So the system of modernized central banking is supposed to save the shareholders of the banks who made terrible investments? The system is supposed to risk taxpayer dollars to make sure private companies which made bad decisions don’t suffer bankruptcy?
I don’t know that you’ll get many people to agree with that.
The reality is we had the biggest recession since the 1930s, as millions of people were thrown out of work in the aftermath of a financial panic involving the banks, whose own problems, caused at least partially by their own mismanagement, were bailed out at taxpayer risk. Even if there was no alternative at the time, we should still be thinking about alternatives now.
I’m glad people with regular deposits did not lose their money. A safe place to store money is definitely an improvement on much of history. But that’s a low fucken bar for saying it’s “how the system is supposed to function”. I don’t think anybody should be patting themselves on the back for thinking, “Well, at least we didn’t do as bad as they did in the 1930s.” Privatized profits and socialized losses (or at minimum: socialized risk) is a really bad way of doing business. It’s possible to do better than that.
The modern system of centralized banking (along with national fiscal policy) is designed to protect the system from total collapse – it worked.
Whether the system of modern finance is working to prevent such problems in the first place is an entirely different thread of discussion, as is whether a national government should simply lend a lifeline to distressed financial institutions and borrowers without any strings attached. The danger that federal intervention has created is that its success has probably created a false sense of security. Thus, what worked in 2008 might not work again if there’s another, even greater crisis in 2028 (or next year for that matter) - and there just might be.
I’m not sure what we’re debating, but as bad as the recession of 2007-09 was, I’m pretty sure it would have been worse without centralized banking, particularly when you consider that the contagion spread to other countries. If you want to argue that the federal reserve made lending too cheap, I would probably listen to that argument. But that by itself is not really what caused the recession. The deeper problem is policy that encourages the concentration of wealth in the hands of fewer private institutions and individuals - who then rewrite the laws so that they can encourage even more pooling of wealth and then run to the taxpayer for a bailout. The existence of the Federal reserve in and of itself isn’t the problem; it’s how our tools and resources are managed by those who control the system.
This is all anecdotal from a financial simulation I built around an empire building game, but I have played with different banking models.
The game mostly revolved around metals so my first currency system was the most useful metal used to back dollars one to one (basically gold standard). Unfortunately this metal was actually useful so there was always a conflict between banks building a reserve (fractional reserve banking quickly became a new feature).
Supply of metals was random so when the metal was scarce there was massive deflationary spikes, basically trade died. Horders of metal could also disrupt industry despite being rich on paper, labor productivity was slow.
The next evolution was multiple metal based currencies. Almost overnight they inevitably established constantly changing exchange rates. If anything hording became worse because you could forward calculate the return of your metal in the future to some degree so soon a wuasi-futures based currency came into being.
Cumbersome to calculate labor productivity was still slow growing.
Next up was a fiat currency with a large initial fixed supply (basically bitcoin with no mining). Prices were constantly falling but the lack of a metal backing made it so productivity actually grew pretty well. However currency hording was a thing since the credits kept becoming more valuable first entities had a strong bias.
Last up was a central reserve based currency, it would issue a bond to banks at prime rate, those banks would lend but were forced to always make bond payments. The banks could also take deposits and had to maintain a reserve of deposits in relation to their central bonds interest payments. If they violated the ratio they could be liquidated with all assets in excess of deposits claimed by the central bank. Outstanding loans auctioned off.
The last system was highly productive. It allowed creating currency when firms had the Idea of expanding so money supply had periods of large booms and relative slowdowns. A key factor was letting banks fail still, as they inevitably did if they got caught up in the wrong side of a war or went loan crazy. Bailing them out was not an option so usually good strategies won out or nee banks eatablished.
Metals were traded on a commodity exchange, on average they had Falling prices because high productivity rapidly expanded the supply and investment in gathering more supply was always happening. Demand was strong because hording dollars was pointless and often a losing strategy since everyone had interest paymwnts to make.
