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A central banker worth hearing?

I’m not aware of any unconditional support for central banking as such around The Cobden Centre but, nevertheless, occasionally a central banker says something worth hearing. Today, that central banker is often Andy Haldane, Executive Director, Financial Stability at the Bank of England.

The Wall Street Journal and the FT (£) report his speech at Jackson Hole, which may be found here. For example,

So what is the secret of the watchdogs’ failure? The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.

Mr Haldane is a way from Greenspan’s famous defence of gold and free banking but the contemporary debate is also far from that point. Haldane’s speech is an intellectual tour de force which concerns some of the epistemological problems which will be so familiar to Austrians.

In my time-limited speech on the Bill which hands vast discretionary power to the Bank of England, I criticised it, saying, “I sincerely hope that it represents the absolute zenith of contemporary thinking on interventionist bank reform”. Perhaps it may yet: Haldane concludes,

Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.

Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.

It does not yet seem likely that a central banker will produce a speech with which Austrian-School liberals will agree whole-heartedly but Andy Haldane’s recent contribution was a courageous step in the right direction.

17 comments to A central banker worth hearing?

  • Re complexity, others have come to a similar conclusion. This is a quote from John Kay’s paper “Narrow Banking”:

    “The Basel agreements, and the growth of financial services regulation more generally, have caused the emergence of a regulation industry. That industry comprises regulatory agencies, the compliance departments which are now a major part of all financial institutions, and an army of consultants and lawyers who mediate between the two. All these groups gain power and prestige from the complexity of their activities. They have an interest in the continued expansion of established systems of regulation, and have been given an opportunity to achieve that by the current crisis.”

    I don’t recommend Kay’s paper, but the above quote is spot on.

    And Laurence Kotlikoff in his book “The Economic Consequences of the Vickers Commission” describes Vicker’s proposals as a job creation scheme for regulators or words to that effect. Reason is that while Vickers has broadcast the phrase “ring fence” from the roof tops, many of the major decisions as to what the ring fence separates from what are left to “the regulators” if you look at the small print of the Vickers report.

    In contrast to Kay’s paper which didn’t impress me, Kotlikoff’s book is worth a read: and it’s quite short.

  • Paul Marks Paul Marks

    The mention of Alan Greenspan should always be joined with a reminder that he rejected his hard money (in this case, gold money) beliefs many years before he became Chairman of the Federal Reserve – hence Ayn Rand puting a dinner plate in his face. He became a standards supporter of credit bubble finance, and endless “Alan Greespan saves the world” bailouts and support operations (prolonging the “boom”, but making the inevitable BUST worse and worse).

    This has to be said (over and over again) because the left have a custom of pretending that the failure of Alan Greenspan (the money supply and banking Central Planner) shows the failure of the free market.

  • Mr. Haldane describes complex regulation as NOT the answer to complex financialization, but what solution does he really offer?

    Is it merely lesser regulation of the complex financialists?
    Or is it lesser complexity for unregulated finance itself?
    Thus requiring ever-lesser complex regulation?

    The reason many monetary reformers sought an end to the financial instability, caused by risk-taking with other people’s money, brought to the real economy was so that we could let the capitalists duke it out on a level playing field.

    Let the bankers get back to banking, and you will need virtually zero regulation.
    But as long as the bankers claim the right to create the nation’s money, you will find the real need for regulating THAT activity.

  • Good points by Joe Bongiovanni above. I suggest the complexity arises from the fact that bank regulators are busy applying sticking plaster to numerous SYMPTOMS of the basic problem, rather than dealing with the basic problem. And the basic problem is that fractional reserve banking is all built on a false prospectus. This is the fact that banks take £X of deposits, put that £X into less than 100% safe loans and investments, while promising to return the £X to the depositor. That is an arrangement that is statistically certain to go wrong at some point – when a bank or the banking industry in general makes a series of bad loans and investments.

