IMF's whacky far-out conspiraloon Government Issued Utility Money Plan

[littlebabyjesus]

I will finish that paper, but I have to say that I'm suspicious of some of its assumptions. I suspect that with 100 percent reserve lending, getting hold of a loan would be very difficult, particularly a long-term loan, as it would have to be matched not only by deposits but by deposits of equal length. That would mean that competition for loans would be high - and therefore interest charged would be high. So in response to that lack of available loans, the govt would create more money. But this centralised, bureaucratic response would inevitably be slow and inaccurate. You're in danger of a stagnating economy in such a situation.

There is an alternative - you remain with a demand-for-loan-driven money creation system, but you nationalise the banks.

 

[Jazzz]

In that case, say bye bye not only to fee free banking, but any kind of affordable loans at all. It'd be an utter disaster.

www.zopa.com

loans not created out of thin air already exist at reasonable rates!

But in fact this is Stockholm Syndrome. We are completely dependent on loans because that's the only way to keep our money supply topped up. With full-reserve banking, we won't need those loans in the first place. The money is already there!

 

[littlebabyjesus]

www.zopa.com

loans not created out of thin air already exist at reasonable rates!

Those are decent rates, but that also illustrates part of the problem - the longer you want to borrow, the higher the rate of interest you have to pay. That's an inevitable consequence of such a system.

 

[butchersapron]

www.zopa.com

loans not created out of thin air already exist at reasonable rates!

But in fact this is Stockholm Syndrome. We are completely dependent on loans because that's the only way to keep our money supply topped up. With full-reserve banking, we won't need those loans in the first place. The money is already there!

Wow. We are dependent on loans. Here is spam for loans.

 

[butchersapron]

**

 

[butchersapron]

Borrowing £1,000 over 2 years will cost you £49.00 per month
You will pay £1,176.04 in total after 2 years, this includes
£66.04 interest (at 5.8% fixed) and £110.00 borrowing fee. The APR is 17.3%

 

[butchersapron]

Borrowing from Zopa lenders is a fair and human way of getting a low-cost loan - and applying is a straightforward, paperless process.

Bring on the robots.

 

[frogwoman]

The IMF, brave warriors for TRUTH against the international financiers.

 

[littlebabyjesus]

Actually, that site is a bit sickening.

And that's why we make sure that everyone that takes out a loan from Zopa lenders is an honest and reliable individual – you know, the sort of person you'd happily leave your bag with while you went to the bathroom.

So if you've ever got into financial trouble, you're not the sort of person someone could leave a bag with? Hmmm.

 

[frogwoman]

Wow. We are dependent on loans. Here is spam for loans.

WAKE UP SHEEPLE! Every bit of spam sent is another pork chop in the mouth of the Jew World Order

 

[camouflage]

I think short-selling is immoral because it is backing failure, essentially.

I do mention Steve Keen a lot, I guess. I think he's very well worth reading.

Prices go up, prices go down. Prices going down could be for any reason, for instance maybe the corporation is spending massively on investment... that could make it's stock price go down. If I were to borrow some of those stocks to short sell them and then return them to the former owners (who were paid a fee for it) how is that immoral? No bets on child-fights involved.

 

[littlebabyjesus]

Prices go up, prices go down. Prices going down could be for any reason, for instance maybe the corporation is spending massively on investment... that could make it's stock price go down. If I were to borrow some of those stocks to short sell them and then return them to the former owners (who were paid a fee for it) how is that immoral? No bets on child-fights involved.

The justification given for short-selling in markets is that it allows the market to 'find' the right prices. I don't buy this. For starters, this 'discovery' theory is yet another example of equilibrium thinking - the idea that the right price is out there waiting to be discovered, that markets 'correct' themselves. But for seconds, I don't see why you need this mechanism to find the 'right' value for a stock. Simple buying and selling should do that. And finally, for dessert, the clincher - that short-selling gives a motive to encourage failure. And we are not all independent actors - the short-sellers are themselves affecting the market with their actions. They are themselves part of the market. I have no problem with a sportsman betting on himself to win. I have enormous problems with him betting on himself to lose.