Currency was destroyed whenever a bank was liquidated and the central reserve had to pay deposits from its own reserve (small initial amount but grows with bond payments from banks). Technically the reserve could always print more money thru extending more loans, but this was basically a limit on deposit insurance. If the reserve could not cover it would be paid over time so deposits would go from riskless to increasingly risky.
Only one game challenged the central reserve limit, where reckless power mad emperors went on spending sprees with foolhardy banks and ended up destroying two thirds of the universe population (from peak). I actually role played that out as the survivors saying ‘fuck those guys’ and the villains were locked out of the system with no deposits and the rest eventually built a utopian republic (with lots of bandits being slowly killed off).
So in my micro/macro experiments there were a lot of benefits to intelligently run central reserves. Inflation of money aupply does not always mean price inflation as long as the amount of goods in the universe is growing faster than currency.
Also do not forget the currency effect, one dollar is traded multiple times so a supply of 100 dollars could facilitate thousands of dollars worth of transactions. It is not a zero sum game, the economy does best when people are trading with the currency not holding onto it (although foolish trade for magic beans is still ill advised).
Gold standard is a bad idea, I do not think a reckless FEd is all that great either, but a reserve banking system can maximize investment and with a few additional checks can counter rampant inflation, deflation, and hording.
Even if we believe that having a Fed is better than the likely alternative (and I do believe that), they still don’t get a passing grade. I do not agree with such a lax standard when evaluating their performance. A bunch of technocrats don’t get the luxury of patting themselves on the back at DC cocktail parties for avoiding Great Depression II, while vulnerable parts of the country were suffering double-digit unemployment from a major monetary disequilibrium. I do not hold with that. Even if you believe the outcome was better than it would have been without them – which is perfectly reasonable – it’s still appropriate to have a more stringent definition of the system “working”. The system was not working for many millions of people.
Didn’t Greece and Cyprus go through deflation and bank runs, though? I don’t trust central banks that are too far away and answerable to less-than-sympathetic powers. ECB doesn’t fully serve any of the Mediterranean countries, because it answers to the northern European states that have a grievance with “those people.”
Something similar in effect if not the Fed’s fault is part of the problem in Puerto Rico: too much power over the economy in the hands of those who are effectively hostile aliens.
Which brings us back to the anti-Fed faction’s central animus. The Fed is seen as a bunch of self-interested, undemocratic, private bankers who will manipulate the currency in ways that screw over the little guy. A “state of nature” with specie sounds at least less biased.
But even democratically elected powers can be awful to “those guys over there.” If New Mexico were burning, how much would the USA government even care? And a commodity metal not only has no loyalties, it has no tools to help.
I know I am seen as a wacky leftist, but I think that economics should be pragmatic rather than ideological. If central banks help, then I’m inclined to keep them. But if they become part of a clearly abusive power structure—not just potentially abusive, but abusive in fact—then they should be reconstituted.
I’m not convinced the Fed is all to the good. But I think a gold standard would be a nightmare for businesses; and I think the really dangerous powers in the USA are more likely on Wall Street, in electoral politics, or in groups like the Koch Network, and that’s where I want to concentrate my fire.
Oh of course, that well known north German, Mario Draghi, he is seeking to oppress the Mediterranean countries with his policies, like the quantitative easing of the past decade… knows nothing, Mario Draghi, of the southern countries.
What would happen in the following scenario: the money standard metal was available in effectively limitless supply but the cost of extracting it was fixed. If the price of metal went too low it would no longer be profitable to mine, while if the price went too high the market would get flooded until the price leveled off. In other words, keep the price of money nearly unchanged while the boom/bust cycles get foisted onto the metal extractors?
Okay, what exactly do you want the Federal reserve to do? I think what you’re concerned about has a lot more to do with than just the existence and performance of the federal reserve - we can talk about regulatory policy, legislating and regulating banks, tax policy, treasury policy. Your concerns, valid though they may be, go beyond just the Fed. The Federal Reserve by itself can’t prevent an economy from overheating, unless it raises interest rates, and doing that might have unnecessarily negative consequences.
What have the unemployment rates been in Spain over the last ten years?
Italy just put fascists in government! Does that sound like things have been going well?
