I discuss the role on Central Banks, with a focus on the RBA with documentarian Sam Hansen.
“The Battle for the Bank: Australia’s Struggle for Monetary Sovereignty” is much more than the simple saga of the Commonwealth Bank of Australia.
Rather it is Australia’s hidden history, stories of betrayal and redemption, viewed through the lens of monetary policy whilst remaining as a reflection upon the often forgotten yet ever present struggle between colonial servitude and republican liberation.
Moreover it is an exposure of the inner workings of the banking system, shining a light on the structures of fractional reserve lending and credit creation whilst laying bare the agenda of the world’s central banks to merge together and establish a one world currency.
It is time that the powers of finance are denigrated to the status of servant, not master of our society. Control over the mechanisms of credit must not remain the exclusive domain of an unelected cabal of private banks , rather the government should reclaim this power and restore it to the people to whom it rightfully belongs.
Suddenly, at the level of central banks, Australia is regarded as an investment risk. Via The Conversation.
On Wednesday Martin Flodén, the deputy governor of Sweden’s central bank, announced that because Australia and Canada were “not known for good climate work”.
As a result the bank had sold its holdings of bonds issued by the
Canadian province of Alberta and by the Australian states of Queensland
and Western Australia.
Central banks normally make the news when they change their “cash rate” and households pay less (or more) on their mortgages.
But central banks such as Australia’s Reserve Bank and the European
Central Bank, the People’s Bank of China and the US Federal Reserve have
broader responsibilities.
As an example, the new managing director of the International
Monetary Fund Kristalina Georgieva warned last month that the necessary
transition away from fossil fuels would lead to significant amounts of “stranded assets”.
Those assets will be coal mines and oil fields that become worthless,
endangering the banks that have lent to develop them. More frequent
floods, storms and fires will pose risks for insurance companies.
Climate change will make these and other shocks more frequent and more
severe.
In a speech in March the deputy governor of Australia’s Reserve Bank Guy Debelle said we needed to stop thinking of extreme events as cyclical.
We need to think in terms of trend rather than cycles in the weather.
Droughts have generally been regarded (at least economically) as
cyclical events that recur every so often. In contrast, climate change
is a trend change. The impact of a trend is ongoing, whereas a cycle is
temporary.
And he said the changes that will be imposed on us and the changes we will need might be abrupt.
The transition path to a less carbon-intensive world is clearly quite
different depending on whether it is managed as a gradual process or is
abrupt. The trend changes aren’t likely to be smooth. There is likely
to be volatility around the trend, with the potential for damaging
outcomes from spikes above the trend.
Australia’s central bank and others are going further then just
responding to the impacts of climate change. They are doing their part
to moderate it.
Its purpose is to enhance the role of the financial system in
mobilising finance to support the transitions that will be needed. The
US Federal Reserve has not joined yet but is considering how to participate.
One of its credos is that central banks should lead by example in their own investments.
They hold and manage over A$17 trillion. That makes them enormously large investors and a huge influence on global markets.
As part of their traditional focus on the liquidity, safety and
returns from assets, they are taking into account climate change in
deciding how to invest.
The are increasingly putting their money into “green bonds”,
which are securities whose proceeds are used to finance projects that
combat climate change or the depletion of biodiversity and natural
resources.
Over A$300 billion worth of green bonds were issued in 2018, with the total stock now over A$1 trillion.
Central banks are investing, and setting standards
While large, that is still less than 1% of the stock of conventional
securities. It means green bonds are less liquid and have higher buying
and selling costs.
It also means smaller central banks lack the skills to deal with them.
In September it launched a green bond fund that will pool investments from 140 (mostly central bank) clients.
Its products will initially be denominated in US dollars but will
later also be available in euros. It will be supported by an advisory
committee of the world’s top central bankers.
Launching the fund in Basel, Switzerland, the bank’s head of banking Peter Zöllner said he was
confident that, by aggregating the investment power of central banks,
we can influence the behaviour of market participants and have some
impact on how green investment standards develop
It’s an important role. Traditionally focused on keeping the financial system safe, our central banks are increasingly turning to using their stewardship of the financial system to keep us, and our environment, safe.
Author: John Hawkins, Assistant professor, University of Canberra
Mark this date – 10th June 2018. This is the date of the Swiss Federal referendum on the Sovereign Money Initiative (or “Vollgeld-Initiative” in German). Swiss voters will be asked who should be allowed to create new Swiss francs: UBS, Credit Suisse and other private commercial banks or the Swiss National Bank which is obliged to act in the interest of Switzerland as a whole.
