UK and US: rigging the bond yields

28 August 2015 · 7:30 am

The special relationship: UK and US bond yields

http://bankunderground.co.uk/2015/08/28/the-special-relationship-uk-and-us-bond-yields/

Matt Roberts-Sklar.

Take a look at UK and US 10-year government bond yields over the past few decades and you’d struggle to say which was which. In the words of the FT last year, “The benchmark 10-year Gilt might as well be draped in the stars and stripes”. And even relatively short maturity UK and US bond yields are highly correlated. But what is behind this co-movement and does it matter?

Chart 1: Spot the difference – UK and US 10-year spot government bond yields

Source: Bloomberg and Bank calculations.
As you can see in Chart 1, there has clearly been a common downward trend in both UK and US 10-year yields over the past few decades. But week-to-week, day-to-day and even minute-to-minute movements are also very highly correlated. Whilst this is nothing new, this co-movement has been particularly strong in recent years. Of course, this isn’t just another manifestation of the special relationship – changes in US yields are correlated with changes in yields across the world, in both advanced and (to a lesser extent) emerging economies. And UK yields are also highly correlated with German yields, sometimes more so than with US yields (though this partly indirectly captures the correlation of US and German yields).
This co-movement isn’t just a feature of 10-year bonds. Focussing back on the UK, these heatmaps show rolling correlations of weekly changes in UK and US yields for different maturities. You can see there is strong co-movement (orange and red patches) between UK and US yields even at maturities as short as 3-years.
Chart 2: Correlation of UK and US spot government bond yields (two year rolling correlation):

Source: Bloomberg and Bank and author’s calculations.
Looking under the bonnet of these spot rates, here are analogous rolling correlations of instantaneous forward rates.
Chart 3: Correlation of UK and US government bond forward rates (two year rolling correlation):

Source: Bloomberg and Bank and author’s calculations.
This suggests that a lot of the strong correlation of 10-year spot yields is coming from highly correlated 3 to 7-year forward rates. That means this co-movement of long-term yields reflects co-movement at short horizons as well as longer horizons.
So what’s behind this co-movement?
Well, it could reflect people thinking future policy rates in the UK and US will be correlated. At short horizons, it’s plausible that people expect UK and US business cycles to be somewhat synchronised, given the importance of global spillovers and the fact that the UK is a small open economy. And longer term policy rate expectations reflect expectations of long-run real rates (which are affected by global factors) and long-run inflation expectations (which should be pinned down by central bank inflation targets).
But bond yields don’t just reflect policy rate expectations. They also include compensation that investors demand for buying a long maturity bond rather than rolling over a series of short maturity bonds – this is known as the term premium. And it’s very plausible that advanced economy term premia co-move. In integrated financial markets, attitudes to risk are determined globally rather than locally.  We could also observe co-moving term premia if advanced economy government bonds are seen as having similar risk characteristics.  For example, investors may well be using simple rules of thumb, extrapolating past correlations and treating ‘safe, liquid government bonds’ as an asset class, rather than looking at specific markets. The rise of global asset managers could have a part to play here.
There’s also a strong role for spillovers from overseas unconventional monetary policy. For example, we observed particularly close co-movement between US and UK yields during the 2013 ‘taper tantrum’. And, over the past year, expected, announced and actual ECB sovereign asset purchases may have become a more important driver of UK – and even US – bond yields.
Does this co-movement matter? Absolutely! Bond yields do feed through to financing costs for households, companies and of course the government. For example, UK mortgage rates increase by around 50bp on average in response to a 100bp increase in US swap rates. As the UK is a small open economy with a large financial sector, these international financial linkages are important for policy makers, both from a monetary and financial stability perspective.

Matt Roberts-Sklar works in the Bank’s Macro Financial Analysis Division.

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

Paul: Why I Want More Thorough Fed Audits

Federal Reserve

Why I Want More Thorough Fed Audits

245 Aug 21, 2015 5:00 AM EDT

By Rand Paul 

http://www.bloombergview.com/articles/2015-08-21/why-u-s-federal-reserve-needs-more-accountability 

The U.S. Federal Reserve has grown massively in recent years. Since the 2008 financial crisis, it has increased its balance sheet from less than $1 trillion to an incredible $4.4 trillion. Given this sharp increase in the Fed's risk, it's reasonable that the Fed should be audited more thoroughly than in the past.
My bill to audit the Fed is just three pages long, and simply says that the Government Accountability Office should conduct a full audit. It has 32 co-sponsors in the Senate and 142 in the House.
The Fed's Countdown
Legislation to audit the Fed has twice passed the House by overwhelming majorities. The Fed opposes the measure on the view that it is already audited enough and that a broader audit might cause political interference.
I invite a thoughtful congressional discussion of the pros and cons of a more thorough audit. I've been encouraged by the broad public support for one and disappointed by the Fed's opposition. Confidence in our currency is important to all of us, and my view is that more information can only help.
According to Deloitte & Touche, which conducts a conventional audit of the Fed's financial statements, the Fed spent $6.1 billion for operating expenses in 2013 and an additional $5.2 billion in interest paid to banks. The audit I would like to see would assess whether those payments are reasonable and necessary or whether they raise conflicts of interest between the Fed's role in monetary policy and its role as a bank regulator.
The Constitution is explicit in assigning responsibility for money to Congress, and it is particularly blunt when it says: "No money shall be drawn from the Treasury but in consequence of appropriations made by law." None of the payments made by the Fed are pursuant to appropriations, but the Fed's actions facilitate the continued growth of the national debt, which is putting our economic future at risk.
If it goes forward with an interest-rate increase, the Fed is contemplating a doubling of its payments to banks to an annual rate of well more than $10 billion. In her recent testimony, Fed Chair Janet Yellen said the amounts owed to the banking system will decline only gradually. That points to a multiyear escalation of the Fed's payments to banks as interest rates go up. The GAO could address the question of whether the Fed has explored more cost-effective options.
The GAO could also determine the market value of the Fed's assets, not just their cost or par value. If bond yields go up, the Fed could easily find itself with a negative mark-to-market net worth.
The Fed says it intends to hold its bond portfolio to maturity, avoiding losses, so it isn't required to report market values under accounting rules. But the minute the Fed's net worth falls toward zero on a mark-to-market basis, currency markets and bond-rating companies will know it and publicize it.
The Fed has never had a negative net worth, so someone is sure to question the safety of a central bank with negative net worth and its ability to run monetary policy. It would be better if the Fed were transparent on this issue, routinely reporting the market value of its positions and explaining the strength of its financial position.
The Fed is able to continue adding to its size and power, undermining monetary and fiscal policy. The Fed owns $4.5 trillion in taxpayer-guaranteed bonds, mostly Treasuries. To put these big numbers in perspective, if all of the Fed's holdings were $200,000 houses, it would be as if the central bank owned 22 million houses financed 100 percent by a giant, adjustable-rate mortgage.
The Fed crows that it earns interest and has made great profits on its portfolio. But that's just one part of government lending to another part. There's no value creation. It's like charging interest to your spouse and counting it as family income.
The assets are bought not with real capital but with "computer-entry" fictions. The danger is that, at some point, the market will become aware that quantitative easing is an illusion and that the Fed can't cause growth or maintain calm, zero-interest markets with more computer-entry purchases.
Danger exists also in a market in which the most universal of prices, the price of money, is so manipulated as to lose its essential feedback mechanism. Danger exists in a market that is deprived of the information that freely floating interest rates provide.
In a market economy, savers are taught the power of compound interest and businesses learn discipline through the cost of capital. How does that work when interest rates have been set at zero for more than six years?
And when interest rates escape the clutches of the Fed, what happens then?
The Fed's interest payments to banks raise numerous questions: Which banks received the most interest? What percentage of the payments are going to U.S. banks versus foreign banks through their U.S. branches? Are there any conflicts of interest for the Fed in determining these payments? Are there any checks and balances on their size?
It would be important for a GAO audit to comment on the fiscal impact of the Fed's decisions. Regarding the Fed's interest payments, for example, do they increase the fiscal deficit and by how much? Could they be reduced?
The Fed has been purchasing longer-term bonds, which tend to pay higher yields. Has this reduced recent fiscal deficits? Is there a risk that it will increase future fiscal deficits as interest rates rise? What are the other ways the Fed is changing the fiscal deficit?
The Fed worries that these types of inquiries will scare markets, but I doubt it. The goals of the audit are constructive and clear -- to improve transparency and ultimately to make the Fed more effective. Markets are flexible and benefit from more information. The Fed itself has emphasized the importance of communication with markets to enhance its effectiveness.
The audit I want would evaluate the Fed's decisions in light of the relevant laws.
Earlier Congresses turned much of their constitutional responsibility for money over to the Fed, often during times of war or crisis. The Fed is sometimes called the fourth branch of government, even though the Constitution created only three branches. Congress is complicit in this concentration of power, and should take responsibility for helping the Fed find constructive limits. A more thorough audit would be a good start.