Is it your belief that Mario Draghi wields autocratic and arbitrary power at the Europea Central Bank? There’s a larger political context.
Look, I’m no expert. My view of Draghi at ECB was colored strongly by Paul Krugman’s view of European institutions’ actions during the crisis.
But apparently somebody was willing to accept even slight negative inflation back in ostensibly content Deutschland while the “PIIGS” or “GIPSI” countries—lovely appellations both :rolleyes:—were in full economic depression.
Pointing out that a US-educated central banker at the head of ECB is of Italian background doesn’t negate the argument that the Eurozone has been trying to punish nations they’ve rebranded as “gypsy pigs.”
And when observers try to say that some countries, like Greece in particular, needed a different monetary policy to deal with an ongoing depression, we’re accused of endorsing the bad behavior by PASOK that got Greece into that mess. That’s not the point.
Italy is in danger of starting what we Americans would call a race war. Greece has been flirting for a while with getting into Russia’s orbit. Spain is lurching toward civil war. Germany itself is so politically fragmented that they can’t get a majority government. Paris is burning.
The ultimate causes of these problems may be more to do with human overpopulation & environmental crises than to do with monetary policy. But hard money seems to have exacerbated problems to the point where Europe is going to go to war with itself; that sounds like a “good idea” mainly in the minds of those who really want Europeans to kill each other in the streets.
It would need to be a different GD thread but IMHO the government
(a) should have “saved” the banks by ordering them to issue new shares and raise new capital. If Warren Buffett or MBS’ cousin chose to be white knights, fine. Otherwise the U.S. government could have been stock-buyer of last resort. In any case, the banks themselves would have been saved but with a moral lesson meted out to the scoundrels who drove them into insolvency. The saviors (Buffett or the taxpayer) would have profited. Why wasn’t this done?
(b) should have saved housing by allowing homeowners to become renters. 20% of these homeowners would have their mortgage arbitrated in 2011, 20% in 2012, 20% in 2013 and so on to make re-adjustment smoother. Government would focus on saving citizens who had been deluded, rather than saving the Wall Street bankers who had deluded them. This isn’t just my crackpot scheme. IIRC, a Nobel-Prize economist proposed it. Why wasn’t this done?
In the early U.S.A. merchants subscribed to weeklies which printed lists of various private banknotes along with the prices they were trading for!
However, [nitpick] the gold-to-silver ratio was held very near to exactly 15.5 throughout most of the 19th century. This was due in part to the willingness of le Banque de France to exchange either metal for the other freely.
IIUC it was the plentiful silver from Nevada’s Comstock Lode that forced le Banque to stop paying an ounce of gold for 15.5 ounces of silver. (Despite its historic origin — a “pound” was once 240 pennyweights of sterling silver — the U.K. had settled on gold as the yardstick for its money in the early 18th century under its most famous Master of the Mint, Sir Isaac Newton.)
The datais here. Of course as I have the family in the Spain, I do not need an american message board to tell me about the conditions.
And? Asserting stupidly there is a northern prejudice in the ECB against the mediterranean countries when it is lead by an Italian (Draghi) who was before that governor of the Italian Central Bank, with a Spanish Vice President ( ) and arrives at its decisions by consensus of the Governing Councilwhich includes all the Euro states is nothing more than the stupid Conspiracy Mongering from a hard left perspective asserting indirectly a kind of ethnic prejudice against the mediterranean…
A complete non sequitor. The dysfunction of the Italian government is not something new nor is it a thing that Central Banks solve.
If you want to find bad guys you will need to look at the heritage of the bad political structure in Italy, the bad heritage that Berlosconi left in the terms of the budget, in the terms of the fragmentation in their system that has prevented reforms in their system that all the leading analyses have highlighted for two, three decades - this is the source of the populist backlashes as problems untreated have built up, badly needed reforms in the adminstration, the kind of dead-hand petty bureaucracy serving not a real ongoing social purposes (and so generating the populist backlashes, of course in the USA it would be libertarian, in Italy it is authoritarian), these are sources - without the Euro it would be even worse.
