Critique the reply my brother gave on this Economic question

I presented my brother with a link about how the Gold Standard was an irrelevant method of measuring the value of paper money.

Here’s my brothers reply;

What he is advocating is an end to fractional reserve banking. The problem with this is an end to the leverage gained by the fractional reserve banking would mean fewer loans and with it less investment and less growth.

It comes down to the political question: who balances the overall advantages and disadvantages of either printing money or limiting banks’ ability to create credit? The gold standard was a rather crude one-size-fits-all/either-or control. But Keynesian policies also involved more or less fixed exchange rates, with an internationally-agreed system for some degree of flexibility for economies under stress.

And one other point of critique - he’d help himself if he learnt punctuation.

So he’s for the gold standard, not for the gold standard? He barely mentioned it and didn’t say if his belief is that such a standard helps or hinders what he wants to happen. I give this paper a D-

This may come as a surprise to the government entity which does control private banking — The Fed has pumped trillions into the banking sector but rather than “taking bigger risks” the private banks are content to leave much of that money in excess-reserves accounts earning 0.25% interest. Your brother’s concern might have merit in other contexts (I advocate increasing broker’s margin requirements during stock market bubbles) but doesn’t seem to apply to today.

The mention of money “created out of nothing”, even though it is tangential to the main point, suggests that there’s a perception that the bank-created money is somehow illicit.

I’ve presented the reply

I think your brother is mistaken about the control the government has on bank lending. They have big levers like the reserve ratio, discount window, and currency trading to control how much lending banks do.

What exactly is your brother proposing? Government already has authority over chartered banks, e.g. to audit and force bad loans to be accounted properly. IIRC, the Fed has left the reserve requirement at 10% for several decades; is the proposal to increase that to 20%? To 100%, thus eliminating fractional-reserve lending? In the latter case, where would businesses get credit? From the government?

I agree with your brother that private banks have run roughshod over the economy in some ways, but ordinary fractional-reserve banking is not the problem.

Here’s the part that piques my interest:

(emphases mine)

What line of work is your brother in (or what activities make up his daily routine), that he comes across the effect he mentions every day?

He runs a debt management company.

[del]I kind of suspect OP’s brother is flailing for an workable reason to condemn banks.

(I don’t want to defend the industry, but that was not an impressive argument.)[/del]

Edit: Wait, on reread, this sounds familiar. Is the UK going through a period of suspiciously easy loans? I’m remembering stories of the S&L sector in the USA in the 1980’s. He may be onto something?

I think that the UK is recovering from a period of bad loans. Wikipedia says of the Clydesdale Bank:

“In September 2013 the bank was fined £8.9m after miscalculating the mortgage repayments of more than 42,000 customers.[5] In March 2015 the House of Commons Treasury Select committee said in a conduct report that they had evidence that the Clydesdale Bank had mis-sold unregulated Tailored Business Loans and that the bank’s own internal review of the mis-selling had serious shortcomings and lacked transparency.[6] In April 2015 the Clydesdale was fined £20.7m the largest of its type imposed by the Financial Conduct Authority for the mis-selling of PPI insurance”.

They didn’t all get into trouble like that, but “mis-sold unregulated Business Loans” doesn’t happen without a context.

So the opinion htat there should be more regulation and less freedom is an opinion some people have.

And it sounds like your brother may be in good place to argue his opinon from his personal experience. You should encourage him to do that, because his idea that banks are “free” to create money isn’t true.

It’s like saying he is free to earn money because he gets paid for going to work: yes, he does get paid, no he really doesn’t have much “freedom” where that is concerned. Similarly, the banking system creates money, but it’s controlled by the government and central bank. Maybe the government has done a bad job, but the banks aren’t any more “free” than he is.

Poor government regulation exacerbates financial crises and consumer debt crises. The “moral hazard” of bailing banks out (e.g. buying their troubled assets as in TARP), and writing bankruptcy laws to favor banks rather than consumers have each led to excessive bad loans.

But fractional-reserve banking is not the problem. And don’t forget that a bank can loan in total only 90% of its deposits; the way some explain fractional reserve you might think it was 900%. :smack:

Sounds a bit like Greenbackerism with a twist. He wants the govt to control lending and printing directly, but under a gold standard. This would never last.

He has replied;

I can’t make heads nor tails of that, sorry.

I’m not a banking expert but my reading suggests that the problem is how the government would know how much money to supply. Banks don’t just lend out all the money they can, they only lend when they think they will be paid out. So in times of growth demand for money goes up and the banks respond by creating more. Government could do this if it knew all the information banks do about who wants loans and how risky the loans are but they currently don’t. The reason the bank would not loan out the other 2 quid is they might not get repaid and would not get the interest.
However, monetary policy is already currently completely controlled by the government. If a recession starts and banks stop making as much money as the economy needs then the government can create more base money or announce a new inflation target or do quantitative easing. I know of no instance in history where a government with a fiat money system failed to create enough money because it was unable to do so. If an economy does not have enough money it is not because the government is unable to do so; it is because they do not want to.
So banning fractional reserve banking would create alot of turmoil in the banking industry in order to give the government a power it already has and is not using in many cases.

Brothers reply to Puddleglum

At this point, I’m totally unclear about what he is proposing. Is it really as simple as “Instead of giving people the ability to borrow money, we should just hand it out directly from the government” or “National monetary policy should be determined by a public vote instead of educated professionals”?

The problem is that you’re juggling so many factors at the same time. When banks lend money, people buy things with that money, which keeps the sales of everything from houses and cars to clothes and food going. Reduce consumption and you enter a recession. The government can stimulate spending in a number of ways, but cutting everyone a check creates greater debt, and that debt has to be purchased by someone.

I think that perhaps what he means is:

If the Bank buys £10 worth of bonds off the BOE, with that as leverage and with £100 of deposits, the Bank can now lend £100 worth of loans credit cards etc, why would it only lend £80 when** It** can lend the extra £20 & get rid of what the banks like to term idle reserve, but when there isn’t demand for that extra £20, banks start loosening there lending criteria in order to garner interest on the £20 their customers created out of loans credit cards etc.

So it appears that he’s missed the technical point that the money is lent out of deposits. In terms of his conclusion, this is just a technical point, but it indicates that :frowning: he doesn’t know what he is talking about, :frowning: which is why he should stick to the part he does understand: when there is too much supply, the banks start loosening their lending criteria.

As a suggested before, his opinion, that money supply should be more tightly regulated, can be decoupled from his understanding of the banking system.

With Monopoly money I can demonstrate to a class of students how the banks, and the banking system, and the regulaters, create and control money, but I don’t think I could convince members of my own family. “A prophet is not without honor except in his own town and in his own home.”