I'm open to be persuaded otherwise, but I've discussed this on here before with finance types, and they've failed to convince me.

 

[love detective]

100% reserve banking means you can only lend someone £100 for 1 year if someone has deposited £100 for 1 year in your bank.

No, quite the reverse in fact. 100% reserve banking in and off itself places no such restrictions on what you can lend, it only places restrictions on what you can or cannot do with money deposited with you as a bank. So the only restraint it places on lending is an indirect one by restricting one of the variety of sources that loans are currently funded from. 100% reserve banking in it's generally accepted form (going back to the original Chicago proposals which this IMF staff paper seems to be based on), means that if someone deposits £100 with a bank in a current account type account (i.e. instant access) then the bank has to retain that £100 in reserve ready to pay out should the customer want to withdraw that money. Even under 100% reserve banking, fractional reserve lending applies to all other deposits that are not instant access (i.e. time deposits etc..). What you describe above is purely maturity matching and can and is done within fractional reserve lending (i.e. it's seen as 'best practice' in terms of managing liquidity & maturity risk)

Yes, and I was answering. The Northern Rock situation could not happen. Banks would no longer be able to lend long and borrow short, which is what Northern Rock did, and every bank does, and why they can potentially hit difficulties if the source of their borrowing short dries up, whether that source is individual depositors or other banks.

As above, full reserve banking entails only that demand deposits are backed pound for pound by the bank taking the deposit

If full reserve banking was in place at the time of Northern Rock going under it wouldn't have made any difference. They went under not because of any customer run withdrawing their deposits but because they couldn't fund themselves when the wholesale money markets froze up along with the losing of their ability to sell packaged up mortgages debts into the market when that also froze up.

The bank run on NR (amounting to around £2bn of deposits withdrawn from that bank and put straight back into the system) only started the day after it became public knowledge that the state had had to step in and provide £26bn of funding that NR had previously relied upon the wholesale money markets for, but was unable to roll over that funding when it came due for renewal

 

[littlebabyjesus]

As above, full reserve banking entails only that demand deposits are backed pound for pound by the bank taking the deposit

If full reserve banking was in place at the time of Northern Rock going under it wouldn't have made any difference. They went under not because of any customer run withdrawing their deposits but because they couldn't fund themselves when the wholesale money markets froze up along with the losing of their ability to sell packaged up mortgages debts into the market when that also froze up

That's not my understanding from reading the paper. I'll try to pin down exactly what they are proposing, but they do appear to be proposing that lending must be backed by matching timed deposits. That would mean that the Northern Rock situation could not occur.

 

[butchersapron]

Which is nothing to do with their commercial ability.

 

[love detective]

That's not my understanding from reading the paper. I'll try to pin down exactly what they are proposing, but they do appear to be proposing that lending must be backed by matching timed deposits. That would mean that the Northern Rock situation could not occur.

I haven't read their paper so possibly they are making other suggestions, these would not however fall under the category of 100% reserve banking however. 100% reserver banking is about what you do with deposits made with you as a bank, it doesn't say anything about what you can lend (other than you can't fund your lending with deposits which are withdrawable on demand)

I have previously however read the original Chigago paper on which their paper is based and that is crystal clear as to what the original proponents of 100% reserve banking wanted, which is what I described above

e.g.

Now let us see how, under the 100% system, the banks would be able to make loans, even though they could no longer use their customers’ demand deposits for that purpose.

There would be three sources of loanable funds.

The first would be in the repayments to the banks of existing loans of circulating medium largely created by the banks in the past. Such repayments would release to the banks more cash than they would need to maintain 100% reserve behind demand deposits; and this “free” cash they would be able to lend out again. The banks would, therefore, suffer no contraction in their present volume of loans. They would have a “revolving fund” of approximately sixteen billions (as of December 31, 1938) of “Loans, Discounts and Overdrafts (including Rediscounts)” with which to operate under the 100% system. The banks could keep these sixteen billions of loans revolving indefinitely by lending them out or investing them as they were repaid.

