Part 16: Monetary Reform: Series 1

To Scott:

Scott,

You said (referring to the NEED Act funding large projects – small ones too, I assume, as they are cumulative), "This would be the Soviet Central Planning Nightmare Scenario - something far worse than the broken system we have now."

The TVA wasn't a Soviet Central Planning Nightmare. There are plenty of other large projects one could cite. You don't seem to hold the WPA and CCC in high regard. What FDR did could be done again but vastly better. You don't mention the bottom-up component that I suggested. If you are referring only to how the bill is currently worded (leaving too much up to the imagination and even potential whims of MA members), then I take your point (with reservations).

My feeling all along has been that the NEED Act is there and can and should serve as not only a conversation piece but the very bill we should work on to change and improve to get as much as we can that will be something that many Austrians and MMTers could support (with their own qualifying language).

I actually believe that Joe's observations would not be lost on Bill Mitchell for instance. Dennis Kucinich rightly wants full employment. Bill Mitchell does also. My difference with Bill Mitchell is the same one the New Dealers had with Big Business back when. Business didn't want the competition of a highly skilled publicly employed labor force doing high-skills work as such. Bill seems to want to appease the capitalists by saying that public employment is sort of last resort and sort of minimum wage. It doesn't jibe with permanent bank-nationalization that he seems to favor. I prefer consistency rather than a mixed economy. For me, the real issue concerns coercion.

To John:

John,

You asked, "By what mechanism can very large loans (i.e., for big projects) be funded, under a full reserve monetary system?" They aren't loans.

On Joe's point about full-reserves, I would say non-credit/debt money as opposed to 100% money.

The MMTers have it right that the issue of price inflation hinges upon productivity. I came to that conclusion independently before I had ever heard of MMT or any of the economists who came up with that model.

If the resulting productivity matches the increase in money to fund major projects, then there isn't inflation. The MMTers, I suppose, would tax any excess out of the system, which is also similar to what I proposed with the real-time, all-items PI and across-the-board access to all accounts held by Treasury as the one bank depository (cyber).

As for what you put to Joe: "Perhaps some form of government lending agency for financial institutions?" in lieu of private capital formation for large private projects, you are running into the limitations of capitalism where the NEED Act is hugely socialistic, just as the single, central depository is socialistic (as are Ellen's public banks). Socialism is not only an absolute, it is also a relative thing. To Ron Paul, we're all Goddamned collectivists (sort of).

The NEED Act lends as a last resort. I would rather it lend nothing and borrow nothing (but the Constitution is an issue).

What I see going on in this discussion thread is the typical complete avoidance of what isn't even an intellectual curiosity among laissez-faire capitalists for fear of it being discussed on the merits, and that's decentralized socialism. I've mentioned it repeatedly throughout, but....

If the government funds rather than lends and if the projects are of all sizes, what's to capitalize privately and why?

Money creation and destruction (withdrawal) will be tools. Why not use them to maximum advantage? I don't suggest that we build new Egyptian pyramids, but I doubt capitalism, per se, "funded" them. The problem with the system that built them was centralization. The same effort could be applied with greater results via more localized funding decisions. A well-informed people can make wonderful choices.

As for the Money-Multiplier issue and Steve Keen's and others' data, that data don't/doesn't (Brit/American) doesn't show to what degree the banks are operating against stated Fed rules. Where there are no reserve requirements, of course there need be not interbank borrowing in boom times (it's all gambling). Who will be stuck holding the bag or hot potato? The taxpayers, the serfs, will.

Also, the fact that there are exceptions to the theory of Money-Multiplier does not prove that there is no Multiplier. You continue writing here as if it is either/or. It is not either/or. It is both. If you are saying that those who hold that the Money-Multiplier is the one and only way debt-money is created, then you are right that they are wrong.

To Joe:

Joe,

I haven't finished the language concerning the "Transaction Account" definition failings. Let's hope we save some things to our respective hard drives and categorize them ourselves for future reference.

As for your use of "transubstantiation," it's not apt because if you will recall, I said that Federal Reserve Notes should be declared United States Money (to save time and recycling costs, etc.) and you took exception. Conversion under the Act is swapping and not transubstantiation.