But you clearly do not understand the role of the central bank.
Blaming ECB for the Italian election results… irrational, incoherent
It is my knowledge of how the ECB works - Mario Draghi is the President of the ECB and the ECB is multilateral body. The Governors representing the states indeed including the lower income ones in the Euro have to reach consensus.
He is well known to have forced through the Quantative Easing and supported the early secondary markets operations.
The Central Banks role is not to be the Fiscal role.
In short you are making the hand waiving political claims from a certain hard Left position without an actual knowledge of the operations of the ECB or understanding of the roles of a central bank.
the larger political context is one in which the institutions relevant to the questions of the fiscal side are not the Central Bank but the EU legislative and executive bodies and the agreed on budgeting rules, the agreed on fiscal coordinations. And that is something outside of the central banking, it is the world of the fiscal politics.
Paul Krugman is not a financial economist nor is he any way expertise in the European institutions. This is the pure Fallacy of Appeal to Authority. Krugman is a man well known for his great work in the trade economics - it does not render him expert or even well informed in European institutions or in central banking, any more than being a brilliant physicist makes you very excellent as a biololgist.
Ah so Draghi has committed the crime of having a degree from a US university (it is MIT), obvioiusly a sign of the contamination… Ignore of course his career with the Italian central bank and european institutions or his first economics degree from la Sapienza, Univerité de Rome, no he has some American education to smear him with by unstated implication. Very nice the ad hominem.
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This is nothing more than the emotional political agitation and propaganda… funny being a person working in this very area in this very European space, I have not once heard the phrase gypsy pigs.
certainly it must make for the colorful hard left propaganda and agitation ‘news’ articles
Hellestel is a better economist than me, he is an academic doing the real research.
But it seems to me that first question is not whether the central banking frameworks can do better, but are they better than no central banking framework at all? that is the question you answered - and it seems to me the statistics from the pre-central banking history show clearly it is more damaging to not have the protections of the framework - the real genuine bank runs of the mass public depositors with the domino damage to confidence in the very basics of the system is an important risk that is mitigated.
It may be as he writes a “pathologically low standard” but it is in fact the basic thing that the US style libertarians actually which to abolish…
Then of course is the question of the managing of the central bank policy but also the banking system policy, but it is very correct to note that big chunks of that problem are outside of the realm of the Central Bank and in the hands of the legislature or the executive of a country / region / union - such as the action to take on the bank failures (is it the partial and temporary nationalisations like the UK and the Spain have done? Or the American style - but the US style is self-constrained by its own ideological orientations in its legislature and its executive, things the Central Bank can not override - not safely).
I think most of us here agree entirely on this, but to say it once more: what happened might have been the best legal option available. I am NOT part of the burn-it-all-down school of thinking.
But that doesn’t mean there’s not room for improvement. There is.
I guess some people are looking at how-it-might-have-been-worse, and are relieved that it was not as bad as it could have been. My own predilection is to look at how-it-might-have-been-better, and then point out the ways in the future we can make it better. We improve ourselves by learning from our many mistakes. And there were some damn big mistakes. I’m not an expert on bank regulation, but I can talk about money.
My concern with the Federal Reserve itself – and with many central banks in general – is their desire to avoid taking responsibility for their own mandates and monetary powers.
“Specific” for me could go hundreds of pages. But my concern isn’t too terribly different from that of Lars Svensson, Swedish economist and former deputy governor of the Riksbank. Svensson has made several reform proposals for central banks which have gone largely ignored by his colleagues.
One of the most important of these is: target the forecast. Let’s say you have an explicit (just under) 2% inflation target like the ECB, or an implicit target like the Fed with its dual-mandate. And let’s say that your own forecast of future expected inflation is an inflation rate of, say, 0.8% or 1.2%. Then… what are you doing, exactly? What are you doing? If according to your own projections, you’re going to miss the target with your current policy, then WHY exactly is that your current policy? Those who don’t follow the thrilling and suspenseful world of central banking might not realize that this actually happens quite a lot. Svensson resigned from the Riksbank (did not seek a renewal for another term) after they acted against his recommendations in order to pursue a policy that was, according to their own projections, contrary to their own mandate. And sure enough, they had to reverse course, exactly like he had warned.