This is the latest incarnation of the so-called Chicago Plan, which is an alternative proposal as to how banking, and central banking should be set up.
The ideas are not new, they emerged in the 1930’s, at the height of the Great Depression when a number of leading U.S. economists advanced a proposal for monetary reform that later became known as the Chicago Plan.
It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. It was supported by other luminaries such as Milton Friedman.
The ideas were brought to more recent attention following the release of an IMF paper – The Chicago Plan Revisited. We discussed the report in an earlier blog.
As we discussed more recently, the classic theory of banking, that deposits lead to banks making loans is incorrect. In fact banks create loans from “thin air”, and have all but unlimited capacity to do so. As customers take the loans, and use them to buy things, or place into deposit, money is created. No other party needs to be involved. The trouble is, not many central bankers get this alternative view, so continue to execute flawed policies, such as Quantitative Easing, and ultra-low interest rates. Banks are intermediaries, not credit creators, they say; when in fact the create funds from nowhere. But this leads to problems as we see today.
But, be clear, when a loan is created, it does indeed generate new purchasing power.It becomes part of a self-fulling growth engine. But at what cost?
Understand that the only limit on the amount of credit is peoples ability to service the loans – eventually. The more loans the banks can make, the larger they become, and the more of the economy banks consume. This is what has happened in recent times. It leads to the financialisation of property, asset price inflation and massive and unsustainable increases in debt. The only way out is the inevitable crash, so we get a state of booms and busts.
Whilst there are some controls on the banks thanks to the Basel requirement to hold a certain proportion of liquid assets against the loans, but it is a fraction of the total loans made, and there is a multiplier effect which means that very little of the shareholders capital in the banks are required to support the loans. In other words, Banks are hugely leveraged. In addition, Basel capital rules favours unproductive lending for secured property (houses and apartments) over productive lending to businesses.
In addition, Central banks have very limited ability to control the money supply, contrary to popular belief, and so their main policy control is interest rates. Lift rates to slow the economy, drop rates to drive the economy harder, against a target inflation outcome. But this is a very blunt tool. This also means that the idea of narrow money, spilling out from a multiplier effect is also flawed.
Well, now perhaps the tide is turning.
In the aftermath of the 2008 financial crisis, Iceland commissioned a report “Monetary Reform – A better monetary system for Iceland” which was published in 2015, and suggests that money creation is too important to be left to bankers alone.
Back in 2014 I discussed this, based on an insight from the Bank of England. Their Quarterly Bulletin (2014 Q1), was revolutionary and has the potential to rewrite economics. “Money Creation in the Modern Economy” turns things on their head, because rather than the normal assumption that money starts with deposits to banks, who lend them on at a turn, they argue that money is created mainly by commercial banks making loans; the demand for deposits follows. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
More recently the Bank of Norway confirmed this, and said “The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become.”.
And even the arch conservative German Bundesbank said in 2017 recently “this means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers“.
So, the Chicago Plan is a alternative approach. Here banks cannot lend by creating new deposits.
Rather, their loan portfolio now has to be backed by a combination of their own equity and non-monetary liabilities. If we assume that this funding is supplied exclusively by the government treasury, private agents are limited to holding either bank equity or monetary instruments that do not fund any lending. Under this funding scheme the government separately controls the aggregate volume of credit and the money supply. The transition to this new balance sheet conceptually takes place in two stages that both happen in a single transition period. In the first stage, banks instantaneously increase their reserve backing for deposits from 0% to 100%, by borrowing from the treasury. In the second stage, the government can independently control money and treasury credit. It exercises this ability by cancelling all government debt on banks’ balance sheets against treasury credit, and by transferring part of the remaining treasury credit claims against banks to constrained households and manufacturers, by way of restricted accounts that must be used to repay outstanding bank loans. This second stage leaves only investment loans outstanding, with money unchanged and treasury credit much reduced. Net interest charges from the previous period remain the responsibility of the respective borrowers.
Part of the transition plan would be the full buy-back of household debt by the government, making all households effectively debt free. This of course means that household consumption is likely to rise.
