Thursday, March 14, 2013

ECOBATE 2013 - 2 Michael Kumhof

Prof Charles Goodhart (last blogpost) gave us history from his personal perspective having been at the centre of economic policy-making for decades. He told us as it was, with its flaws and failures, but it was a sobering tale rather than a hopeful one.  

At the ECOBATE event last weeek, Michael Kumhof, Deputy Division Chief of the Modeling Division in the IMF Research Department and sometime Asst. Professor at Stanford University, also gave us history, but with prospects of hope for a far better way to run national economies through monetary reform.  The Chicago Plan in the mid-1930s, from the Great Depression era,  was the fruit of what Kumhof called a more profound, deeper intellectual debate than we are having now in our own financial crisis. Irving Fischer supported it.  It called for the separation  of the monetary and credit functions of the banking system by requiring 100% backing of deposits by public reserves, that is: government-issued money. And the banning of the private creation of credit 'out of nothing', as happens through banks now. 

To illustrate the way banking is popularly thought to work, compared with how it actually does he gave the example of a garage, where goods are placed on the forecourt and then sold. The garage acts as an intermediary. It is mistakenly assumed that this is how banking works, deposits arrive and are then lent out. Wrong. 'It doesn't happen'; 'that is never used' ; 'that is not what banks do'. Kumhof was a Barclays Bank manager in Singapore for some years and knows from the inside. No other business has the privilege of creating its own raw materials like this. See the book The Free Lunch- Fairness with Freedom, Ch 3: Bakers and Bankers. 

Kumhof has reworked the Chicago Plan to suit modern times and his paper is available HERE.  At page 64, etc, are diagrams which show how transition to a Chicago Plan could work out. Solidly researched in history he cites Michael Hudson with his work on ancient Mesopotamia and debt forgiveness. Also Zarlenga and  Graeber, who show that the private issuance of money through history has caused major societal problems: 'a calculated misuse of a nation's money system for private gain' . He named Steve Keen as one who warned of the problems we now see. 

The key private power of banks that has created the mess we are going through is: 'bank liabilities are money that can be created and destroyed at a moment’s notice...The critical importance of this appears to have been lost in much of the modern macroeconomics literature on banking, with the exception of Werner'. 

He showed how reform would release wealth to all, instead of to banks. A regular Citizen's Dividend could be issued to everyone, private debt could be paid down, permanent low interest rates would ensue, boom and bust cycles would be easier to control, young people would study engineering rather than finance. As an illustration of the reform he held up a banknote which is based on 'debt money' which has to be repaid and a coin which never has to be. The Chicago Plan Revisited could mean that all money would have this debt-free quality. His paper is a must read for anyone wanting a fairer society.  Despite some unfamiliar equations (skip them?) much can be gained.
posted by Charles Bazlinton

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