Goodhart on narrow banking
Posted by WARREN MOSLER on November 5th, 2009
He’s correct in a world that doesn’t know how to use fiscal adjustments to sustain demand.
If we had had a full payroll tax holiday and per capita revenue sharing for the states introduced immediately after the real economy started experiencing the drop in demand associated with the Lehman failure and the Masters commodity liquidation, and all along had fed funded $8/hr jobs for anyone willing and able to work, the real economy would likely not have sustained anywhere near the damage it did. Unemployment may have risen a percent or so, and the economy would have quickly recovered.
And no one outside of investors caught with bad investments would have much cared about the financial crisis.
As long as the real economy is sustained, any financial crisis is far less of a concern- 1987, 1998, Enron, etc.
Narrow banking is not the answer
By Charles Goodhart
The proponents of narrow banking focus, almost entirely, on the liability side of banks’ balance sheets, and their concern relates to the need to protect retail depositors and the payments system. While this concern is entirely valid, it has been notable in the recent crisis that virtually no retail depositors lost anything, and the payment systems continued at all times to work perfectly. The crisis was not much about that, and policies served to protect these key elements satisfactorily.
The key problem that developed, and to some large extent remains, is that the fragility was experienced in the availability of credit to the real economy, companies and households. The modern economy cannot do without credit, and the need to maintain credit flows has been uppermost in the minds of the authorities.
Credit can be replace by income, and with income restored and sustained, credit quickly follows. Unfortunately, modern governments lack the understanding of their monetary systems to adjust incomes through counter cyclical fiscal policy.
The narrow banking proposal would shift virtually all such credit flows out of narrow banking into those parts of the financial system outside the narrow banking boundary, because the narrow banks would be required to invest in safe assets. So had a narrow banking system been in place, the crisis would have been even worse, with a virtually complete cessation of credit flows to the real economy.
Banks are public private partnerships implemented presumably to serve public purpose
‘Narrow banking’ can include bank lending for home mortgages, automobiles, credit cards, and any other assets deemed to suit public purpose to help isolate those sectors from lender related issues.
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November 9th, 2009 at 3:21 pm
“. . . and all along had fed funded $8/hr jobs for anyone willing and able to work . . .” As you know, we are on the same wavelength.
There always are details to consider, however. What would you do with people (of what age?) who are willing but unable to work, either because of physical/mental problems or lack of citizenship?
Also, what are the jobs? I ask because most people do not want a job. They want money, and work happens to be the only way they can get it. So salaries being equal, few would pick a dangerous, sweaty, high-steel job, when for the same money they could get a nice, cool, office job.
Rodger Malcolm Mitchell
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November 9th, 2009 at 5:28 pm
I’m sympathetic to those unable to work such as the elderly, seriously disabled, etc. and would suggest supporting them at a minimum level of decency that makes feel good as Americans for taking care of the less fortunate without the resentment that comes with people who ‘game the system.’
I think the question of what the jobs are is covered elsewhere on this site including the various writings, so have a look around and let me know.
The $8/hr is meant to be low enough not to be disruptive to the private sector and not take jobs away from it. It’s for those unable to find private sector work to use as a transition from unemployment to private sector employment.
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