Good one. I actually did know that they had a policy on this, but somehow as I got into this topic, it never twigged to look there.
This is an excellent resource. Thanks Ryan.
Now I think this part of your argument requires a more nuanced discussion.
Nowhere have I (or the positive money folks) suggested that the government should be playing in the stock market. In fact “playing in the stock market” sounds a lot more like what central banks achieved via “Quantitative easing” which mostly resulted in inflation of stock prices. I am not proposing that we invest in any private organisation.
I think we need to explore the concept of “infrastructure”.
When it comes to left/socialist ideas, I do not believe that the state should own/run everything. As you point out, governments are grossly inefficient at actually doing things. Too much arse covering and not enough doing typically.
What I do think makes sense, is that there are some things that makes sense to socialise and some things that really do not.
For example, it makes a whole lot of sense to socialise the creation of roads, but not to socialise the creation of things we drive on the roads. One of these is a common good and the other is a private good. In fact, this distinction is sooo bleeding obvious that it just doesn’t occur to even the USA die-hard capitalist population to even think that their roads might be … god forbid … “Socialist”.
Now, this doesn’t mean that the government should build the roads themselves. We can quite happily pay whatever private industry corporations provide the best deals, to do the job. The difference is that instead of allowing banks to create ALL of the money, we tighten up on that a bit and create some of it to pay directly for this infrastructure creation.
This injects money for industrial effort directly into economic activity and job creation to build value in the community and increasing private sector industrial capacity, instead of driving the inflation of house prices.
Consider what else looks like public common infrastructure?
There is a lot to unpack here, and some dodgy arguments being thrown about. Whenever I come across a new theory, I read until I think I understand the basic premise and then go looking for criticisms. Two blog posts have caught my attention that seem to have pretty solid criticisms, that have been alluded to by @edeity.
The Problem with Positive Money
and
WHAT’S WRONG WITH POSITIVE MONEY?
The biggest problem to me seems to be the sovereign risk. When banks make bad loan decisions and they go under as a result, it sucks, people lose their jobs, some lose investments and the stock market takes a hit. If the central government makes the same mistakes it is a disaster for the whole economy.
In the current political climate, would you trust politicians to manage currency trades effectively? I don’t. The risk is much greater when everything relies on one fail point, the central bank.
The other really big risk, which is related, is adopting a central economic planning policy means that the countries’ finances are determined based on what has passed, not what the economy is doing now. Setting the cash access rate may put brakes on future plans because there isn’t enough money in the system to provide the loans, if the project appears sensible, a bank can make the loan and take the risk.
There are also issues around inflation, which the Icelandic proposal seems to try to address, but there is so much reading to do I haven’t studied this aspect of the proposal fully yet. The positive money website doesn’t seem to really talk about it.
Now I will poke holes in wrong arguments because they are wrong.
The Australian banking system is quite well regulated, and whilst the government decided to underwrite the the big four banks during the GFC, it wasn’t needed due to said regulation. You can set the required financial reserves of the banks to be higher or lower as the government thereby making the system more or less secure.
The Australian Prudential Regulation Authority (APRA, the other APRA) have legislated requirements that the banks must comply to, including amount of cash that banks can loan based upon money reserves.
This is a bit of a false dichotomy, but if I buy into the dichotomy, I trust the banks more? Sorta. Could you imagine the Libs pouring money into coal, to cut down the competitiveness of renewables? Totally. Banks diversify the risks, want a return or they go under/ lose Board votes etc.
There are other ways to use government controlled banks for the public good, without radically altering the current financial system. The North Dakota State bank seems to work quite well, in cooperation with other banks and can lend money at a low interest to the government, entrepreneurs and even students without creating a single point of failure for the entire financial system.
Here is an interview with the banks President:
How the Nation’s Only State-Owned Bank Became the Envy of Wall Street
This could be done under the North Dakota state bank system without touching the commercial banks.
House prices, whilst exacerbated by bank lending, are mainly driven by negative gearing tax breaks.
@AndrewDowning is correct in the terming of “Banks Make Money”… they dont but it is correct as it is the common description, because they do effectively make money…
Money used to actually ONLY be made by banks… Governments had gold and who would want that paper rubbish… but then of course when the innovation took off it became mandated that only governments could create money etc. and then it went full circle… sort of.
