Last month, the Schweizerische Nationalbank (SNB), the nation’s central bank recorded some large ‘book’ losses after it had abandoned its attempt to stop the Swiss franc (CHF) from appreciating against the euro. It started trying … as a way of protecting its manufacturing sector but abandoned the strategy on January 15, 2015. It had been buying euro in large quantities with francs and on April 30, 2015 the SNB released the – Interim results of the Swiss National Bank as at 31 March 2015 – which showed that its first-quarter 2015 losses were 30 billion CHF or around 29 billion euros. They lost CHF 29.3 billion on its “foreign currency positions” and CHF 1 billion on its gold holdings. This has raised the question, once again, whether central bank losses matter. The answer is always that they do not matter at all given the central bank can never become illiquid as it issues the currency (under some arrangement or another). So the commentators who whip up a lather about impending doom arising from central bank bankruptcies are to be ignored. But central bank officials also publicly express concern about their capital holdings. Why would they introduce that concern into the public domain when they know full well that they cannot go broke. The answer is that they are politicians themselves except they evade democratic scrutiny and election.
There was an article in Bloomberg Op Ed yesterday (May 19, 2015) – U.S. Workers Brought the ‘Great Reset’ on Themselves – which argues that those who bemoan the falling standards of living for workers in terms of job stability, real wages growth etc have only themselves to blame because as workers they demand conditions that they are not prepared to sustain as consumers and taxpayers (higher prices, higher taxes). It is an extraordinary argument not because there are not elements of truth in it, but, rather, because it ignores other realities such as the rising income inequalities and the on-going redistribution of national income to profits. It also tallies with what is going on in Australia at present, which is a specific form of the on-going attack on real standards of living for workers and their families through poorly crafted government policy. The policy design reflects ideology rather than any appreciation of what is required to maintain living standards.
In Part 1, I briefly outlined the Sovereign Money System proposal (SMS) advanced by the Icelandic government as a way forward in banking reform. I also demonstrated that the banking collapse in Iceland in 2008 could hardly be seen as being caused by the banks having the capacity to create credit. Much more was in play including the fact that banks had stopped behaving as banks and were serving the doubtful aspirations of their owners rather than any notion of public purpose. While the Icelandic report claims that the commercial bank lending destabilised the growth cycle in Iceland the reality is that it was other factors that led to the explosion of their balance sheets. The money supply did expand faster than “was required to support economic growth” but that is because the financial system was deregulated and the banksters and fraudsters were allowed to serve their own interests and compromise the national interest. As we will see that sort of duplicity can be reigned in with appropriate structural regulation without scrapping the capacity of the private banks to create credit. In this Part 2, I consider some of the mechanics of the SMS and argue that essentially we cannot get away from the fact that a central bank always has to fully fund a monetary system. If it tries to restrict funds yet maintain private bank lending then recession would surely follow and interest rates would rise beyond the control of the central bank. I also provide some ideas on where more fundamental monetary system reform is currently needed.
In a way this blog is being written to stop the relentless onslaught of E-mails coming, which seek to promote so-called positive money. I am regularly told that I need to forget Modern Monetary Theory (MMT) and instead see the benefits of this alleged revelationary approach to running the economy. Other E-mailers are less complimentary but just as insistent. Then there are the numerous E-mails recently with the following document attached – Monetary Reform: A Better Monetary System for Iceland – which I am repeatedly told is the progressive solution to bank fraud and, just about all the other ills of the monetary system. The Iceland Report was commissioned by the Icelandic Prime Minister and is being held out as the solution to economic and financial instability because it would wipe out the credit-creating capacity of banks. It has been endorsed by the British conservative Adair Turner, who formerly was the chairman of the UK Financial Services Authority and who recently advocated so-called overt monetary financing (OMF) as a way to resolve the Eurozone crisis. I agree with OMF but disagree with his view that it is the credit-creation capacity of banks that caused the crisis. The crisis was caused by banks becoming non-banks and engaging in non-bank behaviour rather than their intrinsic capacity to create loans out of thin air. A properly regulated banking system does not need to abandon credit-creation. Further, I am aware that in holding this view, I and other Modern Monetary Theory (MMT) proponents are accused of being lackeys to the crooked financial cabals that hold governments to ransom and brought the world economy to its knees. Let me state my position clearly: I am against private banking per se but consider a properly regulated and managed public banking system with credit-creation capacities would be entirely reliable and would advance public purpose. I also consider a tightly regulated private banking system with credit-creation capacities would also still be workable but less desirable.
