Dirk Bezemer on Positive Money

The Icelandic National Broadcasting Service, RUV, interviewed Dirk Bezemer about Positive Money on its Sunday lunchtime current affairs programme Silfur Egils.

The interview with Dirk Bezemer, in English, starts almost 40 minutes into the programme at 38:56.

Dirk supports our analysis that banks abuse their powers to create money to feed asset price bubbles and enrich themselves unjustly from the price inflation consequential on their lending practices, and that government and the financial authorities should exert more control over the financial system.

He maintains, however, that our proposals for preventing banks from creating money will not work. His argument has three strands:

1. that money always has and always will be somebody’s debt;

2. that having the government create the money means trusting the government to know how best to use the money (not in his opinion “a very good idea”) and

3. that banks cannot be prevented from creating money as long as they continue to accept deposits.

The last is easily disposed of. Banks will not continue to accept deposits under our proposals. 

Commercial banks’ demand deposits would be removed from their balance sheets and converted into state-issued currency held at the central bank. Commercial banks’ time deposits would be converted into illiquid, non-transferable bank liabilities.  Individuals would then be faced with two choices with regards to where they could place their money: 

1. In a ‘Transaction Account’ (similar to a current account today.) Although these accounts would be administered by commercial banks, they would be owned by the customer, with the funds in them held at the Bank of England. They would therefore be 100% safe. 

2. In an ‘Investment Account’. These accounts would remain on the commercial banks’ balance sheets, and would not be guaranteed by the government (i.e. they would be riskbearing). They would be non-transferable, and illiquid, with either maturity dates or minimum notice periods.

Dirk Bezemer says we are effectively abolishing banks and agrees with the interviewer that this would be a soviet system. Well if you define banks narrowly as deposit taking institutions then this role would indeed be abolished. But banks also run the payments systems and allocate loans, each function being considerably more systemically significant than accepting deposits, and these will continue to be the roles of competitive private banks.

This also disposes of his objection concerning the ability of the government to create and allocate money wisely. The government’s role will be to spend new money just for the first time. After that, how it flows through and stimulates the economy will depend entirely on the spending decisions of the successive recipients of that money, and on the lending decisions of the banks to whom surplus money is paid for investment accounts.

Bezemer instead puts his primary faith in the tailoring of regulatory measures to incentivise banks to direct their lending at sectors identified by the government as of strategic significance for the economy, paradoxically perhaps in view of his apparent lack of faith in the ability of governments to do any such thing. Not only do our proposals not prevent such regulatory intervention, we positively encourage it.

And finally, whether or not money and debt are inseparable there is a world of difference between a monetary system run by banks which creates the money pound for pound in exchange for the debt which is to be repaid, and a system such as that described by the chartalists where money is created and issued without obligation, but separately acquires acceptabilty in exchange through the state’s power to impose tax obligations unilaterally and independently of monetary issue but which can be discharged by tendering money.

A transcript follows of the relevant sections of the interview. The interviewer is Egils Helgasonar.

[38:56]EH – Welcome to Silfu Egils, Dirk Bezemer. I would like to ask you about these ideas that we have from, for example, Positive Money. What is your take on this?

DB – Well let me say in the first place that I’m very sympathetic to the aims, namely to move more of the control over the financial system to the government and to the financial authorities, and secondly to make sure that banking is becoming more socially useful, so I’m fully supportive of that but I think the means by which this is going to be achieved in the Positive Money proposals are not going to work. I think it’s more helpful to look at the actual Icelandic challenges, problems and opportunities and devise policies for that. You have to realise this is a dusted off 1930s blue-print which is now being promoted in many different countries and it’s not specific to Iceland. So I think the aims that they pursue can be achieved in much simpler ways, for instance by nationalising banks, or setting up a development bank, or other ways of regulating banks and you don’t need an overhaul of the system.

EH – This overhaul of the system will actually include the power – what they are worried about is that the banks have the power of, like, printing unlimited money.

DB – Yes, the banks create money as debt and this has always been the case, I mean when you go back 5,000 years or more and you look at the archeological evidence, people have created debt and these debt tokens, these IOUs came to circulate as money, that’s where money comes from. So you’re always going to have money that is a form of debt; having money which is not debt is like wanting to create dry water, right, that is not possible. So, the way that banks create money is by creating deposits which are a liability on the banks themselves, and deposits created by banks cannot be distinguished from deposits created by the public when they put money into the banking system. So, as soon as you have deposit-creating, sorry, deposit-accepting institutions, then these institutions, which are banks, can also create money. So, this is quite technical, but I simply don’t see how banks can be stopped from lending and from creating money. In fact, the core idea of the Positive Money proposals, to separate money creation from lending, is not feasible, because money creation and lending are the same thing.