Another proposal from Svensson to keep central banks on the correct course is level targeting rather than rate targeting. Suppose that a central bank has an inflation rate target of 2%, and they come in at 1.2%. “Whelp, we missed.” Then the next year, they’re at 0.9%. “Ahhh, nuts. Missed again.” Then the next year there is outright deflation. “Man, this central banking stuff is tough!” Well, it would be easier if they were targeting the forecast, so that they adjusted policy until their own forecasts were indicating that they were likely to hit their target. That’s a good start. But even so. World is noisy. It’s easy to miss. So how does a bank maintain credibility after a major target miss?
By targeting the level path, rather than the rate. 2% inflation over two years should result in a price level that is (a bit more than) 4% higher than it was to begin. If you’re level targeting, instead of rate targeting, your target increases every time you undershoot, in order to get back on the correct path, e.g. if you have 1% inflation this year, you should have ~3% inflation the following year in order to stay on the proper path. Rather than missing year after year – which is really what happened in large parts of the world – a central bank that’s serious about its mandate should be taking more drastic action to return to its previous path every time it misses.
Being serious about hitting the target actually makes it easier to hit the target.
And I could go on.
For technical reasons, I agree with monetary economist Michael Woodford that nGDP targets would be superior to inflation targets. Following Svensson: an nGDP level target would be better than an nGDP rate target. More than that, I think there should be more prediction markets supported by central banks to provide market-based estimates of the future path of total spending in the economy. In the spirit of “targeting the forecast”, I know some economists are convinced that monetary policy itself should be hitched to the market forecast, rather than the internal modeling forecast of the central bank. I don’t quite go that far, but it’s definitely true that the markets should be created and sustained in order to provide more information, in a similar sense that the “breakeven” expected rate of inflation is a rough market forecast of future inflation expectations.
In that link, notice what happened to market expectations of inflation in 2008: they dropped like a rock That would not have happened, if the Fed were targeting the forecast. But they weren’t.
Bernanke’s memoir of his time at the Fed is illustrative here, especially his remark about the Fed’s decision to hold interest rates steady in the FOMC meeting immediately after Lehman collapsed.
Yeah. No shit, dude.
Now, at this point, a billion questions begin.
What can central banks do when rates hit zero? What about the “circularity” problem of targeting a market forecast: if the world is convinced their hitting a market forecast, then why would the market forecast not stay at 2% forever, and thus become uninformative? (This is a main reason why I don’t necessarily favor targeting market forecasts, but the people who do favor that actually do have quite a sophisticated answer in response to that question.) What about the potentially higher variance/volatility from a level target, that wouldn’t necessarily exist with a rate target? What’s the effect of quantitative easing? What about political pressures on the central bank? How do payments of interest on excess reserves influence monetary behavior? There are dozens of wrinkles here, and to be truly “specific”, I’d have to get into those wrinkles in a way that involves quite a lot of monetary theory and history. A (good) class on monetary theory is probably a better place to get into that stuff than a Dope thread.
But one of my biggest frustrations is the idea that central banks are “out of ammunition” when the rates hit zero. Not. Remotely. True.
I think the interpretation of monetary policy as interest-rate policy has addled people’s brains. Monetary policy is about the stock and flow of money, not directly about interest rates. Woodford is a great economist, but unfortunately he has contributed to this problem with his favoring of interest-rate-based models. Those models are simply not idiot-proof. Woodford is way too smart to be confused by them, but that’s not true for too many other people. In his mind’s eye, Woodford sees not just the rate at 0 today, he sees the entire dynamic future path of interest rates. People without intuition about the dynamic nature of the problem see the rate at a static 0 percent, when some version of a Taylor rule says the rate should be below 0, and then they shrug their shoulders. Frustrating as hell.
I’m a little bit stupid , so you will all have to bear with my ignorance.
