Radical Swiss financial reform campaign faces defeat
reuters.com
reuters.com
Also, I think Vollgeld comes from an abbreviation of vollwertiges Geld (full-fledged money), and seems like an appropriate translation of 100% money and sounds good, as well.
https://www.admin.ch/gov/en/start/documentation/votes/201806...
>just 26 per cent supported plans to strip banks of their ability to “create” money
Sounds like an attempt to keep the loan-deposit ratio (LTD) at or below 1, so that the bank is only lending money that it actually holds in the form of deposits.
I'm told by a lot of experts that this is a bad idea and it will hurt the entire industry and contract the economy, but I'm wondering if it's possible to put a soft lock (like a semi-fixed-deposit) on portion of a customers deposits and use that to finance lending. As a customer, I personally wouldn't mind being able to put soft locks on parts of my savings in return for a higher interest rate (preferably through an online interface).
That probably means it's a good idea ;)
Full reserve banking isn't quite what is being voted on here, but if it were to be implemented it wouldn't be so different to what Switzerland already has.
I have a Swiss account with UBS. Interest payments on my accounts are effectively zero. Not quite zero but so close it makes no odds. I am happy about this because the SNB is actually trying to force interest rates negative - like most banks, UBS is shielding me from negative interest rates (i.e. direct confiscation of savings) using its own profit margin.
However, the issue remains that I get no yield on my money. Or, no, wait, actually I do, because my banks also offers many different kinds of investment funds with high degrees of liquidity, transparency about what they do, their performance and their different degrees of risk. So I put a big chunk of my money into these sorts of funds (and yes yes, I know, there are better funds out there, I don't only use UBS).
I think this approach is better for two reasons:
1. It's always clear how much of my money is effectively risk-free deposits, and how much is "working at risk".
2. It divorces retail banking services from investment services. For instance if I happen to like a banks customer service, e-banking portal, mobile app, credit card offerings or whatever, I can benefit from those, without needing to take it as a bundle with perhaps riskier lending practices.
The low risk funds I use are mostly short-medium term loans to Swiss business, but I could invest in mortgage funds if I wanted to.
It seems to me that if all banks in Switzerland had to go full reserve, then it'd mean relatively little change for people like me. Some bank customers who don't explicitly invest their money would now have to, if they didn't want to lose yield, but inflation in Switzerland is quite low so I suspect some people would be happy with just knowing their money is where they left it and is going to stay there. Investment isn't for everyone.
> That probably means it's a good idea ;)
This is just pure contrarianism. Experts also say it's a bad idea not to have clean drinking water, reliable electricity, and seatbelts in cars.
And believe it or not, there is a huge amount of data on what kinds of policy in banking work and what don't, leading experts to conclusions like these. We're not talking about a few naysayers, either. The Swiss National Bank themselves, who will be put in charge of all lending if this is implemented, say this is a bad idea.
https://www.amazon.com/Wrong-us---Scientists-relationship-co...
The dubious reliability of much advice presented in the media as expert advice is one of the impending themes of our time. Expect skepticism about "experts" (defined as the sort of people who we tend to be told are experts when debating matters of politics, wealth or health) only to increase in the coming years.
The Swiss National Bank themselves, who will be put in charge of all lending if this is implemented, say this is a bad idea
The Overton window of acceptable thought in central banking is laughably narrow. Central bankers should really be the last people who are listened to on changes to how the monetary system works - they will always argue for minor changes to the status quo.
Difference: There's scientific evidence for the experts opinion in all these cases. Economics? That's more or less just crystal ball reading with a scientific shim on the top.
The opinions of an economist are worth very much, because listening to them sets up situations were it is easy for someone with an economics degree to push an agenda. But economists do have a lot to offer with observations like "this is very similar to the [suchandsuch incident] of [1887] in [Somewhere]", which is worth listening to. The limitations that surround economic 'experiments' are so severe it should be treated more like history and less like physics. Thomas Piketty with Capital in the 21st century is a great example of what I'm thinking - more history and data than theory, but some theory to provide structure to the data.
