Warren Mosler: Discussion of Bank Reforms
Warren Mosler, on with Steve Grumbine at Real Progressives, discussing reforms of banking. In order to reform banks, we have to first decide what banks are for and what they should and shouldn’t do.
The first purpose of banking is to have a stable payment system. This is infrastructure that undergirds the economy, so that individuals or corporations can make payments. Decades and centuries of experience show that banks on their own cannot create a stable payment system, and instead have a tendency towards bank runs, panics, and financial crises. This is the argument for deposit insurance.
With deposit insurance, the government protects bank customers from their bank. It ensures that even in the event of bank failure, customers can still withdraw or transfer their accounts, stabilizing the payment system. Furthermore, centralized payment clearing at a central bank (where the central bank (like the Fed) makes payments between banks) is necessary to ensure that $1 in every bank will actually be equal to $1.
Once there is deposit insurance and central banking, the banking system becomes dangerous. This is because they have government guarantees behind their actions, so they cannot fail. It’s like letting a gambler loose in a casino, then saying “you get to keep all of your winnings and the government will pay for all of your losses.” It encourages extreme risk-taking. This therefore demands full banking regulation, to ensure that banks aren’t taking advantage of government protection.
The next task of banking is lending. There are many purposes to lending, with probably the most important being the capital development of the economy. So, entrepreneurs and businesses can take out loans in order to finance investment in new technology, jobs, factories, etc. This kind of financing activity is a major contributor to the improvement of quality of life. One question here is, should banks do this? The private sector is capable of lending even without banks doing it. This is what the bond market does, and what private companies can do to finance their customers’ purchases (think auto loans from a car company).
However, there are 3 key differences between bank lending and other private sector lending. First, because banks are lending their own IOUs rather than lending from a pre-existing pile of cash, this means that lending for the capital development of the economy is not limited by any quantity of saving. Second, because banks are backed up by government guarantees, they don’t have to lend based on the value of the assets, but can lend based on the ability of the borrower to pay. And third, because banking is heavily regulated by government, it is an opportunity for public policy to shape the development of the economy, by encouraging banks to lend for things that serve public purpose, and discouraging (or banning) lending for things that don’t.
Since banks are already functionally public-private-partnerships, should we just nationalize banks and make them all into public institutions? Mosler argues that we should not. The reason is because public banks are subject to political pressures and can make huge losses, therefore public banks are highly susceptible to corruption. With the public-private model, Mosler asserts, the banks have incentive to lend based on risk, not based on political favors.
Bideoa: https://www.youtube.com/watch?v=hcx-gFh1Alk&feature=youtu.be
Bideo osoa:
Steve Grumbine – Warren Mosler joins Real Progressives to discuss Banking in a Modern Money World: https://www.youtube.com/watch?v=1RJP52bwmcw
Gogoratzekoa: Warren Mosler-ek bankugintzaz