Federal Reserve Audit and Transparency Act of 2015

Federal Reserve Audit and Transparency Act of 2015 by marco saba

It's time to lay siege to the robber barons

Ben Chu

Monday 24 August 2015

It's time to lay siege to the robber barons of high finance

Economic View: Political debate about the economy and business would benefit if people focused less on the sums made by individuals and took more account of how they earned it
http://www.independent.co.uk/voices/comment/its-time-to-lay-siege-to-the-robber-barons-of-high-finance-10468512.html

Ferrying goods along the Rhine in medieval times was an expensive business. Feudal lords who controlled land along the banks of the river (which was also the main European commercial thoroughfare in the period) had a habit of hanging iron chains across the width of the waterway and extorting a fee from anyone who wanted passage. The nobles grew very rich from their tolling activities, building fancy castles overlooking the Rhine with their ill-gotten proceeds.
This was a classic example of what is now known by economists as “rent extraction”. The operators of these tolls weren’t creating any wealth through their activities. They weren’t facilitating trade by maintaining the waterway, or making it any safer for the merchants. They were merely using their privileged geographical location to extract wealth from others – to shift money around.
Rent extraction, or “rent-seeking” as it is also often known, has evolved and broadened as an economic concept. It now covers a whole range of activities in a modern economy. A famous example used in economic textbooks is licensed taxis. Black cab drivers pressure city authorities to clamp down on the activities of unlicensed minicabs. More recently they’ve also tried to get new entrants to the taxi market, like those who work for the Uber web app service, banned. To the extent they are successful in these rent-seeking activities they boost the value of their own licences. It is their customers who end up paying in the form of higher fares.
But cabbies are small fry in the rent-extraction ocean. A more lucrative practice is found in the law firms that mildly tweak and re-file patents as a means of squeezing more money out of clients’ old intellectual property, or who aggressively sue other firms over minor and often spurious infringements. None of this incentivises more research or innovation. And it is the public who pay for this “patent trolling” in higher prices for products.
But easily the biggest source of wealth extraction in modern economies is the wholesale financial sector. Much of the activity of Wall Street and City of London traders in investment bankers constitutes a form of rent-extraction. Their phenomenally lucrative market-making activities in interest rates and foreign exchange don’t actually create new wealth – they merely shift money from the pockets of companies and pension funds into their own.
In a properly functioning market new players would enter and these outsize market-making profits would be competed away. But the sheer size of these financial dealers erects effective barriers to entry, curbing competition. And the “too big to fail” status of these mega financial institutions (which provides an implicit state guarantee) also secures them artificially cheap finance in the money markets, compounding their commercial advantage.
But how do we distinguish rent extraction from high profits due to legitimate business success? A good indicator is the extent to which their profits seem to be dependent on political and official connections.
The American financial sector has spent $6.6bn (£4.2bn) since 1998 lobbying US politicians, according to researchers. It seems unlikely they would spend such  sums for no reason. Our own ministers also seem to have an open door for the UK financial lobby.
The power of the lobby can be seen in the fact that widespread calls to simply break up the too-big-to-fail banks in the wake of the global financial crisis were rejected on both sides of the Atlantic by politicians.
The lobby’s influence is still readily discernible. In last month’s Budget the Chancellor took an axe to his annual bank levy in July after pressure from the likes of HSBC. The levy, which is based on the size of a bank’s global balance sheet, is to be partially replaced by a tax based on the size of a bank’s profits. Thus a tax that used to hit big banks hardest will now discriminate against the smallest. The likely long-term impact will be to reduce competitive pressures on the big players. That’s classic rent-seeking: firms use their political connections to gain a commercial advantage.
There is a heightened public interest in income and wealth inequality levels in Western economies, in particular in the soaring incomes of the top 1 per cent of earners. But Marilyne Tolle of the Bank of England recently made the point on the central bank's excellent new blog, Bank Underground, that too little attention in the inequality debate is given to tackling economic rents. She argued that a focus on redistributing income is actually helpful for the rent extractors since it represents a relatively cheap way of buying off the victims.
It’s a powerful and timely point. Rent extraction and rising inequality are two sides of the same coin. Research by Brian Bell and John Van Reenen last year suggested that up to two-thirds of the increase in the overall share of wages taken by the top 1 per cent of earners since 1999 is due to a massive increase in bankers’ bonuses. Nor was there any decline in bankers’ share of earnings after the financial crisis. In other words, rising inequality is largely a problem of bankers’ pay.
The right and the left squabble interminably over the merits of redistributive taxation. Yet both sides should be able to find much common ground on curbing rent-extraction. Those on the right should recognise that it doesn’t create wealth and that it distorts markets. Those on the left should see that it’s a clear way to reduce inequalities. Far better, surely, to stop people hanging chains across rivers in the first place, rather than taxing what they make from doing it.
The political debate about the economy and business would benefit if people focused less on the sums of money made by individuals and took more account of how they earned it. Is their sector truly competitive? Have they genuinely created wealth, or merely extracted it?
The medieval rent extractors of the Rhine went too far. In the end they provoked a popular backlash. The picturesque castles of what became known as “robber barons” were besieged and sacked by the angry subjects of the Holy Roman Empire.
The strange thing is that, despite bringing on the global financial crisis and taking a sword to the living standards of millions of their fellow citizens, today’s financial robber barons have been more or less untouched.
Twitter: @BenChu_

A spectre is haunting Europe— the spectre of democracy

A spectre is haunting Europe— the spectre of democracy by Yanis Varoufakis

Paul Craig Roberts: Central Banks Are A Corrupting Farce

Central Banks Have Become A Corrupting Force — Paul Craig Roberts and Dave Kranzler

August 23, 2015

http://www.paulcraigroberts.org/2015/08/23/central-banks-become-corrupting-force-paul-craig-roberts-dave-kranzler/

Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?
These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.
It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.
Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.
What is going on here?
The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits.
Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.
As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence. The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment.
Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.
If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.
The problem with central banks is that humans are fallible, including the chairman of the Federal Reserve Board and all the board members and staff. Nobel prize-winner Milton Friedman and Anna Schwartz established that the Great Depression was the consequence of the failure of the Federal Reserve to expand monetary policy sufficiently to offset the restriction of the money supply due to bank failure. When a bank failed in the pre-deposit insurance era, the money supply would shrink by the amount of the bank’s deposits. During the Great Depression, thousands of banks failed, wiping out the purchasing power of millions of Americans and the credit creating power of thousands of banks.
The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve.
If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some astute observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandized belief that all is fine here in the US economy.
We know that the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.
Is the stock market decline of August 20-21 welcome or unwelcome?
At this point we do not know. In order to keep the dollar up, the basis of US power, the Federal Reserve has promised to raise interest rates, but always in the future. The latest future is next month. The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the Uni-power to Third World status.
The Federal Reserve can say that the stock market decline indicates that the recovery is in doubt and requires more stimulus. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again.
On the other hand, the stock market decline last Thursday and Friday could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.
If flight turns out to be the case, it will be interesting to see if central bank liquidity and purchases of stocks can stop the rout.

 

103

Dr. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. Roberts' latest books are The Failure of Laissez Faire Capitalism and Economic Dissolution of the West and How America Was Lost.