    And that model has actually GONE WRONG time and time again over the centuries. It’s about time we caught up with the fact.

    The solution is to bar banks from making the above promise where depositors’ money is loaned on or invested. That is, if those underlying loans or investments go wrong, then the relevant depositors should take a hair-cut, not the taxpayer.

    That’s the system advocated by Laurence Kotlikoff, and by Positive Money and Richard Werner. For the latter, see:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

  • Paul Marks Paul Marks

    The idea (that Joe B. spreads) that if the bankers were kept away from “creating money” all would be well is false.

    General Peron in Argentina tried exactly this policy – the creation of money was declared a function for the state alone and banks were ordered to have 100% reserves of govenment fiat notes.

    The results?

    Argentina collapsed into ever more inflation and declined from living standards on a par with Canada to the level of the Third World.

    It is not WHO creates the money expansion that is the problem – it is the money expansion ITSELF that is the problem.

    If the government does it (rather than the bankers) it is still being done.

    The effects may be different – but the effects will still be terrible.

    I agree that borrowing should be from REAL SAVINGS (not credit bubbles).

    However, financing lending (and government spending) from the GOVERNMENT PRINTING PRESS (or whatever) rather than the book keeping tricks of bankers, MISSES THE POINT.

    You can not increase real long term prosperity by increasing the amount of money.

    Money and real wealth are not the same thing. Indeed concentrating on the government increasing the amount of money DESTROYS real wealth over time.

    On related matters….

    Government spending is NOT investment.

    And government deficit spending is NOT costless.

    If taxes are not used to finance the government spending – then it must be financed by borrowing.

    If the borrowing is from REAL SAVINGS then these real savings are not available to finance investment (the thing govenrment spending is NOT).

    And if the borrowing is financed by incresing the money supply – then that is INFLATION (whether or not prices go up in the shops).

    • Interesting little conundrum created there.
      Among the usual bunch of unsubstantiated GUV-bashing.

      “”. It is not WHO creates the money expansion that is the problem – it is the money expansion ITSELF that is the problem.””.

      So, a given that it is not money-creation BY the government that is the problem.
      Threshold 1 crossed.

      The rest is really, literally, about how much money is created in relation to the amount of real economic goods produced and consumed. I agree with that, only adding that the outcomes are also dependent upon HOW the proper amount of money is created.

      ONLY government can create money without issuing debt.
      Thus the additional cost burden to the national economy associated with money issuance – in WHATEVER quantity, and by WHOMEVER issued – is removed with government money-issuance.

      Government-issued money, as banker-issed money, is SAVED and both used for the same investment purposes.

      I already provided a link to the most recent IMF paper on the Chicago Plan proposal – that by Benes and Kumhof which PROVES the benefits of public money. I add here this later thinking by Australian economist Richard Wood based on that IMF paper, among other things.
      http://www.cepr.org/pubs/PolicyInsights/PolicyInsight62.pdf

      The finding should predominate any discussion of proper CB actions in light of this unprecedented predicament brought to us by FRB.

      Where is your proposal?
      Whatever it is – it MUST be approved by the government.
      So, let’s get it all out there and compare notes.
      Thanks.

  • Paul Marks Paul Marks

    “Only the government can create money without creating debt”.

    Not true.

    For example when the private mints that dominated the American West took in gold and silver and (for a small fraction of the gold and silver they were given) minted coins – they were creating money without debt.

    Congress banned this practice in the 1850s.

    But not because the private mints were producing light weight coins (or anything like that) – it was because they did not like the COMPETITION.

    “Uncle Sam the Monopoly Man” strikes again.

    • Congress banned this practice in the 1850s.
      One result being, only the government can issue money without issuing debts.
      States can make silver coins a payment for debts.
      But it takes a state government to so act.

  • How are you commenters defining money? Markets create money, properly defined. Governments can create putative credit or debt, but not money. They can legislate changes in definitions, or obscure definitions with legislation. A legal fiction cannot create anything real.