Here are some things I would like to understand
What exactly is fractional reserve banking?
When people in this thread are talking about a bank run, here is what I’m thinking. The bank takes people’s money and lends it out again, the bank is hoping that all the people who lent them money will not show up demanding their money to be withdrawn at once. If that happens, does the bank fail? What does the bank do with or without a federal reserve?
Are central bank and federal reserve the same thing?
I don’t have time to respond at length but I appreciate the informative post. Always good to hear a real economist’s assessment. I’ll read up on the names you’ve mentioned.
A fractional reserve system simply means a bank holds a part of the deposits it collects - knowing that they will only have to pay out a small part of the demand deposit system at any one time.
A “full reserve” system holds all deposits all the time and is not conducive to loaning money to others since all funds are kept all the time to pay out depositors.
“Full Reserve” is antiquated and not practiced any longer.
Opponents of central banking (mainly libertarians) prefer full reserve systems. But they have lost this argument and all monetary arguments in general.
It’s not clear at all to me that using taxpayer dollars to pay above-market prices for paper was legal.
OTOH, the solution I proposed in the excerpt above was not only the government’s right but its duty — forcing banks of questionable solvency to increase their capital is one of the purposes of regulation.
But the origin of the discussion is the radical american libertarian (and its main proponent on this board with his … unique interventions). When this is the origin and the original focus, it is in my opinion a mistake then to hold the conversation as if everyone actually agrees on the rational structure - as the origin of the discussion, arose from the irrational and it remains there.
I believe you are thinking like an academic.
It is nice to say this from the idela theoretical point of view, but the political economy in which the central banks operate is delicate and they risk destabilizing populist attacks - even what was done was difficult to push through and sustain politically.
And things that are Fiscal are being put on their backs as well.
as a person in the operational world, I fear the irrational populist interventions more than the central bank imperfections… the rationalization of the targeting or improvement of the targets I think is widely known to be needed inside of these banking circles, but the outside world does not understand the technical discussions and the political legitimacy of these structures is fragile as it is easy for the populists to attack and make emotional based arguments not well founded in the facts about the actual Centra Bank, using it as a scapegoat since they tend to be as we say “the Great silent ones.”
Yes indeed it is the very idea of modern banking versus the hoarding, the economic mediation of the deposit savings to place for the lending.
Not conducive = essentially impossible
It was not really ever practiced in the modern banking world as it is an irrational and uneconomic action.
The “full reserve” systems are not banking, they are hoarding… it is not economically rational, but then almost all of the american libertarian ideas are not really the economics but the politics.
The emergence of the banking as a sector from the first Italian semi modern banks has always been the system of fractional reserve, since to hoard the money deposited with the “bank” is a system where you, the depositor, are not being paid for your deposit, you will have to pay the full cost of the holding and if the bank does not lend out a fraction of the deposit, the money is frozen, dead in the vaults. That is hugely ineffecient, which is indeed why the modern banking system developed organically, since the 1500s, holding a fraction of the deposits behind to cover the short-term liquidity demands of the depositors based on the historical liquidity needs - the cash needs - and paying the depositors an interest to attract the deposits.
the modern addition in the 20th century is the addition of the deposit insurance to cover essentially the smaller depositors to avoid them taking losses from teh panic of the bank run where the majority of the small depositors run to the bank to withdraw the cash to avoid loss, ironically thus precipitating the loss.
What i think is confusing for the Americans is that their central bank, the Federal Reserve, is weirdly set-up for old historical political reasons of the era it was first created.
A central bank is the “lender of last resort” and in a systemic panic where credit is frozen loans on collateral (like bank owned bonds) to cover those demand deposits to prevent bank runs.
In college I became attracted to libertarianism (because of wars and drugs) but after studying finance I realized how loony the ‘End the Fed’ people really are.
I saw a Facebook meme from a right wing nutcase this morning. In all caps it said “AUDIT THE FEDERAL RESERVE”. What the fuck does that even mean? I thought the board meetings are all pretty well documented and the board members are for the most part stand-up kinds of people. So what is the demand for an audit all about?