Sovereign Money – Common Critiques

Written by Positive Money on August 22, 2015. 

http://positivemoney.org/2015/08/sovereign-money-common-critiques/

There are a number of common objections and concerns with the proposal to switch to a sovereign money system. Here we deal with the 3 areas of objections:

1. “It won’t work”

   • “There would be little scope for credit intermediation”
   • “There would be little scope for maturity transformation”
   • “It would not be feasible for the state to establish control of the money supply”
   • “A committee cannot accurately decide how much money should be created”
   • “It would be difficult to judge the performance of central banks”
   • “It’s impossible for banks to be profitable in this model” / “Banking would be unviable”

2. “It’s unnecessary”

   • “Deposit insurance makes the banking system safe”
   • “Remove state support for banks & let markets discipline them”
   • “We just need better regulation”

3. “Even if it works it will be damaging”

   • “It is unreasonable to expect the public to assess the risk of investment accounts”
   • “It would lead to a shortage of credit, deflation and recession”
   • “It would be inflationary / hyperinflationary”
   • “Interest rates would be too high”
   • “It would hand over the printing press to politicians”
   • “It would be difficult to prevent partisan behaviour by the central bank”
   • “It is over reliant on central planning”
   • “It requires control by technocrats”
   • “The shadow banking sector would simply create substitutes for money. Near-monies would emerge and the central bank would lose control of money creation”
   • “This is a monetarist policy”

1. “IT WON’T WORK”

“THERE WOULD BE LITTLE SCOPE FOR CREDIT INTERMEDIATION”

A very common criticism or misunderstanding of Sovereign Money proposals is that they seek to prevent banks from acting as credit intermediaries. As explained in Jackson & Dyson (2013), banks would lend in a sovereign money system, but they would do so by borrowing pre-existing sovereign money (originally created by the central bank) from savers and then lending those funds to borrowers. This would be different from the current system, where banks simply credit the borrower’s account and create new money in the process. In other words, credit intermediation between borrowers and savers would be the very function of the lending side of a bank in the sovereign money system.
https://www.positivemoney.org/2012/03/myths-money-banking/
https://www.positivemoney.org/2014/05/full-reserve-banking-really-hard-understand-reply-john-aziz/
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/

“THERE WOULD BE LITTLE SCOPE FOR MATURITY TRANSFORMATION”

Definitions of maturity transformation tend to focus on the banking sector’s role in utilising short-term sources of funding to finance long-term lending. This maturity transformation will still take place in a sovereign money system. Sovereign Money proposals have bank liabilities – Investment Accounts – set at a range of maturities, from a minimum of 4 weeks (although the regulator could set a higher minimum) to a number of months or years. So banks’ loans could have maturities ranging from a few months, to a number of years. In the extreme, mortgage loans would have maturities of 25 years or more, although in practice many mortgages are refinanced earlier and the average maturity of mortgage loans is as little as 7 years. Such a business plan would see new investments and repayments on existing loans being used to fund new loans and Investment Account withdrawals.
It is important to remember that loan repayments in a Sovereign Money system would not result in the destruction of money. In the current monetary system, the deposits used to repay bank loans disappear or are ‘destroyed’ as a result of the accounting process used to repay a loan. In contrast, in a Sovereign Money system debt repayments would not result in money being destroyed. Instead, loan repayments would be made by debtors transferring Sovereign Money from their Transaction Accounts to the Investment Pool account of their bank. The bank would now have re-acquired the Sovereign Money that it originally lent on behalf of its investors. Therefore investors looking to deposit savings on a short-term basis, which may have been used to make a long-term loan, would receive their return from the repayments of the borrower.
More generally, maturity transformation can be undertaken by organisations other than banks. The peer-to-peer lending market is also developing a range of loan intermediation models involving internal intra-lender markets for loan participations, which could be adopted by banks to further enhance the flexibility of sovereign money financing. The securities markets also do maturity transformation every day. Companies issue long-term liabilities which are bought by investors, and stock and bond markets enable investors to liquidate their investments instantly by selling them to others. Banks are perhaps historically regarded as providing an essential service to borrowers whose liabilities are not marketable (i.e. they cannot be traded in financial markets), but virtually all liabilities can now be converted into marketable securities through the intermediation of banks, and that is not something that the sovereign money proposals will change.
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/

“IT WOULD NOT BE FEASIBLE FOR THE STATE TO ESTABLISH CONTROL OF THE MONEY SUPPLY”

In 1979, attempts were made principally by the US and UK authorities, to manage the economy by controlling the amount of money created by the central bank. This was a failure, because it was based on the neo-classical fallacy that central banks determine the quantity of central bank reserves and the banking sector multiply that amount into a larger amount of broad money (bank deposits), to a multiple determined by the reserve ratio.
Yet, as Keynes had recognised almost fifty years earlier, banks were able to create as much broad money as they pleased so long as they did so in step. This is because reserves are primarily used for payment settlement purposes amongst banks themselves. Only banks and building societies have access to Central Bank accounts, meaning reserves cannot leave the system. If banks create large amounts of broad money in step, then the payments between them will cancel out, the net settlements between them will remain the same, and no additional reserves will need to be injected into the system. In this system, it is a mathematical certainty that if one bank is experiencing a shortage of reserves, another bank will have a surplus. As long as the banks with the surplus are willing to lending to those experiencing a shortage, new broad money can be continuously created. Central banks (as part of the state) can’t establish control of the money supply (through restricting the supply of reserves) when it is commercial banks that create broad money through lending.
The sovereign money proposals address this problem by preventing banks from creating demand deposits, liabilities, which function as the means of payment in the modern economy. Instead, money, in the sense of the means of payment, would exist as liabilities of the central bank, and could therefore be created (or destroyed) only by the central bank. This would prevent loss of control of the money stock and provide the central bank with absolute and direct control of the aggregate of these balances.
https://www.positivemoney.org/2011/08/steve-horwitzs-pro-fractional-reserve-arguments/
https://www.positivemoney.org/2013/02/detlev-schlichter-on-positive-money-a-response/
https://www.positivemoney.org/2012/11/criticisms-of-positive-money-by-mike-robinson-of-uk-column/
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2012/03/myths-money-banking/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/05/power-create-money-safer-state-banks/
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/
https://www.positivemoney.org/2014/02/drews-article-objections-edit/
https://www.positivemoney.org/2013/07/will-there-be-enough-credit-in-the-positive-money-system/
https://www.positivemoney.org/2013/05/would-positive-money-system-be-inflationary/

“A COMMITTEE CANNOT ACCURATELY DECIDE HOW MUCH MONEY SHOULD BE CREATED.”