    Why does the government have to approve of a plan to get the government out of money and debt and credit? Any solution that involves government will be stillborn.

    • I do not understand what you mean by saying governments cannot create money, only credits and debts.
      Government created Greenbacks.
      Without debts.
      Greenbacks are money.
      Ergo, governments can create money.

      As von Mises said, the economic theory of money is discussed in ‘juristic’ terms, or terms associated with the existing, accepted legal aspects of money.
      Whatever serves as money, is money.

      I am not offering nor accepting any definition of money beyond that which is recognized as today’s accepted legal aspects thereof.

      The government now legally RULES what is money, as you say.
      Without changing those rules, definitions, measurements and legal relationships about the issuance, valuation and use of money, nothing will change.
      Thus, government must agree to make the change that will determine – juristically – what will happen next, stillborn or not.
      Otherwise, it’s status-quo.

  • Paul Marks Paul Marks

    If government bans something it proves, to Joe B., that only government can do it.

    So if govenrment banned the private farming – that would “prove” that only government can produce food.

    An absurd (utterly absurd) position.

    As for Greenbacks (whether Union or Confederate) government did indeed produce them – and was WRONG TO DO SO.

    Just as with the “not worth a Continental” fiat notes produced by the Continental Congress (which led to chaos – and led to the calling of the Constitutional Convention).

    Joe B. you write as if you had no knowledge of this – of of the fiat money of the French Revolutionaries (a case of hyper inflation and economic bankruptcty) and of Latin America (with General Peron being only one example of many).

    As for citeing Ludwig Von Mises.

    You must know that his opinions on monetary policy were almost the exact opposite of yours.

    Mises was a classic “hard money” man – who spent his life opposing “cheap money” (low interest rates) and opposing financing government spending via the printing press.

  • The von Mises note was only relative to the call for a definition of money, of which there are many and, rather than offer mine, I agreed with the von Mises observation that money is generally discussed based on its legal nature.
    I not sure that von Mises would find electronic hard money all that hard.

    I have already answered the comments about the Continental – of course it was proper for the government to issue a medium for exchange. Given the dis-organized political state of the Colonial victors, that’s what governments must do to keep the economy going. And the printing of Continentals worked fine, though imperfect, except for the counterfeiting by our enemies of many times the original issue. Not sure why you bring that up again.

    The same is true – again as I have already replied – with the French Assignats. They were counterfeited by enemies to devaluation. Finally again I recommend the Chapter from the The Lost Science of Money on public versus private money.

    Government banning something doesn’t prove anything to anyone. It merely advances a certain legal truism in a nation of laws.
    Government already bans private farming of hemp and that can not prove that only the government can produce hemp. But that could be the result.
    Those are silly points.

    I admit to avoiding the private minted ‘money’ matter.
    Because it is not relevant to anything today.
    It was wild, wild west stuff, for the most part, not worthy of any discussion here, IMO.
    I say TODAY, only the government is capable of issuing monies without debt. That capability stems mainly from the public policy function of ensuring an adequate quantity of the national circulating medium to exchange goods and services.
    That’s the real point. If we NEED more money and less debt, and we DO need more money and less debt, then the government is the natural monopoly for that issuance.

  • Peter Wraith

    Yes, I can’t help but wonder if Joe B is Stephen Zarlenga’s twin brother. The notion for instance, that any criticism of the State is just ‘silly’ comes right out of the pages of ‘The Lost Science’.

    Says Zarlenga, “No doubt some readers will wince at the thought of instituting the monetary power in our government. The reason is that for over two centuries, a poisoning of our attitude toward government has been underway. The stealthy promotion of this self-destructive childishness must stop” – and that folks, is the end of it, no questions!!

    Joe B, like Zarlenga just has no notion that Central Government is simply a (frequently corrupt) dispenser of power and privilege, and that the proposal to hand total money power to the State simply recreates the existing money monopoly – itself a creation of the State via legal tender laws – under new management.

