Sheffield University Authors MAKE AN EFFORT TO Criticise Full Reserve BankingOn by
The remaining first paragraph of section 3.1 highlights that trust in commercial banking institutions is degraded or destroyed by crises like the one which occurred in 2007/8. However the authors have a great solution for the last mentioned problem. But that “state backing” is a subsidy of the private bank operating system!
And it is widely accepted in economics that subsidies misallocate resources (unless there are overwhelming social reasons for a subsidy as is the case with for example children’s education). The Sheffield department of economics perhaps must be reminded that economics is focused on the allocation of resources. To be more accurate, deposit insurance in the UK is funded by taxpayers, whereas deposit insurance in america in the case of small banking institutions is self-funding: banking institutions pay a premium to the Federal Deposit Insurance Corporation. As to bigger banks, it’s essentially taxpayers that have to foot or so the costs: see the billions if not trillions of general public money used to prop up those large banks during the recent problems.
And the reason behind that is that there’s only one entity that can rescue large banks, namely the state itself. And also some states (e.g. Ireland) were near bankrupted by their attempts to save their banks. The next paragraph of the section criticises FR on the grounds that “the option of safe resources would be reduced…”.
That’s a mention of the actual fact that taxpayers no longer underwrite loans or investments which involve more risk that that involved with government debt. As readers will notice probably, that’s essentially a repetition of the idea made in the FIRST paragraph of the section: that is, the Sheffield authors are requesting loans and investments to be backed by (i.e. subsidised by) taxpayers. And if that’s what the Sheffield authors want, perhaps they can clarify why they don’t advocate the whole stock exchange being made risk free gratis the taxpayer. Next, the Sheffield authors make this claim in respect of traditional bank or investment company deposits: “Bank or investment company deposits thus perform the money function of method of payment.
In addition they become a store of value, as long as there is general public trust in bank or investment company deposits. ” No: wrong again. The mistake there is certainly that for every pound of commercial bank issued money there’s a pound of debt. And incidentally it’s not just advocates of FR who make that point: advocates of Modern Monetary Theory (MMT) have made the same point numerous times. For example as Bill Mitchell place it, “…horizontal money nets to nothing”.
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Thus reducing commercial bank or investment company deposits does not decrease the stock of “safe assets”: it has no effect on the NET stock of such possessions AT ALL! Now there are three mistakes there. First, as pointed out already, the prevailing commercial banking system does not offer the public a genuine way of saving, or more accurately a way of “net saving” in that for every pound of saving, there’s a pound of debt.
Second, since FR entails REPLACING commercial bank or investment company money with bottom money or “sovereign money”, FR would INCREASE the scope for without risk saving actually, since foundation money is a kind of risk free keeping from the public’s perspective. About the only faintly valid idea in the last mentioned passage by the Sheffield authors is the idea that people of the public should have an extremely safe approach to saving available to them for individuals who want that. Well FR provides that. First (as stated above) there is the safe half of the bank industry that exists under FR.
Second, and in regards to the riskier fifty percent of the industry, people under most variations of FR have a CHOICE in regards to what to place their cost savings into. If they want something that resembles a traditional British building society, that sort of thing certainly should be made available. Zero interest on safe accounts?
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