This argument runs as follows: “A centralised committee can’t possibly make a decision as complex as how much money is needed in the economy as a whole.” This is a problem that applies to any monetary policy regime in which there is a central bank, including the existing one in which the central bank sets the base rate of interest. It is therefore not an argument against a Sovereign Money system per se, but an argument against the existence of central banks.
In practice, the Monetary Policy Committee’s decision-making process on the rate of growth of money creation would work in the same way that decisions on interest rate policy are currently made. If, in the current system, the MPC would vote to lower interest rates, then in a sovereign money system they would vote to increase the rate at which money is created. The opposite also applies: if they would vote to raise interest rates (to discourage borrowing and therefore reduce money creation by banks), then in a sovereign money system they would vote to slow the rate at which money is created. As with the decision to alter interest rates, the Committee would need to respond to feedback from the economy and adjust their decisions on monthly basis. But whereas the setting of interest rates affects the economy through a long and uncertain transmission mechanism, money creation directed through government spending leads directly to a boost in GDP and (potentially) employment. The feedback is likely to happen much faster and therefore be easier to respond to.
Secondly, the argument is also based on the assumption that banks, by assessing loan applications on a one-by-one basis, will result in an overall level of money creation that is appropriate for the economy. Yet, during the run up to the financial crisis, when excessive lending for mortgages pushed up house prices and banks assumed that house prices would continue to rise at over 10% a year, almost every individual mortgage application looked like a ‘good bet’ that should be approved. From the bank’s perspective, even if a borrower could not repay the loan, rising house prices meant that a bank would cover its costs even if it had to repossess the house. In other words, even if the loan would not be repaid and the house repossessed, the bank would most likely not suffer a loss, as the repossessed house was consistently increasing in value. So it is quite possible for decisions taken by thousands of individual loan officers to amount to an outcome that is damaging for society.
More importantly is the system dynamics of such an arrangement. When banks create additional money by lending, it can create the appearance of an economic boom (as happened before the crisis). This makes banks and potential borrowers more confident, and leads to greater lending/ borrowing, in a pro-cyclical fashion. Without anybody playing the role of ‘thermostat’ in this system, money creation will continue to accelerate until something breaks down.
In contrast, in a sovereign money system, there is a clear thermostat to balance the economy. In times when the economy is in recession or growth is slow, the MCC will be able to increase the rate of money creation to boost aggregate demand. If growth is very high and inflationary pressures are increasing, they can slow down the rate of money creation. At no point will they be able to get the perfect rate of money creation, but it would be extremely difficult for them to get it as wrong as the banks are destined to.
It is also important to clarify that in a Sovereign Money system, it is still banks – and not the central bank – that make decisions about who they will lend to and on what basis. The only decision taken by the central bank is concerning the creation of new money; whereas, all lending decisions will be taken by banks and other forms of finance companies.
https://www.positivemoney.org/2012/10/full-reserve-banking-does-not-mean-a-bank-bailout/
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/05/power-create-money-safer-state-banks/
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/
https://www.positivemoney.org/2013/05/would-positive-money-system-be-inflationary/

“IT WOULD BE DIFFICULT TO JUDGE THE PERFORMANCE OF CENTRAL BANKS

In a Sovereign Money system the Monetary Policy Committee does not attempt to moderate inflation by adjusting interest rates. Instead, it adjusts the rate of money creation directly, by instructing the central bank to create money at a certain percentage growth rate. Any newly created money is transferred to government, and is then spent directly into the real economy, either through government spending or through direct transfers to citizens, or tax cuts. There is a much more direct and certain transmission mechanism between changes in monetary policy (i.e. the rate of money creation) and the impact on the real economy.
For this reason, we cannot see any reason why it would be harder to judge a central bank that controls money creation directly than one that relies on indirect and uncertain means of influencing the economy, in the form of short-term interest rates.

“IT’S IMPOSSIBLE FOR BANKS TO BE PROFITABLE IN THIS MODEL.” / “BANKING WOULD BE UNVIABLE.”

In a sovereign money system banks provide two essential functions, both of which can be highly profitable:
1) The payments system. Billions of pounds are transferred between accounts every single day. MasterCard, Visa and various other payment networks all run successful businesses by providing payment systems. It is unrealistic to think that banks would be unable to find a way to generate a profit given the fact that they sit at the centre of the national payments system.
2) The lending/saving function. Banks would perform this function just like any other part of the financial sector, by getting funds from savers and investing them in financial assets and loans. The rest of the financial sector is profitable. It seems unrealistic to think that banks cannot also generate a profit from providing this service. Indeed, crowd-funding and peer-to-peer lending manage to make profits by extending savings to willing borrowers.
Thus, there is no reason to think that banks in a sovereign money system wouldn’t be able to make similar profits from providing the exact same service.
https://www.positivemoney.org/2012/09/lawrence-white-tries-to-argue-for-fractional-reserve-banking/

2. “IT’S UNNECESSARY”

“DEPOSIT INSURANCE MAKES THE BANKING SYSTEM SAFE.”

Governments currently guarantee the liabilities of banks by promising bank customers that they will be reimbursed, from taxpayer funds, if the bank fails (i.e. £85,000 per person per bank). By reducing the incentives for bank customers to ‘run’ on the bank, critics may argue that Sovereign Money is unnecessary.
However deposit insurance does not make the system safer, it actually makes it riskier.
1) It removes the incentives for bank customers to take an interest in the activities of their bank.
2) It leaves banks free to take whatever risks they like without scrutiny from customers.
3) The role of monitoring is therefore left exclusively to the under-resourced regulator.
4) Bank customers, staff and shareholders benefit from the upside of bank investments, but the taxpayer takes the ultimate losses once the risk taking leads to a bank failure.
5) Deposit insurance leads to greater risk-taking by the banks (moral hazard), and therefore greater risk of failure.
https://www.positivemoney.org/2011/01/no-solutions-on-bbc2-are-britains-banks-too-big-to-save/
https://www.positivemoney.org/2013/02/detlev-schlichter-on-positive-money-a-response/
https://www.positivemoney.org/2012/11/criticisms-of-positive-money-by-mike-robinson-of-uk-column/
https://www.positivemoney.org/2012/06/regulate-banks-or-go-for-the-two-account-system/
https://www.positivemoney.org/2014/10/can-remove-state-support-banks/
https://www.positivemoney.org/2013/05/two-main-problems-with-deposit-insurance/

“REMOVE STATE SUPPORT FOR BANKS & LET MARKETS DISCIPLINE THEM”

This argument proposes that banks would not have taken so much risk without the safety nets provided by governments and central banks. Without these safety nets, those banks that were mismanaged would
 have been liquidated and would have made way for new market entrants with better business practices. The argument makes sense, but the policy prescription of removing deposit insurance and lender of last resort whilst keeping the current structure of banking is a dead end. If deposit insurance (the £85k on bank balances) were officially withdrawn, the first rumour of potential problems at a large bank would be enough to encourage a run on that bank. In such a situation, the government would immediately re-instate deposit insurance (in the same way that deposit insurance caps were raised or removed during the financial crisis). Likewise, central banks are unlikely to have the nerve to refuse to lend to a bank in distress, knowing that the failure of one bank could rapidly cause a breakdown in the payments system.
These problems will remain as long as the payment system consists of liabilities of commercial banks, because any bank failure threatens the payment system and therefore the entire real economy. A sovereign money system tackles this problem by separating the payments system (made up mainly of Transaction Accounts) from the risk-taking activities of banks, and allows taxpayer-funded safety nets to be removed without risking a panic in the process.
https://www.positivemoney.org/2012/06/regulate-banks-or-go-for-the-two-account-system/

“WE JUST NEED BETTER REGULATION”

The better regulation view assumes that regulators actually have control over what banks do. This is an extremely optimistic view, for a number of reasons:
1) The banking sector has far more funds and resources at its disposal than any public body designed to regulate it. Therefore, banks would be able to mobilise substantially more resources for bypassing certain policy reforms, under the guise of financial innovation, than regulators would have in order to prevent them from doing so.
2) If regulatory policies are somewhat successful, as in 1950s and 1960s, their role can be downplayed by lobbyists and eventually removed on the grounds that such restrictions were never required to begin with.
3) The financial system is presently so complex (compared to the 1950s-1970s) that it is becoming increasingly more difficult to regulate.
4) Only regulating and not restructuring, will most likely result in a more convoluted financial system, making it even more difficult regulate.
5) Small banks cannot cope with huge amounts of regulation, in other countries this has resulted in small banks being merged with bigger banks, an unintended consequence.
6) The problems with the current monetary set-up are systemic. What is needed is systemic change, not a number of new rules that will keep the current inherently unstable system intact.
As Andy Haldane at the Bank of England has said, what is needed is greater simplicity: banks that can fail without threatening the payments system or 
calling on taxpayer funds. Our approach ensures that private risk-taking remains private, and losses cannot be socialised. That said, any measures to change regulations to direct more credit and lending to the real economy would be beneficial.
https://www.positivemoney.org/2011/01/independent-commission-on-banking-released-responses/
https://www.positivemoney.org/2011/01/disappointing-half-time-report-from-the-independent-commission-on-banking/.
https://www.positivemoney.org/2011/01/basel-accords-mark-market/
https://www.positivemoney.org/2012/09/vickers-had-no-idea-what-narrow-banking-is/
https://www.positivemoney.org/2012/06/regulate-banks-or-go-for-the-two-account-system/
https://www.positivemoney.org/2014/11/regulation-banks-solution-ignores-larger-issues-play/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/05/cant-leave-power-create-money-hands-banks-regulators-open-democracy/
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/