    As Thomas Greco points out in his review of ‘The Lost Science.’ “Having described so carefully the corrupting effects that result from centralizing the money power,
    it is curious that the author asks us to accept it when under the control of politicians and bureaucrats. Does he not see that the political and financial elites are in cahoots, and indeed are the same people. Did nationalization of the Bank of England solve the money problem in the UK?
    Does he not see the utter futility of getting his program implemented through the political process,the very same process that has been used to construct the system to be as it is?”

    Finally, Joe can say till he is blue in the face that “TODAY, only government is capable of issuing monies without debt” – and he will still be entirely wrong.

    Credit money need not be the offspring of (State granted) banking privilege. Leaving aside whether or not it is desireable, it is easy to imagine the issue of interest free money outside of any banking cartel. To deny this is simply…well, obtuse, especially given that hundreds of such schemes involving millions of people already exist around the world TODAY.

    • The notion that is silly is not that the criticism of government is wrong as it is often correct and justified.
      What is a little silly is that the best ideas for a national monetary system should start without a nation, or a national economy that requires a system on money.
      Once the basic consideration is national, it has no place in the Austrian solution.
      So it is not that the criticism of government is silly or wrong, again much of it is justified.
      But we the people need to use the means available for fixing what’s wrong.
      Both with the corruption of politics by money and corporations, and with having a stable money system and economy.
      Getting beyond the rhetoric, the only things really worth discussing are what the goals are, what the options are and why some options are preferable for achieving better goals.
      I do see the benefits of public money and why the potential benefits are worth pursuing.
      http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

      The existing money monopoly is only going away by changing the law.
      And, issuing money without interest isn’t the same as issuing money without debt.
      Did I miss the Austrian proposal?

      Thanks.

      • Peter Wraith

        “Once the basic consideration is national”

        Personally, I don’t think “national” is or should be the basic consideration.

        “Getting beyond the rhetoric, the only things really worth discussing are what the goals are, what the options are and why some options are preferable for achieving better goals”.

        I agree

        “The existing money monopoly is only going away by changing the law.”

        Perhaps so, but this does not necessarily have to mean the introduction of a new monetary monopoly. Abolishing “Legal Tender” would alone be sufficient political involvement in my view.

        “Did I miss the Austrian proposal?”

        Oh dear. Back to the rhetoric.

        I might be wrong, but I understand that a great many ‘Austrians’ favour a return to some kind of gold standard, or at the very least competing currencies – but this I think you know!!!

        In any case, your views are neither improved nor retarded by the number or absence of alternatives. What is for sure is that a lack of options certainly doesn’t go to make your current proposal correct. Even were it the only one on the table it remains, in my opinion, entirely mistaken.

      • Paul Marks Paul Marks

        Joe – if you want to print paper notes and call them money, that is up to you (God bless you – I will not stand in your way).

        I certainly would rather have you do this – than a bunch of criminal thugs called “the government” do it.

        However, I will not accept your notes as money.

        And I hope you will not use FORCE to get me to use your notes (with tax demands and “legal tender” laws) – after all if you used such squalid tactics you would be no better than the criminal thugs in governments.

        After all one can hardly (honestly) talk about “limited govenrment” if the regime just produces “money” on the basis of whims and forces people to use their system (by “fiat” – command, order).

        As for what buyers and sellers choose to use as money.

        If they want to use gold – fine.

        If they want to use silver – fine.

        If they want to use bits of paper with “Joe B. – debtless money” written upon them.

        Also fine.

  • Paul Marks Paul Marks

    It is not “electronic hard money” it is the electronic transfer of the ownership of hard money (so a person does not have to carry gold bars around with them).

    You are not stupid Joe B. – you do not really fail to understand, you PRETEND not to understand.

    That is why I, quite rightly, call you a troll.

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