Its my Friday lay day blog where I just wander around in the time I allocate to writing this blog. The venality of neo-liberal governments is never far from the surface. The more successful ones manage to mostly hide the nasty stuff they get up to from the general public or assuage public concern via their spin doctors. Sometimes, an outrageous decision breaks out of the cocoon of spin and demonstrates the sheer bastardry of the political elites. That happened in Australia over the last week when it was announced that the Australian government was providing $A4 million to the University of Western Australia to set up a new think tank under the influence of a Dane Bjørn Lomborg – who has been described as a “sceptical environmentalist” (Source). Our Prime Minister has favourably quoted Lomborg’s work in his own work and is the Australian leader who abandoned the carbon tax and thinks continued use of “coal is good for humanity” (Source).
I am travelling a lot today so do not have much time. Apart from my usual projects that are on-going, I started reading the – Court of Directors’ Minutes 2007 – 2009 – that were – released – yesterday (January 7, 2015) by the Bank of England, after the UK Treasury Select Committee (House of Commons) demanded the Bank act in a more transparent manner in its November 8, 2011 Report – Accountability of the Bank of England. The minutes and accompanying data demonstrate that the Bank and the supporting financial oversight bodies were caught up in the myth of the Great Moderation and the governance of the Bank was captive to a destructive neo-liberal Groupthink. The Bank helped cement the pre-conditions to the crisis, didn’t see it coming, and delayed on essential action, thus ensuring the crisis was deeper and more prolonged than was necessary.
Let it be noted that the Japanese government 10-year bond yield hit 0.33 per cent overnight. That tells you that all the scaremongering that has been going on over the last twenty years about hyperinflation, the Japanese government running out of money, the bond markets dumping the yen, and the rest of it were self-serving lies designed to advance a particular ideological position at the expense of the broader social well-being. A year ago, the yields were 0.88 per cent – so they are going in the opposite direction to that predicted by many mainstream economists, blinded by their irrelevant textbook theories about how markets work. In that neo-liberal textbook fairyland, the yields should be sky high now, inflation accelerating out of control and the government forced to admit it had run out of money. Get over it, it won’t happen because the real world doesn’t operate like that. Students of macroeconomics are continually being taught a myth, which is detrimental to their education and life experiences. Many turn into the future doomsayers and sociopaths in organisations such as the IMF, the European Commission and other like policy making institutions. They always rave on about the need for more central bank independence to insulate monetary policy from political decision-making as if that will foster the well-being of the population. The idea of central bank independence is a sham and in the last week there has been stark evidence to support that view.
The ECB recently released a Working Paper – Financial Fragilty of Euro Area Households – which attempts “to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household”. The paper uses survey data based on a sample of 51,000 households in 14 Euro nations. Taken at face value, the research provides some interesting and, perhaps, unexpected outcomes with respect to where the vulnerability lies. On the back of further damaging news about the economic prospects for Germany, the ECB research should, but won’t, motivate a major shift in German government policy towards stimulus. But then the head of the Bundesbank claims that stimulus is not required because Germany is travelling at normal capacity. The data would suggest otherwise and the ECB research would suggest that Germany is very vulnerable to a further recession.
One despairs when a sober institution gets ahead of itself, usually because they make hiring mistakes, and start to think they know stuff. This is an organisation that is steeped in statistical analysis and should have a very good idea of empirical regularities. They know that interest rates have been “essentially zero” in Japan since the 1990s and they know that what hasn’t happened as a consequence. They know that central banks have been “expanding their balance sheets” (now “collectively at … three times their pre-crisis level”) and what hasn’t happened as a consequence (inflation). But as the neo-liberal paradigm has concentrated its control of the policy debate, this organisation has morphed from playing a useful role as a coordinator of central banking into a propaganda unit pumping out misinformation and outright lies and distorting the public debate. Welcome to the Bank of International Settlements, which is now firmly ensconced with the likes of the IMF, the OECD, the ECB, the EU, the World Bank, and others as being part of the problem the World economy faces.
One of the oft-heard criticisms of Modern Monetary Theory (MMT) is that the original developers (including myself) say one thing but know another. We say – there are no financial constraints on a currency issuing government but then, as if as an afterthought, admit that in the real world there are lots of constraints on government spending. On Christmas Day 2009 I wrote the following blog – On voluntary constraints that undermine public purpose. It renders such criticisms redundant. But in the light of the Cyprus schemozzle (putting it mildly), it is interesting to reflect on what could have been done to avoid the ugly consequences that will follow the “Bail-in” package. Even within the constraint of keeping Cyprus in the Eurozone, the authorities (in particular, the ECB) has the capacity to save that nation’s banking system and avoid destroying the nation’s economy. The fact they chose not to use that capacity is telling given the consequences that will now follow. They might have followed their American counterparts who in 2011 clearly knew how to reduce the damage of the crisis and operate as a central bank rather than as part of a vicious syndicate of unelected and unaccountable socio-paths (aka the Troika).