3. “EVEN IF IT WORKS IT WILL BE DAMAGING”

“IT IS UNREASONABLE TO EXPECT THE PUBLIC TO ASSESS THE RISK OF INVESTMENT ACCOUNTS”

Some scrutiny from bank customers is important. We do not think that the average Investment Account holder will spend their time poring through the bank’s financial statements. However, the fact that Investment Account holders must take some risk does create the opportunity for banks to differentiate themselves − based on the types of investment opportunities they offer to the public. This is in contrast to the current situation, in which all banks offer liabilities that are underwritten by the government and therefore ‘risk-free’, and simply compete by offering the highest interest rates.
The idea that bank deposits are somehow special and must be protected from the risk of loss seems rather myopic, as it overlooks the fact that the majority of most people’s wealth is invested in financial assets (or property) that is not protected. If we believe that no bank deposit should ever lose money, why does the same argument not apply to those who invest their pensions in the stock market, or in buy-to-let property? In addition, other forms of finance such as peer-to-peer lending are showing rapid signs of growth despite not being insured by the government.
Investment Accounts in a Sovereign Money system would carry varying degrees of risk, and would not be guaranteed by the government. Investment Account holders would need to choose their respective desired level of risk at the point of opening the Investment Account. The terms of the account would explain how any losses on the underlying investments are split between the bank and Investment Account holders collectively. Losses incurred by the bank will eat into its loan loss provisions and own capital. Losses passed onto Investment Account holders will reduce the balance of their accounts.
For example, the low-risk low-return accounts may say that the bank would take the losses up to 7% of the value of their Investment Accounts (an amount that should be covered by loan loss provisions plus own capital), whilst the customers would take losses proportionately on any amount past this point. In contrast, on higher-risk accounts, which may fund more speculative activities, the terms may be that any losses are split equally between the bank and the Investment Account holders.
The noteworthy points are: a) Investment Account holders would be able to choose how much risk they want to take, and that b) in the worst case scenario, Investment Account holders may end up losing part of their investment.

“IT WOULD LEAD TO A SHORTAGE OF CREDIT, DEFLATION, AND RECESSION”

The basic premise of this argument is that removing the banking sector’s ability to create money will reduce its capacity to make loans, and as a result the economy will suffer. However, this ignores several crucial issues: 1) The recycling of loan repayments coupled with savings would be sufficient to fund business and consumer lending as well as a non-inflationary level of mortgage lending. 2) There is an implicit assumption that the level of credit provided by the banking sector today is appropriate for the economy. Banks lend too much in the good times (particularly for unproductive purposes) and not enough in the aftermath of a bust. 3) The argument is based on the assumption that bank lending primarily funds the real economy. However, loans for consumption and to non-financial businesses account for as little as 16% of total bank lending. The rest of bank lending does not contribute directly to GDP. 4) Inflows of sovereign money permit the levels of private debt to shrink without a reduction in the level of money in circulation, disposable income of households would increase, and with it, spending in the real economy – boosting revenue for businesses. 5) If there were a shortage of funds across the entire banking system, particularly for lending to businesses that contribute to GDP, the central bank always has the option to create and auction newly created money to the banks, on the provision that these funds are lent into the real economy (i.e. to non-financial businesses).
https://www.positivemoney.org/2013/04/the-alleged-deflationary-effect-of-full-reserve-banking/
https://www.positivemoney.org/2012/09/vickers-had-no-idea-what-narrow-banking-is/
https://www.positivemoney.org/2012/09/lawrence-white-tries-to-argue-for-fractional-reserve-banking/
https://www.positivemoney.org/2012/07/george-selgin-favours-fractional-reserve-banking/
https://www.positivemoney.org/2015/01/new-report-stripping-banks-power-create-money-cause-shortage-money-high-unemployment-economic-decline/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/04/ann-pettifor-there-will-be-no-shortage-of-money/

“IT WOULD BE INFLATIONARY / HYPERINFLATIONARY”

Some argue that a Sovereign Money system would be inflationary or hyperinflationary. There are a number of reasons why this argument is wrong: 1) Money creation can only become inflationary if it exceeds the productive capacity of the economy (or if all the newly created money is injected into an area of the economy that has no spare capacity). Our proposals state that the central bank would have a primary mandate to keep prices stable and inflation low. If money creation feeds through into inflation, the central bank would need to slow down or cease creating new money until inflationary pressures fell. 2) Hyperinflation is typically a symptom of some underlying economic collapse, as happened in Zimbabwe and Weimar Republic Germany. When the economy collapses, tax revenues fall and desperate governments may resort to financing their spending through money creation. The lesson from episodes of hyperinflation is that strong governance, checks and balances are vitally important to if any economy is going to function properly.. Hyperinflation is not a consequence of monetary policy; it is a symptom of a state that has lost control of its tax base. Appendix I of Modernising Money covers this process in depth, looking at the case of Zimbabwe.
https://www.positivemoney.org/2014/05/hyperinflation-born-extremis/
https://www.positivemoney.org/2014/04/ignorant-live-fear-hyperinflation/
https://www.positivemoney.org/2013/05/would-positive-money-system-be-inflationary/

“INTEREST RATES WOULD BE TOO HIGH”

There are two assumptions behind this critique: 1) A shortage of credit would prompt interest rates to rise to harmful levels. 2) As savings accounts would no longer be guaranteed by the government, savers would demand much higher interest rates in order to encourage them to save.
Sections above explains how a sovereign money system will not result in a shortage of money or credit in the economy, thus there is no reason for interest rates to start rising rapidly.
The second point is disproven by the existence of peer-to-peer lenders, which work in a similar way to the lending function of banks in a sovereign money system. They take funds from savers and lend them to borrowers, rather than creating money in the process of lending. There is no government guarantee, meaning that savers must take the loss of any investments. The peer-to-peer lender provides a facility 
to distribute risk over a number of loans, so that the failure of one borrower to repay only has a small impact on a larger number of savers. Despite the fact that the larger banks benefit from a government guarantee, as of May 2014, the interest rates on a personal loan from peer-to-peer lender Zopa is currently 5.7% (for £5,000 over 3 years), beating Nationwide Building Society’s 8.9% and Lloyd’s 12.9%. This shows that there is no logical reason why interest rates would rise under a banking system where banks must raise funds from savers before making loans, without the benefit of a taxpayer-backed guarantee on their liabilities.
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/

“IT WOULD HAND OVER THE PRINTING PRESS TO POLITICIANS”

Many critics misunderstand Sovereign Money, and assume that Sovereign Money would equate to allowing the government to print as much money into existence as they want. However, it is important to note that politicians are not directly given control over money creation, because of the risk that political pressures could lead the government to abuse this power. Therefore, the decision over how much new money to create should be taken, as it is now, by the Monetary Policy Committee (MPC) at the central bank in line with their democratically mandated targets. Likewise, the process should be designed so that the central bank is not able to gain influence over government policy.
In practice this means that the MPC and the Bank of England should not have any say over what the new money should be used for (this is a decision to be taken solely by the government) whilst the government should have no say over how much money is created (which is a decision for the MPC). Decisions on money creation would be taken independently of government, by a newly formed Money Creation Committee (or by the existing Monetary Policy Committee). The Committee would be accountable to the Treasury Select Committee, a cross-party committee of Members of Parliament who scrutinise the actions of the Bank of England and Treasury. The Committee would no longer set interest rates, which would now be set in the market.
With these two factors in mind, the procedure for the central bank and the government cooperating to increase spending is relatively simple. First the central bank would take a decision over how much money to create and grant to the government. Once in possession of the money, the government could use it to increase spending, or lower taxes.
https://www.positivemoney.org/2014/05/neither-profit-seeking-bankers-vote-seeking-politicians-can-trusted-power-create-money/
https://www.positivemoney.org/2013/04/dirk-bezemer-on-positive-money-a-response/
https://www.positivemoney.org/2013/02/detlev-schlichter-on-positive-money-a-response/
https://www.positivemoney.org/2012/11/criticisms-of-positive-money-by-mike-robinson-of-uk-column/
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2013/05/would-positive-money-system-be-inflationary/

