Wie berichtet, bin ich Anfang September beim Global Economic Symposium in Kuala Lumpur und nehme am Panel zur “Future of Global Money” teil. Meinen Diskussionsbeitrag habe ich vorgestern hier veröffentlicht. Heute nun die Kritik an meinem Vorschlag von George Selgin, einem der anderen Teilnehmer:
“‘Seignorage’ is a form of producers’ surplus, and as such is earned only by money suppliers that have monopoly power. Modern central banks and mints earn seignorage. So did ancient mints. Commercial banks don’t. Instead competition causes them to share their returns from intermediation (it isn’t money” creation” in the usual sense) with customers through interest payments and services. Consequently a call to “prevent” commercial banks from sharing in “seignorage” is actually a call to enhance monopoly profits at the expense of consumers. Nor, by the way, does the public gain by allowing central banks to intermediate a larger share of their savings. The economic development has a name for policies designed to award central banks the lion’s share of intermediation by limiting the role of commercial banks via reserve requirements, usury laws, and such. It is called “financial repression,” and it has been an important cause of financial underdevelopment. To call for getting banks entirely out of the business of supplying IOUs that can serve as means of exchange is to endorse a particularly Procrustean scheme for financial repression.”
Da ich diese Kritik nicht so stehen lassen kann, habe ich folgende erläuternde Antwort eingereicht:
Response to comment by George Selgin on above proposal
George Selgin has made some interesting arguments against the solutions I originally proposed. Below are a few comments in this regard. Some of these are aimed at clarifying the context to my proposal, and my position vis-à-vis fundamental economic pre-requisites like free market and regulation. Others will hopefully serve to enliven the discussion on this highly relevant topic.
Text of Selgin’s comment (re-arranged for facilitating analysis)
1. “Seignorage” is a form of producers’ surplus, and as such is earned only by money suppliers that have monopoly power. Modern central banks and mints earn seignorage. So did ancient mints. Commercial banks don’t.
2. Instead competition causes them to share their returns from intermediation (it isn’t money” creation” in the usual sense) with customers through interest payments and services. Consequently a call to “prevent” commercial banks from sharing in “seignorage” is actually a call to enhance monopoly profits at the expense of consumers. Nor, by the way, does the public gain by allowing central banks to intermediate a larger share of their savings. The economic development has a name for policies designed to award central banks the lion’s share of intermediation by limiting the role of commercial banks via reserve requirements, usury laws, and such. It is called “financial repression,” and it has been an important cause of financial underdevelopment. To call for getting banks entirely out of the business of supplying IOUs that can serve as means of exchange is to endorse a particularly Procrustean scheme for financial repression.
Setting the context to my proposal
The current economic situation, especially regarding high-debt and low-growth levels, in most developed and developing economies of significance is substantially different from any period in the past. E.g. for the EU 27 countries, the government debt to GDP ratio has gone up from 59% in 2007 to 87% in 2013 , while growth rates have become negative . Private (household) debt has been increasing similarly. Some such statistics (global government debt exceeding 100 trillion USD) have been mentioned in the original proposal.
Remedial measures like debt restructuring via taxes, de-merging of banks, stricter capital rules, etc. have their own merits. Yet, not only have they been ineffective in the current situation in Europe, they have been steadily worsening it over time.
It follows that any current proposal for solutions has no real precedent, and hence it is worth seriously considering unprecedented solutions in these unprecedented circumstances.
Position regarding free market
I firmly believe in the power of the free market. Yet much to my dislike too, the market has not been, and is not really free (more on this in the following paragraphs). With every creation of a money deposit by a commercial bank, the default risk that the bank will not be in a position to pay out this deposit if demanded by the depositor keeps increasing. When governments step in and provide deposit guarantees of around €100,000 for private persons, they further add to the default risk at an even higher level.
In a really free market, new deposits created would be discounted – to factor in the increasing default risk – and be valued increasingly less than equivalent amounts of real money. This would create clear arbitrage opportunities for, and provide real monetary incentives for, every holder of real money to ask for their deposits to be paid out, thus starting a bank run.
Yet we do not see this happening, precisely because the market, especially when it comes to financial institutions and commercial banks, is far from free. The road towards making it free will have to involve dealing with, and modifying, current forms of regulation, till the necessary discipline and stability can be instilled in the market, so that it can indeed function in a free, self-regulating manner.