As for your expression "godam communism – forbid," I will remind you that the Christian Apostles live from one purse. Let me also direct others and you to Acts: "And all that believed were together, and had all things common; And sold their possessions and goods, and parted them to all men, as every man had need. ... And the multitude of them that believed were of one heart and of one soul: neither said any of them that ought of the things which he possessed was his own; but they had all things common." (Acts 2:44-45;4:32).

Now, not everyone here will be a Christian, but there is communism and then there is communism. An atheist-Marxists may join our discussion. Until then, I'm the resident communist; and I don't think it's helpful for you to refer to my well-grounded religious beliefs as Goddamned. I say this not by way of suggesting that you do not know the differences between Christ and Marx, but still...

Thanks.

Concerning your statement to Scott: "...your continuing comment on full-reserve banking as a monetary contraction is bordering on broken-record folly," I must say that I agree. Scott is one bright fellow, but as Bill Mitchell said, it's the student: "...as a teacher I should always realise that if someone is not "getting it" then the first question I have to ask is whether I have explained it clearly enough. Then I have to ensure I have provided enough reference material to support the pedagogy and if all that fails and I am sure that I have communicated clearly then I will conclude that the student is the problem."

In your answer to John regarding Steve Keen, are you aware that Bill Mitchell has a public banking concept where he expressly forbids the banks from having brokerages and from trading in swaps [derivatives], etc. He hasn't spelled it out in detail yet, but I think his thinking is similar to yours and mine on the subject. You say that most that bullsh_t will be gone. I say that the Act should say it outright (forbid). In that, I agree with Bill Mitchell's approach.

You did go on to realize that John gets that banks create money. The issue between MMTers and Multipliers is who goes first, the central bank or the "endogenous" universe. The argument is not as Ellen presents it.

To Ellen:

Ellen,

No offense, but...

Whether the MMT or the Multiplier are in play (and both are), the loans come without interbank borrowing except to meet reserve requirements (if those requirements are being enforced and if there isn't a bank run or more).

It is absolutely not true that base money is equal to all loans from banks outstanding, and I mean commercial banks sans their "new" brokerage/investment bank wings.

Debt-money checks clear. You need to find that out.

I cited highly authoritative voices on the subject, apparently much more knowledgeable than Warren Mosler about huge banks, though he's interesting and I don't mean to offend.

The thing about the CD brokers though is that you can't, from that bit of info, logically conclude that the reason for buying and selling the CD's is to "balance the books" to have avoided creating any credit/debt money whatsoever, which is what you have been suggesting all along in this discussion thread and contrary to all the countervailing evidence and including the fact that you have not put the ultimate question to any authoritative figures or top world-banking experts running the mega-banks.

Do they have to borrow to balance/clear? If they do, then where did the money come from that Steve Keen cited as having not come from the Central Bank first? How does the money supply grow, Ellen, if it's not the Central Bank and it's not from banks creating money (to lend to each other in your worldview)? Now we are moving beyond the realm of thin air to magical thinking, as they say (and that coming from one who really does believe in miracles).

Really Ellen, just explain to Joe, John, and me, where money (not toxic derivative "thingies") comes from if not either the Central Bank or the banks making loans? If you cannot answer that, then how in the world can you envision a pool of money that meets the borrowing needs you have been insisting are required of all banks (solvent we assume)?

The pool neither expands nor contracts or it does expand and contract. If it's the Central Bank pumping out base money, then how do you agree with Steve Keen and others that the multiplier doesn't explain everything? If Steve is wrong, does the Central Bank created/issued base money equal all bank-loan amounts outstanding? It doesn't in my understanding.

Why you don't see that you are stuck in an untenable, unexplainable position about where the money comes from escapes me.

If you can explain it without simply quoting Rose and Hudgins (again), then you'll have done something. If you can't answer the whole question and within the exact parameters, then you owe it to yourself to at least say there's something going on that you haven't been able to "get," to use Bill Mitchell's word about his problem student.

I'm ready to be wrong if you can show, step-by-step, where money starts and how it grows and still fills the requirements you insist upon.