“IT WOULD BE DIFFICULT TO PREVENT PARTISAN BEHAVIOUR BY THE CENTRAL BANK”

If the central bank decided the economy was faltering due to a shortage of money, and decided to create additional money to be allocated to government, it would be for government to decide how that money was to be spent. If instead, the central bank decided that the extra money should be lent to the banking sector, then it would be the banking sector that decided which projects to finance. Since the monetary committee does not have any decision making power to influencehow the newly money is spent, it is difficult for it to behave in a partisan manner.
When the central bank creates new money and transfers it to the government’s account, it would be for the government to decide how that money was to be spent. If the central bank feels that there is a shortage of credit in the real economy, and decides to creates money to lend to banks (in order to finance their lending to non-financial businesses) then it is the banks that decide which firms and projects to finance. Since the Monetary Committee does not have any decision making power to influence how the newly money is spent, it is difficult for it to behave in a partisan manner.
Despite this, the monetary committee should implement the safeguards that are typically used to protect against partisan behavior by any committee or body, such as having staggered terms and submitting any appointments to possible veto by a cross-party group such as the Treasury Select Committee.
https://www.positivemoney.org/2013/02/detlev-schlichter-on-positive-money-a-response/
https://www.positivemoney.org/2012/11/criticisms-of-positive-money-by-mike-robinson-of-uk-column/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/05/power-create-money-safer-state-banks/
https://www.positivemoney.org/2014/05/neither-profit-seeking-bankers-vote-seeking-politicians-can-trusted-power-create-money/
https://www.positivemoney.org/2013/05/would-positive-money-system-be-inflationary/

“IT IS OVER RELIANT ON CENTRAL PLANNING”

This critique argues that placing the power to create money in the hands of a body at the central bank is overly centralized, amounts to central planning or relies on rule by technocrats.
Firstly, does the proposal amount to ‘central planning’? The Money Creation Committee would be responsible for just two things: a) identifying the increase in the money stock needed to promote non-inflationary growth, and b) monitoring any possibility of a shortage of credit to the real economy. They are not responsible for deciding how to spend newly created money, as this decision is given to the elected government (just as with the decision on how to spend all tax revenue). Neither are they responsible for deciding which businesses get loans or investment, as this decision remains with banks (and the savers who provide them with funds).
Secondly, is this process of money creation over-centralised? We would argue that the decision over how much money to create necessarily has to be centralised for a nation. However, the decision over how the money is spent can be as decentralised as one would wish. The most decentralised method of distribution would be to divide the newly created money equally between all citizens and allow them to spend it as they see fit. But decentralisation of the decision of how much money to create is unworkable. If the decision is decentralised by giving a range of banks (whether private or publicly owned) the power to create money, every individual bank has the incentive to create more money to maximise loan revenues. The overall result will be excessive levels of money creation. If each bank is to be given a quota for how much money to create, then this necessitates a central decision maker again. If the decision were decentralised to say, local authority governments, who were permitted to create money up until the point that it started to fuel inflation, then every local authority would have the incentive to create as much money as quickly as possible, in order to create and spend the maximum amount in advance of other local authority governments and before the combined effect led to inflation.
https://www.positivemoney.org/2013/04/dirk-bezemer-on-positive-money-a-response/
https://www.positivemoney.org/2013/02/detlev-schlichter-on-positive-money-a-response/
https://www.positivemoney.org/2012/10/full-reserve-banking-does-not-mean-a-bank-bailout/
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2012/03/myths-money-banking/
https://www.positivemoney.org/2015/01/new-report-stripping-banks-power-create-money-cause-shortage-money-high-unemployment-economic-decline/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/
https://www.positivemoney.org/2014/06/disagree-ann-pettifor/
https://www.positivemoney.org/2014/05/power-create-money-safer-state-banks/

“IT REQUIRES CONTROL BY TECHNOCRATS.”

This is very similar to the argument above: A centralised committee can’t possibly make a decision as complex as how much money is needed in the economy as a whole.
Currently, the MPC make decisions on interest rates that have huge influence over the returns that savers make on their pensions, on how much householders pay on their mortgages, and how much businesses must pay in interest to banks. This is a blunt tool with far-reaching consequences. Indeed, the Bank of England suggests that it can take up to three years for it to start taking an effect.
On the other hand, conventional Quantitative Easing is an extremely complex technocratic process. Not only is the majority of society confused by its mechanics and how it works, but there is still a large debate as to whether it actually works.
In contrast, the creation of new money in the controlled and measured manner proposed in Sovereign Money has a much more precise and concentrated impact, and does not have the same level of ‘collateral damage’ upon the wider economy.
https://www.positivemoney.org/2012/07/eleven-arguments-against-interest-rate-adjustments/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/

“THE SHADOW BANKING SECTOR WOULD SIMPLY CREATE SUBSTITUTES FOR MONEY. NEAR-MONIES WOULD EMERGE AND THE CENTRAL BANK WOULD LOSE CONTROL OF MONEY CREATION.”

The concern here is that restricting the ability of banks to create money will lead to the shadow- banking sector creating close substitutes for sovereign money, thus circumventing the intention of these reforms. However, there is minimal risk of this happening, for a couple of reasons:
1) Unless there is a shortage of money, there will be no demand for money substitutes. So this argument only applies if there is a genuine shortage of money in the economy. We’ve addressed the reasons why this is unlikely above.
2) Even in a recent case of shortage of money in the economy (i.e. the years following the financial crisis) there is little evidence of ‘near monies’ rising up and taking the place of bank deposits on any economically significant scale. Any money substitutes created by the shadow banking system would be risk bearing, whereas money in Transaction Accounts would be entirely risk-free. The company or shadow bank attempting to issue near-monies would have to offer significant advantages over a standard Transaction Account in order to compensate for this risk.
However, the emergence of near-monies is actually extremely easy to prevent. For any shadow bank’s liabilities to function as near-monies, they would have to be as easy to make payments with as normal sovereign money in a Transaction Account. This would mean that it must be possible to make payments with them using the same payment networks as the banks do: BACS, CHAPS, Faster Payments and so on in the UK. Therefore any shadow bank that wishes to connect to these payment systems must be required to operate as a Transaction Account provider, and would therefore have no ability to create money. Any shadow bank that was not willing to work in this way would find the payment services it offered would be less widely accepted and therefore less useful, and not an effective substitute for sovereign money.
https://www.positivemoney.org/2014/12/possible-stop-banks-creating-money-shadow-banks-just-take/
https://www.positivemoney.org/2014/11/sovereign-money-response-andrea-leadsom-economic-secretary-treasury/

“THIS IS A MONETARIST POLICY.”

Currently, the Monetary Policy Committee attempts to control bank lending – and therefore the quantity of broad money in the economy – by influencing the interest rate at which banks lend to each other on the interbank market. After the reform, the MCC would have direct control over the money stock and so there would be no need for the MCC to use interest rates to affect it. This has only a superficial resemblance to the monetarist policies of the 1980s. It is important to note that one reason monetarism was disastrous, was because central banks were attempting to control the growth in bank deposits (mainly through bank lending) through restricting the monetary base.
The theory was that the quantity of money on deposit at the central bank (reserves) could be used to restrict the quantity of deposits at private banks (broad money). This policy was in part based on a money multiplier view of bank lending – that banks required deposits (or central bank reserves) before they could make loans. However, the money multiplier model is incorrect – loans in fact create deposits and reserves are required by banks only to settle payments between themselves. In short, base money is endogenous to the creation of bank deposits and is supplied by the central bank on demand. Central Banks were unable to credibly restrict the supply of reserves to any private bank once it had made loans, as to do so could have led to the bank in question being unable to make payments to other banks. This could have led to a bank run and as such would have contravened the central bank’s remit to maintain financial stability.
In addition, monetarists were mainly concerned with inflation, and saw all money creation
 as inflationary. In contrast, a sovereign money system recognizes that there are situations in which money creation actually raises demand and output rather than simply causing inflation. Monetarists also saw inflation as the main threat to the economy, and were willing to let unemployment rise in order to keep inflation under control (although this did not work). In contrast, proposals for a sovereign money system have a strong focus on how money creation can be used responsibly to boost employment and output.
https://www.positivemoney.org/2012/10/does-full-reserve-banking-equal-monetarism/
https://www.positivemoney.org/2014/08/sovereign-money-system-monetarism/

How The Eurogroup circumvent Club-Med countries

Why is the Eurogroup ruling Europe?

http://goofynomics.blogspot.it/2015/08/why-is-eurogroup-ruling-europe.html

Let us suppose that the executive members for finance of Manchester, Glasgow, Nottingham, and Oxford city councils meet by chance at Bristol beach (UK). They decide to have a beer together, and during this informal meeting they take another, less irrelevant, decision: to raise your tax rate. Yes, I mean precisely yours, even if you live in London, or Smarden, or Edinburgh, or wherever in the UK...

