nothing. The system was set up to help the banks loot the masses and the government. And to control the government.

They continue to operate it so that it appears as if banks are lending out deposits because they are concerned that average people would be appalled if they knew the truth.

Dan Kervick said...

I don't see anything wrong with selling published content, since published content costs something to produce. If you go into a book store, the books generally are not free but cost money. If the price is right, you pay. If not, you don't. The FT publishes a lot of valuable stuff. I don't subscribe because my needs and time for utilization are limited and so the value I get is not worth the cost. I appreciate that they make a limited portion of the the content available for free.

Dan Kervick said...

There is no conspiracy. If you go to the Fed's website you can find an abundant amount of free and clearly written information about how the banking system works. If there is misinformation out there it is due to the fact that a lot of economists have some bad theories and poorly researched preconceived opinions about how things work, and they pass those biases on to their students and the public.

Tom Hickey said...

I don't see anything wrong with selling published content, since published content costs something to produce.

Nothing wrong with it. I just don't support it with links to it. People can find that stuff on their own.

David said...

So he's schooling everyone on how banks work, while he doesn't understand how bond sales work

Scott, maybe that's the crux of it. In his book Princes of the Yen, Werner says
"During the 1990's most fiscal spending was funded not through money creation, but through borrowing from the private sector. Such fiscal spending must crowd out private activity. Fiscal policy becomes a zero-sum game that merely reallocates existing resources."

So he has a sort of quantity "crowding out" theory that he developed to explain the "ineffectiveness of fiscal policy" in the case of Japan. Bill Mitchell says they just didn't do enough(fiscal) for long enough. Werner does say that fiscal policy would have been more effective in the 1990s if the BOJ had been willing to increase its bond purchases and thereby monetize the fiscal interventions. Perhaps the "credit contract" with commercials banks is to circumvent the sometimes perverse actions of independent central banks:
"By raising most money through bank loans, the government can increase credit creation and thus monetize fiscal policy."

STF said...

Right, David.
What he doesn't seem to understand is that QE as the Fed does it is the exact same thing as what he proposes. The Fed buys a Tsy and leaves banks with overnight RBs (functionally an overnight Tsy) and the deposit of the dealer, while the Tsy's spending provides a deposit to the spending recipient. With his preferred "borrowing from banks," dealers keep their deposits, the banks get a tsy sec, and spending recipients get deposits. Exact same thing in either case. Not that it matters, though, relative to selling a bond with no QE--which the failure of QE to do anything but support financial asset prices has already proven.

STF said...

The only difference is that if banks were holding longer-term Tsys instead of RBs, they would have potentially more interest income and greater profits, potentially helping to recapitalize. That's what US banks did in the early 1990s--held lt Tsy's and earned a sizeable spread for a few years. But with avereage rates so low, it's doubtful that would have worked in this case. And I don't see that Werner's talking about recapitalizing in the first place--seems to me he's referring to more of a loanable funds issue. When I met him in 2009 that's essentially the argument he made.

Tom Hickey said...

It seems that the only way that this makes sense is fiscally — if the cb sells a bond from its assets to a bank, which pays for it with rb AND then the cb credits the TGA with the rb from the bond sale.

Now that may be legal somewhere that the cb cannot directly credit the TGA with rb without getting the rb from the private sector, but it's not the case in the US, where the Tsy has issue new bonds at auction to get the reserve ad from the sale in the private sector.

Seems like everyone with a "plan" is trying to get fiscal out of monetary or somehow force banks to lend against their choice.

To work. the cb would have to either directly credit private bank accounts held outside the payments system, i.e., not simply bank reserve balances, which amounts to a "helicopter drop" — really a transfer payment — or buy real assets in the private sector, or else directly credit the TGA with reserves for spending, none of which is permitted under current rules, as far as I know.