Now, so there’s a technical discussion about deposits and reserves, and what is lending and money, it is good that we have this discussion, it’s an academic discusion, I am engaging in this, but I don’t think it is a response to Icelandic problems and the Icelandic situation. So I would much rather than take a blue-print from the 1930s to Iceland, I would like to look at the Icelandic situation of indexed household debts, large krone balances within the financial system, the need for economic diversification and the development of the real sector: those are the things that you want to think about, and I don’t think that the Positive Money proposals, sympathetic in their aims, but I don’t think their response to those specific challenges and it will be in that case sort of a red herring, something that distracts attention from more helpful ways of discussing Iceland’s problems.

EH – But if you put all of the money creation into the hands of the government, wouldn’t we be having a sort of a, well, we could say, a soviet system?

DB – Yes, actually you would. You would. Basically, what the Positive Money proposals, and also other IMF proposals, what they imply is that you abolish banks, you do away with private banks. You just have one central bank and everyone banks at the central bank, and you have to put great faith in the ability of the governments to create enough money and to make sure that money goes in the right direction. Now, given the recent experience of Icelanders with their government, I don’t think that’s a very good idea. [43:00]

The discussion then turned to Iceland’s CPI-linked mortgages and exchange controls before returning to the subject of banks

[47:55]EH – So, just to get back at where we started, how do we prevent the banks from issuing all this debt, because we’re in agreement that too much debt is a problem, and if we don’t use the Positive MOney approach how do we regulate the banks?

DB – As you righfully say, too much debt is a problem. The important thing is that debt itself is not the problem. Debt is part of the solution, that is invented by humans thousands of years ago in pre-history, to make our economic system work. The problem is, not that debt is being created, but how debt is used. So the fact that banks create debt is good because it helps entrepreneurs who have good ideas but no money to get money from the bank as a loan to, whatever, build a factory, develop energy resources, invest in fishing or tourism, and if it’s a good business plan it allows them to repay the debt, and meanwhile the economy is growing, jobs are being created, and so on. So that’s how debt helps the economy. What has been happening over the last years in many countries, including my own country, and I’m studying this now for many countries, is that too much debt has been created for property and financial markets, not for productive purposes, and this has just inflated house prices, inflated asset prices like stocks and bonds and all kinds of derivative assets and instruments. That is the problem. So the sort of regulation that you need is not a completely new monetary system but you need to go back to the sorts of regulation that were quite common in the 1970s, for instance, adapted to current times. So you need to regulate banks, to encourage them, to incentivise them, to invest more in the sectors that, erm, the government agrees are important sectors for the economy. So to leave credit allocation to the market is not a good idea. I think that’s one of the Positive Money points which I fully support.

EH – and maybe cutting between investment banks and commercial banks, is that a good idea?

DB – Absolutely. So there is a number of specific measures which are a part of this but the overall goal must be always to ask yourself is the banking system working in the public interest? is it helping our economy to grow? Or is it just inflating asset markets and creating debt problems. No some of those specific measures are in the first place definitely to separate commercial banking from investment banking, because banks are not casinos and if they act like casinos they should bear the risk themselves. Another measure is to have a politically agreed plan for which sectors are going to be strategic sectors for Iceland, I would think about energy and tourism and fishing of course, and to make sure that banks, Icelandic banks or foreign banks operating in Iceland, have the right incentives to invest in those sectors. And that can be done quite simply using already existing regulations, like the Basel regulations, where banks have to accept a loan to capital ratio, so they cannot make more loans than a certain multiple of their capital and where you can apply weights to the capital and to the loans. Now you can weigh loans to certain certain sectors like mortgage loans more heavily than loans to for instance energy and that way you can stimulate banks to invest in energy. So there is all kinds of sensible regulations within the current system which will stimulate diversification of the Icelandic economy, which is very necessary now.

EH – So more regulation, more controls, more supervision but not going the whole way towards taking the power to create money from the banks.

DB – That is not possible, I think. [51:32]