What would be your reactions next year, when the happy moment would come to pay taxes? I suppose that you would be disappointed. But, over and above that, you would probably ask yourself an obvious question: “Who or what on Earth gave to these guys the right to raise my tax rate?”

The answer is: nothing. I am quite sure that nothing in the British (or French, or German) Constitution grants to an informal meeting of local politicians the right to raise taxes at the national, or even at the local, level. Such a decision, would it be enforced by some authority, would immediately provoke an upheaval.

Yet, this is exactly what is happening in Europe now, without people opposing, or even noticing it.

During the last weeks everyone has heard of the Eurogroup. The Greek crisis has been managed mostly by it: the Eurogroup has taken decision, has proposed or rejected “rescue” packages, has conceded or refused delays, and so on. But what is the Eurogroup?

According to the website of the Council of Europe, “the Eurogroup is an informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro” (emphasis added). Is the Eurogroup mentioned in the Treaties, and where? Are there any rules disciplining its competences, its functioning, and its agenda setting? Is it really needed? How is it possible that such important decisions as the rescue plans for a sovereign state be taken by an informal body whose task is to discuss, not to decide? Is this a good thing?

Before answering these important questions, let us put them in perspective.

As it happens, the story of the Eurogroup is a very interesting one: Lakoff would probably call it a metaphor of the European integration model and of its shortcomings.

The creation of the Eurogroup was advocated by France in 1997, at the time the Stability and Growth Pact was introduced. French motivations were the usual ones: to get rid of (what French perceived as) German tyranny. Let us move a little step backward (reculer pour mieux sauter). Everybody knows that the euro was advocated by France (and Italy) on the purely delusional assumption that, being managed by a “European” bank, the single currency would put an end to Bundesbank’s hegemony. As a matter of fact, free capital movements and quasi-fixed exchange rates (i.e., the need to “defend” the Exchange Rate Mechanism – ERM – central parities) had deprived the European Monetary System – EMS – participant of their (national) monetary policies. Just as in any entry-level textbook version of the Mundell-Fleming model, EMS countries were forced to stick to the German interest rate, in order to avoid disruptive capital movements, and excessive swings in their exchange rates. In particular, if Germany raised its interest rates, the other countries were forced to follow suits, even if the conditions of their economies would advise against this move, or capital would have moved to Germany.

It is frequently stated by amateur economists that the euro is dysfunctional because it implies a “one-size-fits-all” monetary policy. This statement is extremely naïf. As shown above, the European monetary policy was “one-size-fits-all” well before the euro, because of the ERM-plus-capital-mobility mix (as implied by Mundell-Fleming model). It is precisely in order to get rid of such a policy constraint that the adoption of the euro was fostered. The French (and Italian) reasoning was: “Ok, financial markets are integrated, and for that reason we cannot really manage our ‘national’ interest rate anymore: henceforth there will be only one European interest rate dynamics (levels may differ because of the spread, but the movements will be synchronized). As of now, interest rate dynamics is chosen by the Bundesbank. Let’s merge our currencies, and the decisions about the interest rate will become collegial. It will still be a dysfunctional setting, but less than the present one, where only Germany decides. Perhaps we, the French, we will be able to induce some moderation in German decisions, and to obtain an interest rate dynamics closer to the interests of our economy”.

Two things were wrong with this approach.

Firstly, the Machiavellian French politicians were apparently unable to imagine the obvious: it was really easy to predict that any European collegial body would have been dominated by a majority corresponding to the members of the former “DM-area”. Let’s excuse them (the French, I mean): in order to have “esprit florentin” you must be born in Florence (in which case you are unlikely to become a French minister: Mazzarino himself was born in the Abruzzese mountains...). However, in case you are an énarque (the French version of Ottoman eunuch), have a look at Jens Weidman answer here:

Question: Today it is even harder for the Bundesbank to assert its influence as it is just one of 17 central banks in the Eurosystem. What impact does this have on your work?

Weidmann: Even though what you say is correct in terms of shares of voting rights, I certainly would not say that we are “just” one of 17 central banks. We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem. This means that we have a different role. We are the central bank that is most active in the public debate on the future of monetary union. This is also how some of my colleagues expect it to be. (emphasis added... by Weidmann!)

Secondly, the desire to keep money under French (or whatever) political control was frustrated by the fact that there was no credible political counterpart of the ECB, and this is where the Eurogroup comes into the picture.

Let’s go back to basics. Dependence is a relation, and so is independence. You depend on something (or someone), and are independent from something (or someone). It was, and it still is, unclear, from what institution the ECB is or should be independent. The usual dialectic between Treasury and Central Bank does not make sense at the European level, for the very reason that there is no European Treasury (because there is no European government, no European budget, no European state, no European people, no European language, no European politics, and so on – even though there is an European history that nobody wants to learn). The obvious conclusion was that the ECB would have operated in an absolute political vacuum, which is something very different from independence, and it is something very worrying. So worrying that, lest the European citizens noticed it, Dominique Strauss-Kahn proposed the creation of the Eurogroup, on the wise ground that “in the absence of a visible and legitimate political body, the ECB might soon be regarded by the public as the only institution responsible for macroeconomic policy” (cited in Majone, p. 34). The Germans opposed this project: as we all know here, they were very reluctant to entrust any political body with the responsibility of managing money (albeit indirectly).

As a result, they obtained a completely emasculated Eurogroup: an informal, consultative body, without any definite competence. Only a half of DSK wishes were achieved: the Eurogroup was visible. The other half was not achieved: the Eurogroup was not legitimate (besides being powerless). The Treaties did not consider nor discipline it. It was unclear what its power were (for instance, it had no power to fine countries breaching the SGP rules, not to say to guide the ECB), it was unclear at what majority it decisions should be taken (and in fact regular voting was taking place only in the ECOFIN meetings), and so on.

This situation lasted until the Lisbon Treaty came into force at the beginning of December 2009 (twelve years later)! Since the reform of the Treaties, the Eurogroup is still not mentioned among the European institutions (in the Title III of the Treaty on European Union). Yet, Protocol 14 of the Treaty kindly informs us that:

Article 1

The Ministers of the Member States whose currency is the euro shall meet informally. Such meetings shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. The Commission shall take part in the meetings. The European Central Bank shall be invited to take part in such meetings, which shall be prepared by the representatives of the Ministers with responsibility for finance of the Member States whose currency is the euro and of the Commission.

Article 2

The Ministers of the Member States whose currency is the euro shall elect a president for two and a half years, by a majority of those Member States.

No information on the agenda setting, on the powers, on the voting procedures, basically: on anything but a mention to the informal nature and to the need of meeting when necessary (very reassuring, given the evident far-sightedness of our governments).

By the way (and keeping in mind my negative assessment of the French “strategy”), upon reading the Treaties, one realizes that the Eurogroup is a useless body. Its relevance is at best transitory (“pending the euro becoming the currency of all Member States of the Union”, as specified in the premises to Protocol 14). Moreover, back in 1998 the European Parliament itself recognized that “all decisions on economic policy, multi-lateral surveillance, and the Stability and Growth Pact will be taken within EcoFin, as the only legally constitutional body under the Treaty to have the necessary powers”. However, “in practice the Euro-11 Council [i.e., the Eurogroup] is likely to take decisions on economic integration which will be specific to the Euroland countries”, and “because of the qualified majority situation, [Ecofin] would have little difficulty in endorsing them”.