Fractional reserve is a big thing for banks, when I worked in helping strategy for an institutional bank the ratio of reserve to loans was the single biggest item for potentially increasing profitability… after slashing staff. All the banks actually want to get rid of fractional reserve.
Replacing it with centralised control is however not a good idea. Governments are bad at financial management and utterly horrendous when it comes to innovation. People who invent things and create jobs and change the way the world works… these are not the people who are successful in government.
It would be risky for the party to get drawn into abstract debates about competing economic theories. Our candidates are mostly IT people, artists, civil libertarians - who would be far outside their comfort zone in these sorts of discussions.
Maybe if we can narrow it from theory to a specific and easily digested policy proposal, there might be something. But don’t fall into the trap of using trendy theories as cover for old-school authoritarian impulses. Massive state spending and domineering central planning have never worked well regardless of the rationale that gets attached to them.
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The point of Positivie Money - from what I can tell is it is anchored on moving monetary creation away from debt towards funding activity. At this point I think they are still the same thing, just shifting the decision making for merit of investment from the free market to centralised government control… but I could be off the mark here.
I do think these are good debates to have - BUT as with almost all of these debates here, I regard them as effectively meaningless without an ability for us to actually have an impactful voice - which is something much bigger than writing policy.
What about just pumping new money out to the real economy with the UBI?
I mean you talk as if the bankers are such smart investors but they’ve shown themselves to be epically catastrophically short-sighted on multiple occasions. The only surefire investments the banks do is index funds… UBI is an even broader index.
UBI does not create money. It pays for itself out of taxes. A UBI model that is payed for by creating new money I and almost everyone with a high school education would be against.
Market economies outperform centralised government economies. If you think this is debateable your talking in the wrong place. http://www.cpa.org.au/ Is where you want to be, although even there you will get debate and factions not supporting your view, so maybe try http://www.korea-dpr.com/
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As long as taxes are payable in $AU on deemed income, then there is a mechanism for the dollar to remain and be an instrument of policy. See Bitcoin being ruled as an asset recently.
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At some point we need to answer the economic questions for the rest of the platform on funding various initiatives to have credibility. So how do we develop that in-house expertise?
I never said it did, I said it very clearly…
Your original complaint was government deciding what to do with the money so I’ve said give it to the people to decide.
Thats called a market.
Honestly I think you’re being needlessly contrarian.
It doesn’t matter where the new money goes… all government programs are being paid in tax or debt, you’re just adding new-money to the mix of payment methods.
The sensible creation of new-money is what your crazy devolution into memes is about and that’s actually not that hard for a government to do sensibly and even moreso than the banks. We measure inflation obsessively, we know a good inflation target is ~2% so all the government has to do is create new-money to meet that target. And as the government does the service of keeping the inflation rate stable it gets the benefit of being the first to use the new-money.
Banks don’t do anything as sensible as using new-money to keep inflation stable and abuse the benefits of being able to create it.
you seem to be saying im being argumentative for saying free money isnt free and you think that use of memes reduces the credibility of my position.
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There are already a couple of economists floating around PPAU that I know of.
I will leave it to them to announce their own credentials.
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Well you’re arguing your use of memes and strawmanning my position instead of giving an actual argument so yeah your credibility is garbage.
I must be out of touch with how people debate on the internet these days.
A surprising response from you @MarkG.
Firstly, we’re the freakin’ PIRATE PARTY, not conservatives.
If we’re not here to push and debate less-that-conservative ideas, then I must have missed the memo.
Also, note that the Icelandic Pirate Party has just such a monetary reform policy (here is their report: https://www.forsaetisraduneyti.is/media/Skyrslur/monetary-reform.pdf).
Apparently not so abstract theoretical any more.
Here, published in the “International Review of Financial Analysis” in 2014, is a paper examining empirical evidence in the internal ledger movements of a real banks, to compare the top general money creation theories:
- Credit creation theory - what the Positive Money people are saying, “Loans create deposits”.