In the transition period households only pay the net interest charges on past debts incurred by constrained households to the banking sector. The principal is instantaneously cancelled against banks’ new borrowing from the treasury, after part of the latter has been transferred to the above-mentioned restricted private accounts and then applied to loan repayments. From that moment onward the household sector has zero net bank debt, while their financial assets consist of government bonds and deposits, the latter now being 100% reserve backed.
Now this approach to me has significant merit, and I believe it should be considered as a platform to deal with the current economic situation we face. This appears to be a better, if more radical approach than the so called Glass-Steagall separation of speculative banking assets from core banking operations, but which still perpetuates the current rocky banking road. The Chicago Plan offers significantly more benefits, and the opportunity to reset the economy, and household debt.
So, if the vote is successful on 10th June, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld.
This also means that Central Banks have the ability to managed the overall money supply, rather than just narrow money and interest rates. And the flows of credit can go to productive business investment, rather than inflated housing loans.
So the bottom line is, The Chicago Plan deserves to go mainstream, despite the howls from bankers, as their businesses get rightsized. It can also deal with the problem of highly indebted households and offers a path potentially to economic success. Current models have failed, time to move on!
The Bank for International Settlements Committee on Payments and Market Infrastructures has released a report “Central bank digital currencies“. It looks at both wholesale and more generally available models. The former, they say might be useful for payments but more work is needed to assess the full potential. Although a CBDC would not alter the basic mechanics of monetary policy implementation, its transmission could be affected. A general purpose CBDC could have wide-ranging implications for banks and the financial system. Customer deposits may become less stable, as deposits could more easily take flight to the central bank in times of stress.
Interest in central bank digital currencies (CBDCs) has risen in recent years. The Committee on Payments and Market Infrastructures and the Markets Committee recently completed work on CBDCs, analysing their potential implications for payment systems, monetary policy implementation and transmission as well as for the structure and stability of the financial system.
CBDC is potentially a new form of digital central bank money that can be distinguished from reserves or settlement balances held by commercial banks at central banks. There are various design choices for a CBDC, including: access (widely vs restricted); degree of anonymity (ranging from complete to none); operational availability (ranging from current opening hours to 24 hours a day and seven days a week); and interest bearing characteristics (yes or no).
Many forms of CBDC are possible, with different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system. Two main CBDC variants are analysed in this report: a wholesale and a general purpose one. The wholesale variant would limit access to a predefined group of users, while the general purpose one would be widely accessible.
Wholesale CBDCs, combined with the use of distributed ledger technology, may enhance settlement efficiency for transactions involving securities and derivatives. Currently proposed implementations for wholesale payments – designed to comply with existing central bank system requirements relating to capacity, efficiency and robustness – look broadly similar to, and not clearly superior to, existing infrastructures. While future proofs of concept may rely on different system designs, more experimentation and experience would be required before central banks can usefully and safely implement new technologies supporting a wholesale CBDC variant.
In part because cash is rapidly disappearing in their jurisdiction, some central banks are analysing a CBDC that could be made widely available to the general public and serve as an alternative safe, robust and convenient payment instrument.
In circumstances where the traditional approach to the provision of central bank money – in physical form to the general public and in digital form to banks – was altered by the disappearance of cash, the provision of CBDC could bring substantial benefits.
However, analysing whether these goals could also be achieved by other means is advisable, as CBDCs raise important questions and challenges that would need to be addressed. Most importantly, while situations differ, the benefits of a widely accessible CBDC may be limited if fast (even instant) and efficient private retail payment products are already in place or in development.
Although a general purpose CBDC might be an alternative to cash in some situations, a central bank introducing such a CBDC would have to ensure the fulfilment of anti-money laundering and counter terrorism financing (AML/CFT) requirements, as well as satisfy the public policy requirements of other supervisory and tax regimes. Furthermore, in some jurisdictions central banks may lack the legal authority to issue a CBDC, and ensuring the robust design and operation of such a system could prove to be challenging. An anonymous general purpose CBDC would raise further concerns and challenges. Although it is unlikely that such a CBDC would be considered, it would not necessarily be limited to retail payments and it could become widely used globally, including for illegal transactions. That said, compared with the current situation, a non-anonymous CBDC could allow for digital records and traces, which could improve the application of rules aimed at AML/CFT.
The introduction of a CBDC would raise fundamental issues that go far beyond payment systems and monetary policy transmission and implementation. A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations. Introducing a CBDC could result in a wider presence of central banks in financial systems. This, in turn, could mean a greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources. It could move central banks into uncharted territory and could also lead to greater political interference.