If science has a measure of quality, then that quality is the accuracy of its predictions. That ties in very closely to the ability to conduct experiments and collect accurate data. Economics as applied is a highly political process, which hampers both the perceptions and reality of how fair the experiments are.
Using a single positive statement instead of a double negative would bring much needed clarity.
>Experts also say it's a good idea to have clean drinking water, ...
> That probably means it's a good idea ;)
This is a really bad heuristic.
Going "full reserve" would drastically contract the money supply and have pretty severe effects on the real economy.
A society that spends all its time and effort on bad investments like building statues and blowing them up again, is a society with a problem, yet by the metrics used by conventional economics, it'd be doing great! Full employment! Tons of production! GDP increasing!
As long as economic activity is driven by individuals it is inherently better.
My build-statues-and-blow-it-up example was deliberately exaggerated for clarity and effect. In the real world malinvestment tends to look like asset bubbles, the construction of houses that nobody needs, "airports to nowhere" (like the cases of that happening in Spain) and so on. It may look like beneficial economic activity when you're zoomed all the way in, but when the free money dries up, suddenly it becomes clear that maybe strippers shouldn't be allocated two houses, or maybe airports should be built near population centers, and so on.
Anyone who can print money from nothing can essentially override the judgement of wider society about how best to allocate resources. Note that resources can also be allocated towards savings, but that tends to suppress economic activity, so people whose job performance is judged by measuring economic activity invariably end up attacking savings. Hence the frequency with which central banks try to push down interest rates.
Of course at that point people are actually treating the entertainment value as an asset rather than the statue and explosives themselves so maybe that’s also completely reasonable.
You can do that, it's called a Certificate of Deposit (CD)
The problem I see with this law is that as a Swiss law it can not have the intended result. But globally reforming banking this way would probably be very effective at fixing the absurd state of global economics.
In the US banks offer this through websites.
Fractional reserve banking? https://en.wikipedia.org/wiki/Fractional-reserve_banking
Aka, the way things already work.
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...
It was brought up by local gambling interest but sold as protecting gambling addicts.
[1]: https://contrakrugman.com/ep-141-do-you-want-the-crankish-mo...
[2]: https://en.wikipedia.org/wiki/Fractional-reserve_banking
Woods and Murphy follow the Rothbardian school and that is a minority even among Austrian Economists. If you want to see a more modern Austrian-Chicago critic on that, I would recommend George Selgin.
If the Swiss central bank already sets reserve requirements, what would this proposal do?
No, but bank lending is not made from customer deposits or bank reserves - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...
Was the last global financial crisis not caused by idiotically lax lending conditions, made possible by - amongst other things - the fact that loans were far too abundant and cheap? And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?
If the loan supply was significantly tightened, this would be "bad for the economy" in the sense that there'd be less economic activity. However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.
No. It wasn't.
The housing market began collapsing in certain states as early as 2006 and many banks had problems then. The wider crisis only happen once the central bank totally misjudged the monetary conditions and let demand collapse.
They were talking about high inflation fears in 2008 when it was clear that NGDP was dropping like a stone (look at FOMC meeting in November of 2008). The real 'Great Recession' meaning the large bank failures and the even most of the housing problems outside of the original crisis states only happened after that.
The effect of bad house lending was visible from 2006 but that should not effect all other industries unless the broader monetary system fails.
My favorite 1h talk on the subject:
http://www.econtalk.org/archives/2015/12/george_selgin_o.htm...
> And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?
That is how the monetary system has worked for 200 years. Its hard to explain crisis by this alone.
> However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.
You can not just assert that economic activity is wasted without having a story why that should be true. The investment are driven by individuals who want to improve their lives, not dig holes and fill them up.
Sure, if you're rich enough, you can self-finance your education or your new business, but if not, a loan is what you're looking for.
I think you mean borrow. Loan would be the opposite.
You're arguing that loans are useful. Nobody is arguing the opposite. Yes, loans are useful, but when the people making them have nothing at stake because they are creating the money from nothing, you get a lot of low quality lending to low quality investments that are unlikely to pay back (put another way, are bad investments).
Thanks, fixed.
> You're arguing that loans are useful. Nobody is arguing the opposite.