UPDATE:

[Let's take the issues one at a time and fix them one step at a time so we don't lose anyone.]

National Emergency Employment Defense Act of 2011

SEC. 402. REPLACING FRACTIONAL RESERVE BANKING WITH THE LENDING OF UNITED STATES MONEY.

(a) Conversion Process-

(1) DEPOSITS-

(A) IN GENERAL- All deposits at any depository institution shall be designated as and treated as United States Money (either cash or an electronic equivalent) and as transaction accounts.

[All deposits must necessarily include all time-deposits.]

(B) PROHIBITIONS- In addition to subsection (d), the following provisions shall apply with respect to United States Money on deposit in a transaction account at any depository institution:

(i) INTEREST- No interest may be paid or may accrue on any United States Money on deposit in a transaction account at any depository institution.

[It follows then that no bank may pay interest on any time-deposit.]

(ii) DEPOSITS AS BAILMENT- Any United States Money on deposit in a transaction account at any depository institution shall--

(I) be treated as a bailment for the mutual benefit of the parties and terminable at will; and

(II) as property held in trust as bailed property, not be treated as an asset of the depository institution or as a source of credit.

[It follows then that no bank may lend out time-deposit money and whether or not at interest.

Under the Act as it is currently worded, banks may not extend credit because all deposits are transaction accounts and may not earn interest or be lent out.

Does anyone here not see this? If so, raise your hand. If I'm seeing things that aren't there, explain how so.]

UPDATE:

Hi Ellen,

Thanks for the reply, and I'm sure everyone here will join me in wishing/praying your surgery goes well and that you make a full and speedy recovery.

"The bank may be borrowing back the money it just created...." What's your source for that understanding? What more does it tell you?

With that knowledge, what distance do you yet see between us and/or among all of us concerning this money-creation aspect/ability and whatever constraints on liquidity you see in the NEED Act, which specific language needs addressing/fixing.

How would you fix it (in lay terms to start)? What would you reword and how.

UPDATE:

"I'd cut out the part where the bank has to fork over its loan repayments to the government. The loan repayments are needed by the bank to balance its books. Not letting the bank collect on the loans would be the equivalent of having all the loans default." -- Ellen

You would not though allow any further multiplier after that though, right? The debt-money would be converted to United States Money but remain with the commercial bank(s) that created it so they could settle their own debts, etc.

What would that money be after all the borrowings for liquidity (even under the fractional-reserve system) finally settled out? Would it be bank capital/equity? That wouldn't be inflationary. They could lend it out directly along with customer time-deposit money. What would be the harm in it, Joe?

The government Fund would not be flooded with money, but the government would still have to increase the money supply to fund all the new public productivity. It's a compromise with capitalism.

I'm not saying I agree, Ellen. I'm hypothetically working here within the commercial-banking scenario, with which I disagree in principle; but if I can't get everything I want immediately, I still want monetary reform to go forward sooner than later. If this will be a huge sticking point with getting millions of voters to agree, then I'm a realist and think the language should be deleted.

My preference is for nationalizing the banking system so that it will be a public utility along the lines I've outlined previously. However, nationalized enterprises can still "turn a profit." I don't like it, but people are so brainwashed against socialism that they don't ever hear of decentralized and non-profit versions.

On your second point, Ellen ("it should be made clear that all banks can borrow from the Monetary Authority at any time, at a designated rate, which should be in the Act. Otherwise you're going to wind up with liquidity crunches and credit crises"), I'm not seeing that. The Act is clear about the mandate to avoid inflation/deflation while going for full employment and infrastructure repair, upgrading, and new, etc. The MA could not possibly do those things while any "liquidity crunches and credit crises" could simultaneously exist. It couldn't happen if they were to do even the most basic job of it. I don't like the MA at all, but still....

Monetary Reform: Series 1

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  • Tom Usher

    About Tom Usher

    Employment: 2008 - present, website developer and writer. 2015 - present, insurance broker. Education: Arizona State University, Bachelor of Science in Political Science. City University of Seattle, graduate studies in Public Administration. Volunteerism: 2007 - present, president of the Real Liberal Christian Church and Christian Commons Project.
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