The remaining first paragraph of section 3.1 points out that rely upon commercial banking institutions is degraded or damaged by crises like the one which occurred in 2007/8. However the authors have a great solution for the latter problem. But that “state backing” is a subsidy of the private bank operating system!
And it is widely accepted in economics that subsidies misallocate resources (unless there are overpowering social known reasons for a subsidy as is the situation with for example children’s education). The Sheffield department of economics perhaps needs to be reminded that economics is focused on the allocation of resources. To be more accurate, deposit insurance in the united kingdom is funded by taxpayers, whereas deposit insurance in America regarding small banks is self-funding: banking institutions pay a premium to the Federal Deposit Insurance Corporation. As to larger banks, it’s essentially taxpayers that have to base the expenses: see the billions if not trillions of open public money used to prop up those large banking institutions during the recent turmoil.
And the explanation for that is that there’s only one entity that can rescue large banks, the state itself namely. And even some states (e.g. Ireland) were near bankrupted by their efforts to save their banks. The next paragraph of the section criticizes FR on the lands, “The option of safe assets would be reduced…”.
That’s a reference to the fact that taxpayers no longer underwrite loans or investments which involve more risk that that involved with government debt. As visitors will notice probably, that’s essentially a repetition of the idea made in the FIRST paragraph of the section: that is, the Sheffield authors are asking for loans and investments to be supported by (i.e. subsidized by) taxpayers. And if that’s what the Sheffield authors want, perhaps they can explain why they don’t advocate the whole stock market being made risk free gratis the taxpayer. Next, the Sheffield authors get this to claim in respect of traditional bank or investment company deposits: “Bank or investment company debris thus perform the amount of money function of means of payment.
In addition they act as a store of value, so long as there is public trust in bank or investment company deposits. ” No: wrong again. The mistake, there is certainly that for every pound of commercial bank issued money there’s a pound of debt. And incidentally it’s not merely advocates of FR who make that time: advocates of Modern Monetary Theory (MMT) have made the same point numerous times. For instance as Bill Mitchell place it,”…horizontal money nets to nothing”.
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Thus reducing commercial bank or investment company deposits does not decrease the stock of “safe assets”: it has no effect on the web stock of such resources AT ALL! You will find three mistakes there Now. First, as already pointed out, the prevailing commercial bank operating system does not provide public a genuine way of saving, or even more accurately a way of “net saving” in that for each pound of saving, there is a pound of debt.
Second, since FR entails REPLACING commercial bank or investment company money with foundation money or “sovereign money”, FR would actually INCREASE the scope for without risk saving, since foundation money is a kind of risk free saving from the public’s perspective. About the only faintly valid idea in the second option passage by the Sheffield authors is the theory that associates of the general public should have an extremely safe approach to saving available to them for individuals who want that. Well, FR provides that just. First (as stated above) there is the safe half of the bank industry that exists under FR.
Second, and as regards the riskier half of the industry, people under most versions of FR have a CHOICE as to what to put on their cost savings into. If they want something that resembles a traditional British building society, that type of thing should be offered certainly. Zero interest on safe accounts?