Like everything else, making it harder to make loans will decrease the amount of loans. It's not exactly a sliding scale converting between "the amount of reserves necessary" vs "the amount of loans available", but that's the basic model.
So arguing that we should go from a certain amount of fractional reserves, to effectively 100% reserves, will have the side effect of cutting down the amount of loans by a lot.
So the discussion needs to be "how much risk are we willing to tolerate, for X amount of loans".
However, I see most people in this thread (including your parent comment) who are saying something like "loans are bad". I'm trying to make the case that, quite the opposite, loans are inherently a good thing, it's the risk that's bad, but you can't cut down one without impacting the other, so you have to consider the tradeoff.
Maybe I misread your comment btw, but you're talking about digging holes in the ground and filling them up being a bad thing - I agree! But I just don't think that's what most loans are doing, certainly not the 90% of them that we would be killing! (I'm totally guessing on the number, but I think it's >50%?)
I'm happy to agree that loans are neutral but "inherently good" is pushing it.
Loans on things that generate more income for a socially-positive purpose can be good things but often loans can cause enormous problems of their own (see: student loan debt spiraling out of control because there is so much free money available to buy an education now).
No, banks do create money through loans - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...
The idea of "fractional-reserve banking" isn't accurate when it comes to modern banking.
The two things are directly linked. If people want to gamble on a bank deposit like any other investment, that's fine. The less sound banks will need to offer higher returns on money than the more sound banks in order to compete. The problem lies when the government (implicitly or explicitly) backs the deposits - without this backing, people wouldn't care nearly as much about the issue.
[1] https://professorwerner.org/shifting-from-central-planning-t...
Or is there some other factor which determines which accounts are current vs savings?
I suspect most people would have moved their money to "savings" accounts and things would continue as before.
Taking UBS as an example, the interest rate offered on the current account is 0%. The interest rate offered on the savings account is 0.01% (and it comes with some restrictions, withdrawals above CHF 50'000 p.a. require a three-month notice).
Even if they were otherwise identical, why would anyone put their money in the "risky" savings account instead of the "safe" current account? Interest rates paid to depositors would have to rise to make saving accounts attractive.
On the other hand, banks are allowed to lend more money than they actually have. Remember that a lot of money exists purely as numbers in a bank ledger. When the bank gives you a loan, they make a note in one place that you owe them X and then they simply increase the number associated with your bank account.
When people withdraw money from the bank, they are given notes from the branch’s own stock of notes. If the notes get low or run out then they are restocked from the central bank.
In the simple case, yes. But let's say I run a bar, and decided to open a tab for customers so they don't have to pay right away. I'm effectively loaning them money (extending them credit), so I've effectively created "money from nothing" in the same sense, though on a much smaller scale, of course.
Banking is a simple business - you raise money by taking deposits, issuing bonds, borrowing from other banks, etc. then you keep a reserve (say 10%) and lend out the rest. That's why it's called "fractional reserve banking" because they must reserve a fraction of the money they have raised.
The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.
The two million dollars gets created at a different stage, either through a government bailout, quantitative easing, or other (generally) inflationary methods but it absolutely does get created "out of nothing" at some point in the cycle. (There is also the FDIC which, while technically insured by the banks, in practical terms is backed by an implicit government guarantee that the funds will be there even if all the FDIC banks fail.)
If a bank just writes £5 in your bank account, they've created that £5. There is no corresponding £5 that has been removed from somewhere else, unlike when you or I extend a loan.
If they loan me £5, but I leave the £5 in my account, then it counts as loan, but it also counts as a deposit. So their loans can never exceed their deposits.
I wouldn't be able to give you £5 that I don't have just because I also write myself a note saying you owe me £5. For me to lend it to you, it would have to come from somewhere. With banks that's not the case.
"money from nothing" -> "when making loans"
So you understand that that's the exact opposite of nothing right? You admit yourself that it is not nothing.
I would imagine banks would start issuing non-reserve-backed loans in other currencies, and it would make lending just marginally more expensive (exchange rate is now an extra barrier to getting a loan).
More detail: http://www.batz.ch/wp-content/uploads/2017/10/Vollgeld_Summa... ; the implementation is not just a 100% reserve requirement but a limitation on interbank lending.
