FT: Hitch-hiker’s guide to monetary infrastructure

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The Financial Times published an excellent letter from Prof Richard Werner, Chair in International Banking, School of Management, University of Southampton, UK on March 5, 2013 entitled “Hitch-hiker’s guide to monetary infrastructure”

Screen Shot 2013-03-08 at 10.30.54In the letter R Werner responds to the recent Paul Tucker’s suggestion that negative interest rates on reserves might encourage banks to lend more. He says this suggestion is likely based on textbook descriptions of “fractional reserve” banking, which belongs to the world of fiction.*

Here is a short extract from this article:

But they [the banks] don’t lend existing money. Instead, they newly invent the money that they lend, by pretending that the borrowers have deposited it and thus crediting their accounts without transferring any money there, by simply inputting the desired number. … This is how the bulk of the money supply is invented into existence.

R Werner further discusses another way of quantitative easing that would create a “full-blown recovery within six months” while we have “this peculiar monetary system”.

Read the whole article

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Screen Shot 2013-03-08 at 10.39.51* Most university economics courses still teach a model of banking that hasn’t applied to the real world for decades. Please watch our video course ‘Banking 101′ 

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  • http://www.facebook.com/avdmerwe Anton Van Der Merwe

    Does Positive Money support Richard Werner’s proposal? Seems to me it very much goes against the grain of what you are pushing for by requiring creation of even more bank money through lending to the government. I suspect banks would be happy with it, which may be why he is proposing it.

    • montmorency

      No: see Mira’s reply to another poster. This is a measure that could be taken now without any change to any rules or to the system. Of course we all want the system to be changed, but that isn’t going to happen tomorrow, but Richard Werner’s suggestion could happen, or in a very short time, if the powers that be had any sense.

      I would go further, and suspend VAT (which may be only bending EU rules rather than breaking them, as abolishing VAT would be), and then make up for the VAT revenue by bank borrowing (and this would be at lower rates of interest than that paid on gilts). That should supercharge the recovery. Everyone would benefit: Businesses, customers, unemployed through new job creation, and yes, banks would benefit, but if we are going to have private banks, better that they are healthy than insolvent.

      Regards,
      Mike Ellwood

  • Pitter

    Who creates money? What caused the current economic crisis? All explained and more at this positive money event.

    Qrops Malta

  • Pitter

    Who creates money? What caused the current economic crisis? All explained and more at this positive money event.Qrops Malta

  • http://www.facebook.com/thomasphillpotts Tom Phillpotts

    He says accept the system as it is, allow the banks to create the money, and have the government borrow from them?!! Sounds like madness! How is this different to selling bonds?
    ‘..funding the public sector borrowing requirement by having the Treasury enter into loan contracts with the money creators – the banks.’

    His solution is vastly different to the Positive Money solution.

    • Mira

      R Werner suggests this as another way of quantitative easing WHILE we have “this peculiar monetary system”

  • RJ

    Money is credit. There is no such thing as real (or existing) money. Maybe money should be categorised as our money (bank credit), tokens for bank credit (notes and coins) and the banks and treasury money (bank reserves). And the UK treasury can finance all of their spending without exception. The banks must accept RESERVES to support Govt spending. The Uk Govt does not need bank credit first (we do, euro countries do, companies do but MONETARY SOVEREIGN GOVTS LIKE THE UK do not)

  • Michael K

    I’m a big hg2g/Adams fan, and once designed a Positive Money flyer for a contest of the Birmingham group. It didn’t win the billion (Zimbabwe) dollars, but is now happily posted at banks-need-boundaries DOT NET / Downloads “casual department” – enjoy!

  • Hugh Andrews

    Surely a better system for financing the pubic sector borrowing is for the Treasury to issue the money directly, rather than loaning it from a bank, as suggested by Prof Richard A. Werner. That would only continue giving unnecessary profits to banks.

  • Phyllis
  • http://www.facebook.com/thomasphillpotts Tom Phillpotts

    He says accept the system as it is, allow the banks to create the money, and have the government borrow from them?!! Sounds like madness! How is this different to selling bonds?
    ‘..funding the public sector borrowing requirement by having the Treasury enter into loan contracts with the money creators – the banks.’

    His solution is vastly different to the Positive Money solution.

  • Mira

    R Werner suggests this as another way of quantitative easing WHILE we have “this peculiar monetary system”

  • RJ

    Money is credit. There is no such thing as real (or existing) money. Maybe money should be categorised as our money (bank credit), tokens for bank credit (notes and coins) and the banks and treasury money (bank reserves). And the UK treasury can finance all of their spending without exception. The banks must accept RESERVES to support Govt spending. The Uk Govt does not need bank credit first (we do, euro countries do, companies do but MONETARY SOVEREIGN GOVTS LIKE THE UK do not)

  • Michael K

    I’m a big hg2g/Adams fan, and once designed a Positive Money flyer for a contest of the Birmingham group. It didn’t win the billion (Zimbabwe) dollars, but is now happily posted at banks-need-boundaries DOT NET / Downloads “casual department” – enjoy!

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  • Hugh Andrews

    Surely a better system for financing the pubic sector borrowing is for the Treasury to issue the money directly, rather than loaning it from a bank, as suggested by Prof Richard A. Werner. That would only continue giving unnecessary profits to banks.

  • Pingback: Our Magic Money Tree: Fixing the Financial Crisis | freedom this time()

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