- Fractional reserve theory - deposits support loans -> other banks as deposits, supporting more loans etc. collectively creating money without individual banks deciding.
- Financial intermediation theory - Deposits as reserves against which loans are created.
Result: Fractional Reserve Theory and Financial Intermediation theory are both empirically incorrect.
Here is the paper: http://ac.els-cdn.com/S1057521914001070/1-s2.0-S1057521914001070-main.pdf?_tid=be1aba7c-fe63-11e6-bb6d-00000aab0f26&acdnat=1488361682_9b1204d1efcc8658d5c9f0478addeb81
Also, if you didn’t notice above, the somewhat non-trendy conservative organisation “The Bank of England”(http://www.bankofengland.co.uk/publications/Pages/news/2014/051.aspx) and the credit agency “Standard and Poors” (https://positivemoney.org/wp-content/uploads/2013/04/standard-poors-rating-services-lending-creating-deposits.pdf) seem to agree quite openly.
Also of interest from International Review of Financial Analysis, Dec 2014, “How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking”, link: http://www.sciencedirect.com/science/article/pii/S1057521914001434, in which they find the root difference between banking institutions and other institutions that might lend money.
The answer is that although there is no legislation directly saying that banks can create money, they are exempt in law from compliance with “Client Money Rules”, meaning that they can mix third party (customer) deposits with their own finances in the same ledger. Non-banks may not do that.
OK, now we’re talking.
I definitely want to get to some specific and easily digested policy proposals, but as per brainstorming practices in general … go wide and deep, focus back into specifics, go wide again, repeat until things consolidate.
Having specific policies would also address the issue you raised about PPAU members explaining this stuff.
I have no intention of falling into the trap you describe. Lets not put a wet blanket on this before we get anywhere.
I think this is the point where I diverge from the Positive Money people.
They advocate taking money creation control away from the banks. I think that’s dumb.
Money does need to get created, and it also needs to get destroyed, in roughly equal measure, only scaling up/down to manage the speed of the economy, where speed is just the rate of economic activity.
- When banks create money by lending, it gets destroyed by repayment.
- When governments create money by fiat, and spend it, it gets destroyed by taxation (return to issuer).
What I observe is that wherever money gets created and injected into the economy, there is only limited movement into and around the in-country economy.
e.g. when banks create money mostly as housing loans, it mostly inflates house prices
e.g. when central banks to quantitative easing, by creating/lending billions to banks for investment, it mostly just increases share prices.
e.g. when government delivers helicopter money, it gets spend on wide-screen TV’s, and goes overseas.
I think the trick is to have a small diversity of methods by which money is created, with a focus on ensuring that the diversity of methods achieves good coverage of the economic activities of our citizens, and that there are built-in mechanisms for money destruction to balance the money creation mechanisms, such that we manage overall money supply as well as having a more diverse, and therefore robust and stable economy.
None of this requires authoritarianism, impulsive or otherwise.
Remember how authoritarian/libertarian is an orthogonal axis to left/right?
Can we move on and have that discussion?
If so, I’ll create a new thread. This one is fragmented.
If not, continue here.
The goal in PPAU forums should be to achieve reasoned consensus backed up by evidence.
Some internet forums may have less enlightened objectives.
YMMV.
These are both just blogs making speculative remarks, premised on a policy of actually banning banks from creating money and not having actually accepted to consequences of the actual method by which money is created.
The first one assumes fractional reserve banking, which is incorrect, based on banks actual practices (http://ac.els-cdn.com/S1057521914001070/1-s2.0-S1057521914001070-main.pdf?_tid=be1aba7c-fe63-11e6-bb6d-00000aab0f26&acdnat=1488361682_9b1204d1efcc8658d5c9f0478addeb81) …
and then goes on later to say "The government currently creates debt in the same way any consumer does – borrowing to pay for public services"
Consider that for a moment … Why would a sovereign issuer of currency borrow money in its own currency from a private enterprise and pay interest on that at all? What would be the point? It’s delegating the act of money creation to that bank, then receiving that money, then paying interest to that same bank for the privilege of having it create its own money. How bizaare?
The second one just goes on a rant presuming the most extreme possible policy position derivable from the positive money concept.