I'd be content if they threw in little tidbits about "No economists can accurately predict recessions and thus economies are very poorly understood. One theory is..."
So, nothing is going to happen.
It's also an easily reversed experiment, which suggests that the naysayers may fear success more than failure.
I'm sorry but that is a totally naive perspective. And as somebody from Switzerland maybe putting your lives savings on a 'might work but has no explainable advantages'-initiative is idiotic and that's why people affected by this absolutely destroyed it.
If there´s one lesson we really need to get over to the Economists from Computer Science it´s that they have to stop experimenting with the production system.
Of course, for those to be possible you would need a vast connection infrastructure spanning the globe, and many millions of people willing to participate (perhaps because the world simulations are clothed in cultural common places and so are disguised as "fun"), and something of value that they are willing to trade in earnest. Then you could run all sorts of fun economic experiments there and prove theories via A/B tests.
I wonder if the idea will catch on. I hope it's not held back by a perception that those world simulations are not serious enough for real science to be done.
Because what we have right now is nothing but experiments with the production system, under the guise of "monetary policy".
Central banks are necessary to provide the lender of last resort functionality.
Meanwhile, there are several scientifically based simulations of the banking system out there, that could be used as a basis for developing a testable system to experiment on - this is completely within current technological capabilities to achieve.
If actually read the books by the inventor of the 'lender of last resort' called Walter Bagehot. He wrote on of the most famous monetary books 'Lombard Street: A Description of the Money Market (1873)'.
Modern central banks constantly refer to how they 'follow Bagehot' but actually don't.
In this book he actually makes it quite clear that the 'lender of last resort' is only need in England because he says 'Getting ride of the Bank of England would be as hard as getting ride of the monarchy' (turns out its even harder).
He specifically point out in his books that a better solution would be for England to adopt a banking system like the Scottish had where the 'lender of last resort' was not needed because banks can create their own liquidity.
'Lender of last resort' was his idea how to restrict and give a clear set of rules to the central bank so it would stop causing so many crisis that were all avoid in the free banking system of Scotland.
https://iea.org.uk/wp-content/uploads/2016/07/upldbook115pdf...
[1]: https://twitter.com/ydemombynes/status/985560599248756736
Massive instability in the lending market and a higher average cost of borrowing because of frequent short term credit crunches as the money supply is delinked from borrower demand is.
Borrowing costs may be higher because this proposal removes some "free" money that banks can currently lend out. But maybe interest rates will stay the same and instead checking account fees will rise. This could induce some checking account holders to move some of their money to term loans to the bank which the bank could then lend out. It is not clear that interest rates have to rise.
> the money supply is delinked from borrower demand
The money supply available to meet borrower demand need not be created. It already is partially provided by people lending their money for a term to the bank. This proposal merely says that the bank may not use checking account money to meet borrower demand, i.e., it may not represent to a checking account holder that his money is available when in fact it has been lent out to someone else.
Market makers do not sit around with huge piles of uninvested cash waiting for the day that loan demand to exceed its supply on loanable funds, and consumers with interest-free deposit accounts are not exactly the ideal people to make markets. And of course when loan demand exceeds the amount of cash available to be loaned at that point in time interest rates rise. That's Econ 101.
That is why I and everybody I know voted against it, nobody could explain why it would be better. The only explanation was that if it was implemented perfectly it would cause additional problems.
Switzerland is not going to be short of capital. The interesting question is, would it have positive or negative effects elsewhere? e.g. if it had been in place when lots of Hungarians took out disasterous CHF-denominated mortgages.
But, what happens in the long run to the Swiss markets? I would suspect it’s not good either, it mirrors how the money worked while on the gold standard too much for my taste in that rapid responses to recessions becomes much more complicated.
The money supply under the gold standard was highly flexible.
Banks depending on demand (or velocity) automatically raised or lowered their reserves.
Meaning that if velocity is slow, banks would automatically lend more and create stable monetary conditions. Basically what central banks now do by having a bunch of burocrates look at statistics.
Eventually they would announce how it would work and the SNB would probably just copy the way it is doing now, with a different way of accounting.