Prominent Economists Call for End to Fractional Reserve Banking:
Posted on April 30, 2014 by WashingtonsBlog.
Challenging a Sacred Cow of Banking Dogma:
Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.
As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.
But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):
The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.
So huge swaths of loans are not subject to any reserve requirements.
Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico, Canada, New Zealand, Sweden and the UK).
But there is a growing recognition that this is going in the wrong direction, because fractional reserve banking can destabilize the economy (and credit can easily be created by the government itself.)
It was big news this week when one of the world’s most prominent economics writers – liberal economist Martin Wolf – advocated doing away with fractional reserve banking altogether… i.e. requiring that banks only loan out as much money as they actually have on hand in the form of customer deposits:
Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.
What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.
A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well.
Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.
Opponents will argue that the economy would die for lack of credit. I was once sympathetic to that argument. But only about 10 per cent of UK bank lending has financed business investment in sectors other than commercial property. We could find other ways of funding this.
Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.
(The IMF study is here.)
In fact, a lot of experts have backed this or similar proposals, including:
Bank of England Chief Mervyn King
Prominent conservative economist Milton Friedman
Prominent liberal economist Irving Fisher
Prominent conservative economist Lawrence Kotlikoff
Prominent liberal economist James Tobin
Prominent conservative economist John Cochrane
Prominent liberal economist Herman Daly
Prominent conservative economist Murray Rothbard
Prominent British economist John Kay
Conservative Spanish economics professor Huerta de Soto
German economist Thorsten Polleit
Conservative French economist Jörg Guido Hülsmann
Head economics writer at the Guardian Ambrose Evans-Pritchard
Bloomberg columnist Matthew C. Klein
Interestingly, the Chicago Plan for full reserve banking came very close to passing in 1934. But the unfortunate death of one of its main Congressional sponsors – Senator Bronson M. Cutting – in a plane crash reversed the momentum for the bill.
As Wikipedia notes:
Cutting played a key role in the political struggles over the reform of banking which Roosevelt undertook while dealing with the Great Depression, and which resulted in the Banking Reform Acts of 1933 and 1935. As a supporter of the Chicago Plan proposed by economist Irving Fisher and others at the University of Chicago, Cutting was among a handful of influential Senators who might have been able to remove from the private banks their ability to manipulate the money supply by enforcing a 100 percent reserve requirement for all credit creation, as stipulated in the Chicago Plan. His unfortunate death in an airliner crash cut short what may have been his most enduring legacy to the nation.
Polls: Americans Are Sick of the War On Terror, War On Drugs … And All of the Other Failed U.S. Wars
Posted on May 1, 2014 by WashingtonsBlog
Americans Turn Anti-War
The American people are now overwhelmingly opposed to more war in Ukraine, Syria, Iran and elsewhere.
A new Wall Street Journal/NBC poll shows:
Americans in large numbers want the U.S. to reduce its role in world affairs even as a showdown with Russia over Ukraine preoccupies Washington ….
In a marked change from past decades, nearly half of those surveyed want the U.S. to be less active on the global stage, with fewer than one-fifth calling for more active engagement—an anti-interventionist current that sweeps across party lines.
A Pew poll from December found a majority of Americans – more than ever before in Pew’s 50-year history of polling this question – think the U.S. “should mind its own business internationally and let other countries get along as best they can on their own.”
A Pew/USA Today poll conducted over the weekend found that Americans oppose – by a 2-1 margin – any U.S. military aid to Ukraine.
A YouGov poll conducted last month found that only 14 percent of Americans said the U.S. has “any responsibility” to get involved in Ukraine, and only 18 percent think the U.S. “has any responsibility to protect Ukraine if Russia were to invade.”
Americans are more likely than not to say that the United States has no responsibility to get involved in Ukraine even under extreme circumstances, the new survey shows ….
Pluralities of Democrats, Republicans and independents agreed that the U.S. does not have a responsibility to protect Ukraine.
Support for a war against Syria is 500 percent less than for the Iraq war (Americans would rather have a root canal or a colonoscopy than bomb Syria).
A USA Today/Pew Poll from January shows that Americans now believe by a 50%-38% margin that war against Iraq was stupid.
Support even for the Afghanistan war has collapsed. For example, only 35% of all Americans support the Afghanistan war, according to a 2011 CNN poll.
Most Americans are now strongly opposed to intervention in any Arab country.
The warmongers, however, are desperate to drum up business.
War On Drugs
A new Pew poll also shows that the American people are sick of the war on drugs, noting that a broad majority of Americans are ready to significantly reduce the role of the criminal justice system in dealing with people who use drugs.
54% are in favor of marijuana legalization
67% say the government should focus more on providing treatment for people who use drugs like cocaine and heroin, and only 26% think the focus should be more on prosecuting people who use such drugs
Of course, the war on drugs is a total boondoggle. And stopping government support for drug dealers and producers might be a good place to start (even though it is making American banks rich).
Other Failed Wars
Obama has also declared a war on inequality. But given that income inequality has increased more under Obama than under Bush, and that bad policy enacted on a bipartisan basis is making inequality worse and worse, we may be in real trouble.
Of course, neither mainstream political party represents the interests of the people as revealed by polls.