Position regarding financial innovation
Likewise, I am a supporter of financial innovation and entrepreneurship. Securitization as such is a wonderful development, so are financial derivatives. But distorted incentives (for commercial & investment banks), incompetency of key watchdogs (auditors, ratings agencies), biases in human behavior (extrapolating past into future, cognitive dissonance, etc.) all combined to create the worst crisis by 2008.
When incentives are distorted and perverse, any innovation, including financial, is pre-programmed to wreak havoc as above. Re-establishing a well-functioning, free market, with institutions that are empowered to intervene appropriately (see below), is necessary for promoting financial innovation that truly benefits us all.
Position regarding allowing financial institutions to fail
As a supporter of the free market, I support a regime that allows banks to go bankrupt without risking the system. Yet I acknowledge that today we are all stuck with, and have to deal with, a legacy of SIFIs (systemically important financial institutions) and too-big-to-fail banks. In the post-Lehman Brothers period, even in the USA – the epitome of free market enterprise – the Fed & Treasury did not let the markets play it out. They intervened heavily, introduced TARP, and offered a helping hand to FIs like Goldman Sachs, thus distorting the rules of the game. So did European authorities when it came to Greece and other countries. That is the not-really-free market we have to first deal with, whether we like it or not! Yet I am hopeful that we all can, and should indeed, attempt to change it in future, but we need to survive well till we get there.
Authority is not always monopoly
I refuse to accept that institutions that have well-defined, final powers, necessarily and always act monopolistically. The supreme court of a country has the final say on a judicial matter, but it is not a monopoly institution. There are clear bases and guidelines on which it acts, and if it fails to, that tarnishes the image of that entire nation in the eyes of the world.
Central banks, in my opinion, can be entrusted with similar powers, provided they are also subject to clear mandates, guidelines, and checks & balances. A central bank’s credibility will be lost – and the nation’s long-term competitive position jeopardized – if those powers were to be misused. When it comes to something as fundamental as money, institutions like a powerful central bank are necessary, and they can still be made to act in society’s best interests!
Seigniorage vs. Special Profits of banks (Selgin, comment 1)
Seigniorage earned by central banks was on the currency (notes, coins) they actually, physically introduced into the economy. I agree that commercial banks do not earn seigniorage this way, but they do earn what are called special profits. The critical difference – in substance, and way more important than the terminology – is that commercial banks do not need to introduce real money into the system for creating computer entries of deposits. Based on these deposits (liabilities), which are purely computerized entries, they are able to make loans (assets), and earn the interest spread in the process. So commercial banks do not need to borrow the equivalent amount of real money before lending it, but they are able to make real profits on it. This is a distortion of a free market.
On competition forcing banks to share their returns (Selgin, comment 2)
In principle, I agree that competition among financial institutions forces them to share their returns. But where is the free-market basis for generating these returns? As explained in the previous point, what commercial banks share are returns that were mainly possible because of the distorted playing field (arbitrage spread profit through fictional deposit-lending activities) caused by a fractional reserve banking system. Furthermore, some of these banks enjoy the too big to fail status, and along with them, some others are SIFIs (systemically important financial institutions). It is naïve to expect free market forces to be active, effective, and in control of such situations.
We are globally in a huge and unprecedented financial mess, with no clear perspectives for a way out. Matters will only worsen, as long as politicians and key banking regulators keep fudging facts and resorting to ineffective, half-baked measures.
This mess has arisen, because markets have not really been free, and in fact have been subject to highly distortionary regulation and incentivization. Fractional reserve banking and the current fiat money system are at the crux of this distortion. Replacing them ASAP with a sovereign money system – while considering subsequent alternatives like crypto currencies (Bitcoin) – is of paramount importance.
The author thanks Shirish Pandit for his contributions to this paper.
Jörg Guido Hülsmann, “Has Fractional-Reserve Banking Really Passed the Market Test?”, 2003. http://www.independent.org/pdf/tir/tir_07_3_hulsmann.pdf
Ich hoffe, dass die Leser von bto diese Diskussion interessant finden. Ich werde weitere Beiträge zu dieser Konferenz posten.