Warren Mosler eta DTM (2)

(i) Moneta zerga-kreditu gisa

Currency Is Simply A Tax Credit1

Warren Mosler, on with Steve Grumbine of Real Progressives, discussing the nature of money. One way to think of currency is as a tax-credit. A one dollar bill is an IOU, whereby the government promises to accept it to extinguish $1’s worth of taxes owed. They are freely transferable tax-credits. (The fact that they can be used in the private markets for transactions doesn’t discredit this. Tax credits will be valuable as long as people owe taxes, and so they will trade for their face value in private markets).

(ii) Gobernua prezioa ezarlea, zergak

Government Is Money Monopolist, Therefore It Sets The Price2

Warren Mosler, on with Steve Grumbine of Real Progressives, discussing the source of the price level, which is made very explicit in Modern Monetary Theory (MMT). The currency is a simple public monopoly. Because the government issues the currency under monopoly conditions, the normal rules of monopoly apply: the government is necessarily the price setter.

Suppose a new government was creating a new currency, and declared that every citizen owed a tax of 10 coins per month. What would be the value of these coins? The answer is, whatever the government says you have to do in order to get the coins. If the government declares it will pay 1 coin per hour, then the coins will be worth 1 hour of labor, and everybody will work for the government for 10 hours per month in order to get the coins they need to pay the tax. Or, if the government said it would pay 10 coins per hour, then one coin will be worth 1/10 of an hour’s worth of labor, and everybody will work for 1 hour per month for the government in order to get the coins they need to pay the tax.

(And clearly, the government must spend the coins by hiring the people BEFORE those people become able to pay the tax, because otherwise they wouldn’t have any coins.)

(iii) Fed, banku zentrala, jabegoa eta akziodun pribatuak

Former Banker: The Fed is NOT Run By Private Shareholders

Warren Mosler, former banker, discussing “ownership” of the Federal Reserve. Many people believe that the stock that banks own in the Fed proves that it’s a private organization, operating for profit of its shareholders. This is simply not true. The Fed was created by Congress, given its mandate by Congress, and all its profits above statutory outlays go to the US Treasury.

The “shares” in the Fed do not convey ownership nor are they transferable. The dividend is a fixed interest rate, therefore even if stockholders could influence policy, they have no incentive for the Fed to make more profit (in fact they have incentive for it to make *less* profit because this generally means higher interest rates).

There are many quotes of Fed staffers saying this, some under oath. From Chairman Marriner Eccles: “One of your favorite complaints is that the Federal Reserve Banks are owned by private bankers and that the Board of Governors in Washington as well as the Federal Reserve Banks are operated in the interest of private bankers. These charges will not stand up under examination. The Board of Governors, the members of which are appointed by the President and confirmed by the Senate, is a public body. As to the Federal Reserve Banks, you rest your case upon the slender point that the stock of the Federal Reserve Banks is owned by the member banks. Congress specifically provided for this, as well as for the rate of dividend and Congress can change the nature of the stock and the rate of return at will. This so-called stock ownership, however, is more in the nature of an enforced subscription to the capital of the Federal Reserve Banks than an ownership in the usual sense. The stock cannot be sold, transferred or hypothecated, nor can it be voted in accordance with the par value of the shares held. Thus the smallest member bank has an equal vote with the largest. Member banks have no right to participate in earnings above the statutory dividend, and upon liquidation any funds remaining after retirement of the stock revert to the government. You greatly exaggerate the significance of this so-called stock ownership. At the current dividend rate of six per cent, it involves the payment annually of approximately $8,000,000 to more than 6,000 member banks, and could be done away with altogether without important effects except to put an end to an illusion created by you and others in the minds of some people.” (https://goo.gl/rgd7bv)

From Bruce MacLaury, Former President of the Minneapolis Fed and Deputy Secretary of the Treasury: “First, let’s be clear on what independence does not mean. It does not mean decisions and actions made without accountability. By law and by established procedures, the System is clearly accountable to congress—not only for its monetary policy actions, but also for its regulatory responsibilities and for services to banks and to the public… Nor does it mean that the Fed is independent of the government. Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the “public-interest.” It has a degree of independence within the government—which is quite different from being independent of government. Thus, the Federal Reserve System is more appropriately thought of as being “insulated” from, rather than independent of, political—government and banking—special interest pressures.”

