Transcript וולף אנגלית
On radical monetary reform Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Bar Ilan University 7th December 2015 Israel On radical monetary reform • Case for permanent government creation of money • Modalities of government-creation of money • Arguments against government-creation of money • Alternatives to radical monetary reform • Possible ways forward 2 1. Case for government-creation of money • The monetary system is both a social creation and a public good (non-excludable and non-rival) • It should not be handed over in full to private entities • Indeed, it cannot be handed over in full to private entities, since the latter cannot ensure monetary stability: – Central banks, which are part of the state, insure the “moneyness” of monetary liabilities of solvent banks – Since solvency cannot be known from outside, regulators also oversee the solvency of private banks 3 1. Case for government-creation of money • Government-created money could be distributed as the government saw fit • It would reclaim seignorage from the private banks • It would deleverage the economy • It would lead to a more stable financial system: – By eliminating inherently fragile fractional-reserve intermediation; and – Curbing the private credit cycle, which is driven by feast and famine in the creation of debt-backed money; 4 1. Case for government-creation of money • A government monopoly over the creation of money would limit the ability of the private financial system to extract rent and so generate massive inequality: – Banks lend against property collateral, thereby leveraging up and enhancing the value of the latter; – Banks earn fees and interest in return for providing money that is costless for them to create; – It is “money printing”, as many say of central bank money; – These fees and interest are then turned into income for employees and shareholders; – Under competition, the rent will be partly competed away, but end up as excessive leverage 5 1. Case for government-creation of money • In a crisis: – It should be possible for central banks to create money and hand it over to the citizens in a crisis, even if there were no agreement on a permanent government monopoly of money creation, it – This would be more effective than today’s form of quantitative easing – This works via the financial system. – But, after a crisis, the financial system is, by definition, dysfunctional. – So QE is quite ineffective 6 2. Modalities of government-creation of money • There are two main proposals for governmentcreated money: – 100 per cent reserve banking, in which banks provide services to customers, but money is created by the central bank, on behalf of the government. – People then deposit government cheques in their bank. Banks are not allowed to create deposits against advances. – Direct government-created money, in which banks are purely agents for accounts containing government money. – The economic difference between these alternatives is unimportant. Under both, money-creation would be transferred to the state. 7 3. Arguments against government money • Governments will abuse the new privilege: – This is why the decision on how much money to create would have to be left to an independent institution – But this is not fundamentally different from the current situation, in which the central bank governs the terms on which people lend and borrow – That is also deeply political – We can remember when it was taken for granted that finance ministers would manipulate interest rates for political reasons – This would surely be better. • 8 3. Arguments against government money • The borderline between banking and non-banking cannot be policed: – Here one should take into account why one might want to make the shift – Financing the government more cheaply would stand even if it were hard to distinguish banking from non-banking – I used to take the position that 100 per cent reserve banking (or a close relative) could not work because "banking" would reappear outside the banking sector – This must be true • 9 3. Arguments against government money • But a counter-argument exists: – If we cannot police the borderline between banking and nonbanking, the new regulatory structure is also likely to fail – Promises to repay on demand, at par, would be illegal, except for fully-reserved banks, while those who made implicit promises would must inform customers of the risks – Alternatively, high capital requirements could be imposed on institutions that made such implicit promises – Limited liability could even be removed from any company that invested in financial claims – In this way, chains of financial claims could be eliminated. 10 3. Arguments against government money • It would be impossible to do standard monetary policy: – If we assume 100 per cent reserve banking, monetary policy would become quantitative – The central bank would no longer be a lender of last resort. – Of course, the central bank might be a lender of last resort to non-banks. – In that case, the central bank's emergency lending rate would influence interest rates in the rest of the system. – The fundamental question is whether the authorities should allow such a commitment and so emergence of a hybrid system. It would subvert the principle of the reform – 11 3. Arguments against government money • We would lose valuable financial intermediation: – But the bloated banking system of today has been doing little, if any, useful intermediation: productivity growth is slow; support for small business is a tiny part of the balance sheet; and much of the activity consists of leveraging up the value of land and creating exotic derivatives – Would we really lose much if this were to stop? – We could create the needed small-business banks with a mixture of equity and non-monetary debt – Or via peer-to-peer lending 12 3. Arguments against government money • We would lose flexible accommodation: – The supply of flexible bank credit is an alternative to investing in large holdings of money – With 100 per cent reserve banking, this flexibility would be lost – So all companies would need to hold excess money 13 4. Alternatives to radical reform: new orthodoxy • One approach is “macro-prudential policy”: – It is a way to protect the financial sector from the cycle and the cycle from the financial sector; – But it raises difficult challenges: • • • • • 14 The interventions will be difficult to judge They will be politically unpopular They may conflict with monetary policy They may have unintended consequences Above all, the system’s riskiness will be managed by officials, not financiers 4. Alternatives to radical reform: deleveraging • Another approach is radical de-leveraging of the economy and the banks • Deleveraging of economies and so also finance: – Greater use of equity or equity-like instruments, notably in mortgage lending, which is the core of modern finance – Reform of fiscal systems, to discourage debt – Deleveraging of systemic financial institutions, with leverage down to 3:1 • But political obstacles to this are as big as to radical reform 15 4. Possible ways forward • Big bang reform is unlikely • Instead, make current reserves a permanent requirement. • Let the government finance itself through money creation and adjust bank reserve requirements, so taxing (and curbing) private credit creation. • Prepare a worked-out scheme to be implemented after a future crisis • Individual countries can embark on experiments 16