Does the IMF read Monetary Realism?

It sure seems like it. The latest paper to cause a big splash is their “Chicago Plan” proposal, where they analyze what might happen to the economy if the government decided to go to a 100% reserve system and issue money directly from the treasury.

Here’s highlights from the first few pages.

First up is some interesting ideas about how the government treats coins:

“In this context it is critical to realize that the stock of reserves, or money, newly issued by the government is not a debt of the government. The reason is that fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money.1 Money is therefore properly treated as government equity rather than government debt, which is exactly how treasury coin is currently treated under U.S. accounting conventions (Federal Accounting Standards Advisory Board (2012)).”

Huh. Sounds like someone has been following the saga of the Trillion Dollar Coin. Carlos put this idea on the international map.

There is an interesting observation on money-like instruments:

“Second, the banking system’s credit assets must be funded by non-monetary liabilities that are not subject to runs. This means that policy needs to ensure that such liabilities cannot become near-monies.”

Huh. Did they read anything about Money-like Instruments?

Then, the observation we’ve somehow given banks complete control over our money supply:

 “In a financial system with little or no reserve backing for deposits, and with government-issued cash having a very small role relative to bank deposits, the creation of a nation’s broad monetary aggregates depends almost entirely on banks’ willingness to supply deposits. Because additional bank deposits can only be created through additional bank loans, sudden changes in the willingness of banks to extend credit must therefore not only lead to credit booms or busts, but also to an instant excess or shortage of money, and therefore of nominal aggregate demand.”

Huh. Seems close to plagiarism of Cullen Roche if you ask me.

“The US monetary system is designed to cater for the creation of the public’s money supply primarily by private banks. Most modern money takes the form of bank deposits and most market exchanges involving private agents are transacted in private bank money: it is “inside money“ which rules the roost so to speak in the day-to-day functioning of modern fiat monetary systems. The role of the public sector “outside money” creation is comparatively minor.

It seems like we’d have to change the nature of our institutions to be able to accomplish the Chicago Plan. Here’s JKH’s contingent institutional approach.

Now, I am not claiming we’re the only people on the internets talking about these ideas. We are one of the few sites on the web where you’ll find all of these ideas in one place.

The two authors of the IMF paper have dealt with these issues in other papers, and I don’t think they read MR and had an Eureka! moment. Still, single papers don’t change minds on complex topics like these, and they investigate these ideas through the lens of a very specific plan instead of a broadly based approach like we have here.

 

 

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Fed Up
4 years 6 months ago

“Because additional bank deposits can only be created through additional bank loans, sudden changes in the willingness of banks to extend credit must therefore not only lead to credit booms or busts, but also to an instant excess or shortage of money,”

Replace money with medium of exchange.

Sounds like they are saying the way the system is set up now, all new medium of exchange has to be borrowed into existance from a bank or some thing bank-like. Correct?

If so, what if no one wants to borrow?

Guest
beowulf
4 years 5 months ago

Actually the bank would first borrow the money into existence from the discount window before lending it to a customer. Seeing as the Fed rebates its net earnings to Tsy, requiring all loans to originate from the discount window, embedds a bank tax into every loan (like mortgages rates, the long-term discount rate could be adjustable or fixed). This transfer hundreds of billions a year in seigniorage income from banks to Uncle Sam. Higher interest rates would means more revenue rebated to Tsy instead of more net interest paid from Tsy.

Don’t tell JKH this, but it sounds like something RSJ would think up while sitting at home watching a hockey game. :o)

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Andrew P
4 years 6 months ago

It requires much more than these 2 things, and the paper recognizes this. Their entire scheme is dependent on ensuring that private entities can never ever create any money equivalent of any kind by lending money that wasn’t sourced from the Government. Currently, shadow banking does this collectively, even though that is only obvious when you tally up all the components of the industry together, since the functions are separated in different companies for regulatory purposes. It will require really heavy handed regulation and surveillance to absolutely guarantee that not even a few dollars of money equivalents are created outside official channels through loan making. And if a loophole is ever found to the scheme that is set up, whole convoys of trucks will be driven through it.

beowulf

1. Buy back the Public debt with US Notes (though I hear tell that jumbo coins would work just as well and without a new law), this would sweep out Fed security accounts into Fed reserve accounts.
2. Increase reserve requirement to 100% except for discount window loans.

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Colin, S.Toe
4 years 6 months ago

If the Discount rate were low enough to undercut alternatives, but with high standards for collateral (eg cash deposits and government notes), would this serve to limit the creation of ‘money equivalents’?