This situation did not change substantially later on, when the Eurogroup was legitimated ex post by Lisbon Treaty. The Article 136 of the TFEU (in the Chapter 4 “Provisions specific to member states whose currency is the euro” of the Title VIII “Economic and monetary policy”) specifies that:

1. [...] the Council shall [...] adopt measures specific to those Member States whose currency is the euro:

(a) to strengthen the coordination and surveillance of their budgetary discipline;

(b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.

2. For those measures set out in paragraph 1, only members of the Council representing Member States whose currency is the euro shall take part in the vote.

A qualified majority of the said members shall be defined in accordance with Article 238(3)(a).

(i.e., “55 % of the members of the Council representing the participating Member States, comprising at least 65 % of the population of these States”: not a detail, see below).

One may discuss whether the concept of “economic policy guidelines” encompasses “rescue packages” (it will certainly do under an extensive interpretation). My point, however, is rather different. In both the ex-ante assessment by the European Parliament, and the  ex-post provisions of the Lisbon Treaty, the Eurogroup appears to be useless. It has no legitimate power to decide, and the body which has this power, the Ecofin:

(a) can discuss the same matters as the Eurogroup (and hence, no need of the latter), and:

(b) will necessarily reach the same decisions as the Eurogroup, because non-Eurozone members are not 

allowed to vote (and hence, once more, the Eurogroup is an unnecessary duplication).

Summing up the discussion so far, the Eurogroup was born basically as an unnecessary non-entity, set up for purely cosmetic reasons on French demand, and deprived of any real meaning by German will.

Let me add some reflections on this point. This paradoxical creature is the result of a specific feature of the European integration process: the tendency to favor process over outcomes, stressed by Majone following a distinction introduced by Bhagwati. In short, European politicians have always favored what they could display as an immediate result (the signature of a new treaty, and hence the integration process per se), over the future results of the integration process (i.e., over the goals the new treaty was supposed to achieve). This behavior has simple motivations: the process (i.e., the signature) takes place now, in front of the cameras; the supposed results instead will arrive in an uncertain future, and every politician discounts the future very heavily. The politicians' intrinsic short-sightedness has originated a huge “political economy” literature (think for instance of the political business cycle hypothesis). In the case of European integration, the primacy of process over outcomes has led to two unfortunate and eventually self-defeating features. Since what matters for politicians was always to reach an agreement (rather than what results this agreement would bring about), in order to speed-up the procedure (1) contentious issues were mostly side-stepped, and (2) any precaution principle, involving the definition of rules and institutions devoted to crisis management, was ignored.

As mentioned above, the Eurogroup is precisely the outcome of side-stepping the political contentious issue about who or what would be the political institution in charge of macroeconomic policy in the Eurozone (the “Treasury” from which the ECB would have been independent).

These reflections allows us to answer the question as to why such a political freak is ruling Europe, taking important decisions such as whether and how to rescue sovereign states.

The Eurogroup rules, despite being an informal body, because the strategy of side-stepping contentious issues and of ignoring the precaution principle has left a huge political vacuum in the European integration process. Once the crisis arrived, it was not clear who and how should manage it. At the same time, Germany, after consolidating thanks to the euro its hegemonic status, was not puzzled anymore by this supposed “counterbalance” of the by now blatantly German ECB. Quite the contrary: using the crisis as a “window of opportunity”, a decision was apparently taken to endow an informal body, completely controlled by creditor countries, with the power to rule over Europe. This is the European federalist’s dream (as described by Roberto Castaldi): to use a crisis as a window of opportunity to take outside any democratic control a decision that the constituency would otherwise not take, such as the decision to be ruled by an informal comité d’affaires of local, possibly unelected, politicians.

This may seem an abstract and largely irrelevant question. The same argument I used in order to show that the Eurogroup is a useless duplication of the Ecofin, could be reversed to demonstrate that my concerns are misplaced. After all, if both bodies would reach the same conclusions, who cares about what body takes ultimate decision?

Yet, even if we would be willing to disregard the importance to abide by the rules in a democracy, the resurgence of the Eurogroup as the “leader of an European awakening” (in Alberto Quadrio Curzio’s words) has practical implications that should not be underrated. In particular, much in the spirit of European federalism, this outcome results in a dangerous compression of democracy. I give you two examples of what I mean.

Firstly, we received already a serious warning on June 27th, when the Eurogroup decided to convene itself without the representative of a member country (yes: Greece). This decision has been commented extensively by both Varoufakis and Jacques Sapir. While agreeing with Sapir analysis, I allow myself to disagree on a detail. According to Varoufakis, he was told that:

“The Eurogroup is an informal group. Thus it is not bound by Treaties or written regulations. While unanimity is conventionally adhered to, the Eurogroup President is not bound to explicit rules.”

The argument was that the body is informal, not, as Sapir writes, that the meeting was informal. And unfortunately this argument, as the previous discussion demonstrates, is correct: the Eurogroup is an informal body, and as such it is not bound by rules. After all, the four executive members of my first example could have chosen to drink cider, instead of beer! The danger of entrusting an informal body with momentous decisions is evident. At any crucial moment, it can decide to give itself rules that deprive of voice one of the parties concerned by its decisions. Hence, in a sense the situation is even worse than the one depicted by either Sapir or Varoufakis. The questions then arises as to who, when and how entrusted the Eurogroup with the task of managing the “rescue” of Greece (i.e., of Greece’s creditors, as we all know here). Sapir affirms that it was the European Council, but, while trusting him, I was unable to find evidence of this decision. It would be extremely interesting to see in what terms the Eurogroup received its mandate.

Another example. Being an informal body, the Eurogroup has no definite voting procedure. We can assume by analogy that it would adopt the voting procedure of the Ecofin council, disciplined by Article 16(4) of the Treaty on European Union as well as Article 238(2) of the TFEU. However, we could also have assumed by analogy that the Eurogroup could not convene itself without a member country, and it did. If the Eurogroup did not exist, any decision would be taken by the legitimate body, the Ecofin. Interestingly enough, the voting calculator shows us that under the current rules, the four “Club Med” countries constitute a blocking minority for Eurozone-related issues, under both qualified majorities envisaged after the reform in November 2014. In other words, if you

(1) exclude from the vote Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom (as envisaged by Article 136(4) of the TFEU), and

(2) Greece, Italy, Portugal and Spain vote against

the criterion of “at least 65% of the population” will not be met. This is what would happen by following the rules. I will not go as far as to say that the Eurogroup was somehow entrusted with the task of solving the crisis because it is not bound to follow this rule. Yet, the argument that, being an informal body, it is not bound by any rule has already been used. I maintain that a political solidarity between debtor countries is impossible. Everyone thinks that its situation is better than that of its neighbor, and all of them are ruled by commissioners of the creditor countries (Tsipras, in my opinion expressed here, could be a good example). However, once the informal Eurogroup (instead of the formal Ecofin) becomes the institution for the discussion of economic affairs, any political solidarity among Club-Med countries could be easily circumvent, by adapting the “informal” voting procedure.

Yes, I know: I am too “florentin”. This is because I am actually Florentine. But think about it. Are you able to find a sensible reason for entrusting an informal body with crucial decisions? My take is that this choice is political, not technical, and it aims deliberately at repressing democracy (which is what the euro was made for).

And yours?



(...apologies for my poor English. I hold the opinion that the hegemonic language is doomed to be badly spoken and poorly written. This is what happened to Latin, and what’s now happening to English. For that reason, although I am quite a careful writer in Italian, I do not really care a lot about reaching an impossible task: write a correct English. The half-full glass is that I am quite sure that those who wish to understand, will. The other will not, but they would not even if Shakespeare had written this post. However, unlike Shakespeare, I had this post grammar-checked by Words...)