The second sources of loans would be the banks own funds, capital, surplus, and individual profits which might be increased from time to time by the sale of new bank stock.

The third source of loans would be new savings “deposited” in savings accounts or otherwise borrowed by the banks. That is, the banks would accept as time or savings deposits the savings of the community and lend such funds out again to those who could put them to advantageous use. In this manner, the banks might add without restraint to their savings or time deposits, but not to the total of their demand deposits and cash.

 

[littlebabyjesus]

Ok, I've found this

the banking system’s credit assets must be funded by non-monetary liabilities that are not subject to runs.

I am confused by this now, though. Maybe I'm being thick, but if all deposits must be backed by equal reserves, where does the money to lend come from for long term loans if not from long-term deposits?

 

[littlebabyjesus]

The first would be in the repayments to the banks of existing loans of circulating medium largely created by the banks in the past.

But these repayments would also destroy the deposits those loans themselves had created, which must mean that there is no net gain of 'free money' to circulate.

 

[littlebabyjesus]

Ok, part of the answer seems to be that banks would be expected to be lending their own money.

Apart from deposits, banks’ own net worth is another important source of funds.

Interesting to read that Friedman was in favour of a 100% reserve system. I guess it might have made his monetarism theories more tenable. But it still doesn't seem to add up to me.

And this couldn't end bank failures requiring bailouts. If a bank is allowed to lend against the value of an asset the bank owns (which becomes a liability!), and the value of that asset/liability then goes down, the bank is no longer funding its loan. So where does it get its funding from? Why would it even bother taking deposits if it wasn't allowed to lend them out? This whole scheme appears to be based on a misguided idea of equilibrium in which things have a 'true' monetary value, somehow, magically.

This actually seems to me to be far worse than the current system. There doesn't seem to be any mechanism by which a bank in trouble could finance itself.

 

[Jazzz]

Ok, I've found this

I am confused by this now, though. Maybe I'm being thick, but if all deposits must be backed by equal reserves, where does the money to lend come from for long term loans if not from long-term deposits?

I suggest simply ignoring love detective's posts to avoid confusion. He does not understand the process of money creation and the difference between fractional and full-reserve banking, or indeed bank runs.

With full-reserve banking, there's no such thing as a bank run. The money is there.

 

[love detective]

Ok, I've found this



I am confused by this now, though. Maybe I'm being thick, but if all deposits must be backed by equal reserves, where does the money to lend come from for long term loans if not from long-term deposits?

the restriction (in generally accepted 100% reserve banking) is that you can't use demand deposits to fund loans. It doesn't prevent using a rolling 1 week deposit to help fund a 25 year loan (if a bank chose to do so then they clearly have a maturity mismatch risk, but there's nothing stopping them doing that from 100% reserve banking 'theory'). So yes, long term loans are funded from 'long term' deposits but a long term deposit in this sense of the word could be anything from 1 day to 5 years or so, and a long term loan anything from a few months to 25 years. So the restriction that 100% reserve banking in and off itself places on lending says nothing as to the maturity matching of deposits & loans (other than ruling out demand deposits being used to fund any kind of loan at all)

But these repayments would also destroy the deposits those loans themselves had created, which must mean that there is no net gain of 'free money' to circulate.

I made no comment/judgement on their proposals other than to state what they are - the point of quoting that bit was to highlight the two parts i've bolded, which describe in essence what generally accepted 100% reserve banking actually applies to, i.e. it purely restricts what a bank can do with deposits made with it which the customer can legally withdraw on demand

As i said, this IMF paper may have a whole load of other proposals in it in relation to other things they would like to see, but these are nothing to do with 100% reserve banking

 

[littlebabyjesus]

Of course with full-reserve banking, there's no such thing as a bank run. The money is there.

The money is only 'there' if the time of the deposits is matched to the time of the loans.