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beowulf
4 years 6 months ago

Define money equivalents as counterfeiting and let the Secret Service worry about it. Banning such transactions from clearing through the Fed and declaring the debts legally unenforceable in the courts would go a long way and the federales can g further. Look at how Tsy is choking out the Iranian economy in large part with draconian banking sanctions and I don’t doubt Uncle Sam can build Predator drones longer than shadow banks can build convoys of trucks (metaphorically speaking).

While the IMF wants to take your guns argument is creative, I would suggest there’s a golden mean somewhere between lax banking regulations and United Nations world goverment.

Guest
Colin, S.Toe
4 years 6 months ago

I’ve been waiting for you to weigh in on ideas like these. Your indication that such a plan could be implemented relatively straightforwardly, and without the excessive regulation Andrew P is concerned about, impresses me.

I agree with Mike, though. A number of such specific plans need to be proposed, examined, and compared before coronation of one as ‘the solution’.

Admin
4 years 6 months ago

I could certainly be wrong so I appreciate Andrew’s comments. However I’m less worried about whether the govt can enforce a new policy (Uncle Sam has more or less unlimited resources and some very competent public servants on the payroll) than whether the policy can be enacted in the first place.

When someone outlines a reform proposal, my first thought is always, how do we get there from here? Can it be carried out (from easiest to hardest) by Tsy alone, by the Fed alone, by Tsy and the Fed in cooperation, by Congress with a filibuster-proof reconciliation bill, by Congress with a regular order bill (which need 60 Senate votes) or, God forbid, does it require a Constitutional Amendment?

The best plans require the least moving parts. In 2008 Secretary Paulson and Chairman Bernanke insisted that Congress pass the TARP bailout bill a month before the election. The market crash itself doomed John McCain’s presidential campaign (he was actually up a few points until the Lehman bankruptcy in mid Sept), but just having voted for TARP doomed a slew of moderate Democrats and Republicans in 2010. It was completely unnecessary. Tsy and the Fed could have bought as much bank stock or bad debt as they (or rather, the President) wanted under the Gold Reserve Act (“the Secretary or an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary”… The Fed is an “agency” and the word “securities” is damn broad).

Guest
Colin, S.Toe
4 years 6 months ago

Point taken. However, to me, this is all contingency planning. If we continue to ‘muddle through’ nothing like this will happen.

But if 2008 was just the prelude to a renewed GFC, the political realities could change fast (cf 1929 vs 1933). In that case , having carefully thought through alternatives at hand could be critical.

Guest
Andrew P
4 years 6 months ago

Oh, and I’m sure the IMF would LOVE to be the sole sovereign entity with the power to issue money worldwide. This scheme must be viewed in the context of all governments acting in a manner to increase their powers.

Guest
Geoff
4 years 6 months ago

“Because additional bank deposits can only be created through additional bank loans”

Did they just say that loans create deposits?

Guest
beowulf
4 years 6 months ago
Its not plagiarism, more like a homage to Cullen Roche. :o) No seriously, I think Jaromir Benes and Michael Kumhof wrote a solid paper. I think a lot of people are just reading second-hand sources and think its a copy of the original Chicago Plan, which was similar to what Bill Still proposed (and Milton Friedman endorsed) in The Money Masters. http://www.themoneymasters.com/monetary-reform-act/ But as estimable as Still’s work is (more about that below), he goes off course believing in the fractional reserve fallacy. What’s great about the IMF paper is they do understand how money works (“The deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth”). I’ve read comments about the IMF paper that they don’t understand that reserves requirements don’t control lending, capital requirements do. Further, is the assumption with 100% reserve banking, the economy will crash by cutting off credit cards or revolving lines of credit. That’s the Chicago way, sure, but its not the IMF way. The subtext of this paper is death to the Fed Funds market! Banks actually can lend more than 100% of deposits… but only by going to the discount window. “First, banks that are subject to a 100% reserve requirement know that they cannot create their own funds to fuel a lending boom, but that instead they have to borrow these funds from the government at rates that increase in a lending boom, and that the additional borrowing could furthermore be subject to much higher capital requirements. Arguably this knowledge makes it much less likely that banks will develop their intermittent bouts of optimism and pessimism in the first place” I actually think that’s a great idea since its Uncle Sam, after all, who’s backstopping the entire monetary system, there’s no reason Tsy shouldn’t be the one… Read more »
Admin
4 years 6 months ago

Yes. 🙂

Nice post Mike.

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