Dear Trond
>Thanks to both of you for comprehensive answers. I am in sympathy with your
>model, since I have been thinking along these lines for some years myself.
my pleasure.
>I have a further question:
>
>Is it at all neccessary to allow banks to create money through lending?
>Should
>not the government/cb be the only money creator? Wouldn't it be better for
>the
>gvt.'s ability to control the general macroeconomic situation (and
>inflation), that high-powered money was the only money, and that
>borrowing/lending only took place through selling/buying of bonds in the
>private sector + banks borrowing from the gvt. (through the central bank)?
>
>This is -- as I understand it -- Fisher's "100% money". Somehow I have got
>the impression that there is some sort of cranky flavour that adheres to
>this proposal, even among "progressive" economists. I have never understood
>why this idea is not a good one. Comments, anyone?
Randy, earlier this morning has given a response that I concur with. viz ...
>you can, however, remove govt promises and/or encouragements behind
>privately issued "money". on the one hand, this would tend to reduce
>"moral hazard"; on the other, it would remove protection of depositors,
>and hinder "par clearing". i see good arguments for narrowing the
>govt's promises (explicit or implicit guarantees of particular
>forms of horizontal leveraging). but i see no good argument for
>eliminating all govt promises.
I can add the following:
one of the arguments concerning the reason that the CGS (commonwealth govt
securities)
market should continue in Australia is that Government securities are
alleged to provide a
'safe haven' for investors when there is financial instability. The 'flight
to quality' argument
suggests that it is beneficial to the macro economy for investors to have a
risk free
domestic asset available to avoid capital losses on other assets. However,
in addition
to the previous points I made (in the last post) regarding subsidy through
government annuities,
I would also note that CGS compete directly with these other assets,
thereby driving down their
prices and exacerbating matters during 'flights to quality'.
But further, and relevant here, in a monetary economy, investors can always
hold money balances
by increasing actual cash holdings or banking system deposits. Deposit
insurance makes bank
deposits equivalent to CGS for all practical purposes. That passes the
'risk' to private
banks when they select their assets and selection of assets is regulated by
the RBA.
There is no compelling macroeconomic reason why risk and return decisions by
private maximising agents should be 'further protected' by retreat to a market
distorting government annuity.
So deposit insurance is an important component of the safety of the system
and in some
respects attenuates moral hazard.
More generally, the government should not be in the business of bailing out
every financial
institution. Financial stability is a public good and requires:
1. Clearly defined property rights;
2. Central bank oversight of the payments system;
3. Capital adequacy standards for financial institutions;
4. Bank depositor protection;
5. An institutional lender-of-last resort when private institutions refuse
to lend to
solvent borrowers in times of liquidity crisis;
6. An institution to ameliorate instances of coordination failure among private
investors/creditors;
7. The provision of exit strategies to insolvent institutions.
While some of these requirements can be provided by private institutions,
all fall in
the domain of government and its designated agents.
The implicit government bailouts of operations like LTCM in the US helped
the principals
escape with large stockpiles of wealth when it is questionable that they
should have been
accommodated by another government institution in the US that was also
growing rapidly
in the 1990s!
The only comprehensive guarantee that the monopoly issuer of the currency
should engage in
is to provide a job for all those who are unable to currently find work for
whatever reason. this
job should be at a fixed wage. in this way the level of net government
spending is endogenous
and is whatever it has to be to maintain full employment. This is the Job
Guarantee policy
advocated by CofFEE and others (like Randy ... under a different name).
>urthermore, to the rest of this list:
>
>The list has 87 subscribers. Traffic is very low. Why is that? Bill has now
>given a challenge to another part of the heterodox camp, to the
>
> >....progressive economists (including some on this list) who advocate the
> >continuance of debt issuance....
>
>..to finance gvt. spending.
>
>I would like to hear their reply. Or does everyone agree with Bill in spite
>of what he says about them?
I was probably wrong ....!!!
best wishes
bill
William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle, NSW, Australia
E-mail: ecwfm@alinga.newcastle.edu.au
Phone: +61-2-4921 5065
Fax: +61-2-4921 6919
Mobile: 0419 422 410
http://e1.newcastle.edu.au/economics/bill/billeco.html
http://www.billmitchell.org
Received on Mon Jan 27 19:01:49 2003
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