 

[love detective]

Ok, part of the answer seems to be that banks would be expected to be lending their own money.

Yes, this is stated as the 'second source' of funding in the part I quoted above from the original chicago proposals - alongside the 'third source' which is time deposits

Why would it even bother taking deposits if it wasn't allowed to lend them out?

See above

 

[Blagsta]

There would be no need to bailout a full-reserve bank that went bust, any more than there would be a need to bail out an ordinary business. Those who had demand deposits would have them back - as the bank would be obliged to have reserves to cover them. Those who had money invested in time deposits would lose out, retaining the fraction of the money left that was available.

As the bank was not creating any new money, there is no loss of money in the system if it did go bust. Also, note that a bank run cannot hurt a full-reserve bank.

Whereas if a fractional reserve bank goes bust it is catastrophic. As confidence in it vanishes, so does all the money it created vanish - which can lead to a chain reaction with the other banks, as massive amounts of money vanishes they can't get their loans repaid - hence further loss of confidence, which is all that is needed to start the next run.

The full-reserve situation is very ordinary and straightforward. The fractional-reserve is really utterly bonkers.

Northern Rock didn't go bust though, did they?

 

[Jazzz]

Even under 100% reserve banking, fractional reserve lending applies to all other deposits that are not instant access (i.e. time deposits etc..)

I'll break my own advice to quote this because it is such utter nonsense. If you have any fractional reserve lending, you have money creation by private banks, you do not have full reserve banking. This the whole point.

 

[littlebabyjesus]

the restriction (in generally accepted 100% reserve banking) is that you can't use demand deposits to fund loans. It doesn't prevent using a rolling 1 week deposit to help fund a 25 year loan (if a bank chose to do so then they clearly have a maturity mismatch risk, but there's nothing stopping them doing that from 100% reserve banking 'theory').

Right, well in that case, there's no guard against a bank going bust when its rolling deposits dry up. I still don't quite see how that is truly 100% reserve lending. It clearly isn't if your long-term loans are not fully funded by long-term deposits. And if all loans had to be matched exactly to deposits like that, the whole system would grind to a halt.

I know you're not advocating this, but it doesn't seem to be a coherent theory to me.

 

[love detective]

Even under 100% reserve banking, fractional reserve lending applies to all other deposits that are not instant access (i.e. time deposits etc..

I'll break my own advice to quote this because it is such utter nonsense. If you have full reserve banking, you cannot have any fractional reserve lending. That is the whole point.

Original Chicago Paper on Full Reserve Banking (Page 22):-

Under the 100% reserve system, demand deposits of checking deposits, being the equivalent of cash, would be withdrawable or transferable without any restrictions whatever. The cash would belong to the depositor, and ought to be ready at his beck and call. But savings or time deposits would, as at present, normally be covered only fractionally by cash reserves.

Muppet

 

[littlebabyjesus]

I'll break my own advice to quote this because it is such utter nonsense. If you have full reserve banking, you cannot have any fractional reserve lending. That is the whole point.

Is it, though? I'm confused by this, Jazz. Loans have two components - amount and time. For a full 100% reserve lending system to be in place, both of these would have to be matched up. Such a system simply wouldn't move.

 

[littlebabyjesus]

Northern Rock didn't go bust though, did they?

Hmmm. I must say that you might have been right after all to bring up Northern Rock. This system isn't quite what I first thought it was.

 

[Blagsta]

If full reserve banking was in place at the time of Northern Rock going under it wouldn't have made any difference. They went under not because of any customer run withdrawing their deposits but because they couldn't fund themselves when the wholesale money markets froze up along with the losing of their ability to sell packaged up mortgages debts into the market when that also froze up.

The bank run on NR (amounting to around £2bn of deposits withdrawn from that bank and put straight back into the system) only started the day after it became public knowledge that the state had had to step in and provide £26bn of funding that NR had previously relied upon the wholesale money markets for, but was unable to roll over that funding when it came due for renewal

Yes, this is what I was getting at. Thanks for putting it more clearly than I could!