Here’s former Chairman Bernanke telling Congress under oath that the Fed will do whatever Congress tells them: https://youtu.be/pH2RLObp41o

Add to that Mosler‘s account that his bank had “shares” in the Fed yet this gave him no policy influence.

Plus due to the nature of Fed and Treasury operations, it’s necessary for them to be in near-constant communication. More about this here: https://goo.gl/uPqIDf

The Fed is a public/private hybrid, chartered to operate in the public interest. The Board of Governors, which oversees everything the Fed does, is clearly a public body (with their pay fixed at the level equal to that of a Cabinet Secretary). The remaining Fed employees, while technically considered “private,” are also chartered to operate in the public purpose (with their pay decided by the Board of Governors).

That doesn’t mean the Fed does a good job or that it’s decisions aren’t heavily influenced by financial lobbies. They’ve enacted tons of bad policy and the bias towards banks is clear. But it’s not because they’re operating for shareholders, but rather through the same ways by which the rest of the government is bought by banksters: groupthink, tribalism, lobbying the President/Congress to appoint friendly Governors, and forming cozy relationships with regulators. This is typical “institutional decay” flavor of corruption, not “shadowy conspiracy” flavor. More discussion of this: https://goo.gl/5Kkz60

(iv) Bankugintzarekiko diziplina

Against Free Banking: The Liability Side Isn’t The Place For Market Discipline3

Warren Mosler, former banker and investor, discussing bank regulation, and specifically the institutional structure called “free banking.” In free banking, the government would not backstop the banks at all, and instead private citizens would have to choose which bank was safest when deciding where to keep their money. If the bank fails, then the depositors lose their money.

Contrast this with the situation we have today, where the federal government backstops the banks. It does so in two ways: first, the Federal Reserve will lend to any bank that is illiquid (meaning that the bank is still solvent, but that it’s incoming cash flow isn’t enough to meet its cash outflows). And second, the government provides deposit insurance to protect bank customers. In the event that a bank is insolvent (meaning that its assets are greater than its liabilities (or, in simple terms, it owes more than it owns)), the Federal Deposit Insurance Corporation will ensure that bank customers get their money back.

Many free-market types (particularly Libertarians) point out the problem with this situation: with the bank’s customers’ welfare guaranteed by the government, the bank is effectively playing with “house money,” and has incentive to do irresponsible things with it. It’s sort of like saying “if your bet goes well, you get to keep the profits. If it goes poorly, the government will bear the costs.” Big incentive problem.

One possible response to this would be to have free banking, where there is no government backstop. However, this makes the system excessively prone to bank runs, to private citizens losing their savings for no real reason, and to general financial panics. It also means that there won’t be “par clearing,” so that $1 in your bank account might not actually be worth $1. We used to have this in the United States, and each bank printed its own banknotes, so that there were hundreds of different currencies circulating at once. Merchants had to keep books telling them at what rate each banknote was being accepted for (perhaps CitiBank’s $1 notes would be accepted for $0.98, while Bank of America’s might only be accepted for $.70.). The system proved quite unpopular, and so the government took steps to stabilize the system.

The alternative approach is to acknowledge that the government backstop creates perverse incentives for banks, and also that it effectively turns them into public/private partnerships. As such, the government should treat them as vehicles for enacting the public purpose, by regulating what they can and can’t do, to make sure the banks’ actions are consistent with the goal of the development of the economy.

(v) Gobernu zorra

Warren B. Mosler‏ @wbmosler4
@alexxdouglas @FadhelKaboub(r)i erantzunez

Gov debt is ‘repaid’ via the cb debiting a reserve account and crediting a securities account, all on its own spreadsheet.

2017 api. 24


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