Question for Mosler/Mitchell/MMT: Bank Reform, Assets or Liabilities?

Warren Mosler, in his excellent recommendations for bank reform (similar to Bill Mitchell’s proposals
and others )focuses on the asset side of banks, and writes:

“The hard lesson of banking history is that the liability side of banking is not the place for
market discipline.”

Mosler doesn’t discuss this history or reasoning any further though. Can anyone elaborate on this banking history? And how it shows that disciplining the liability side of banking is not a good idea?

4 Thoughts.

  1. On a side note, I found this interesting tidbit, published in 1919:

    “In America, we are accustomed to the doctrine that deposits grow out of loans, in very large degree.”

    (1919 p. 27)


    How did economists forget this?

    Back to the discussion on banking systems more limited on the liability side than modern systems, the above work from about the page just mentioned has some interesting information

  2. I seem to recall Scott Fullwiler saying (somewhere) that there are volumes of MMT literature on finance reform that critics have ignored, but I have yet to find it. All I’ve found are the short list of blog entries cited on Mike Norman’s blog. I wouldn’t call this “volumes of literature,” though.

    Look forward to finding/studying more.

  3. Kyle,
    If you find anything relevant, I would love to have it cross-posted here – thanks.
    The last comments on MikeNorman’s were:

    “Warren Mosler said…

    a few notes

    not to defend private banking, but the Fed is a public bank, as is the federal home loan bank and other govt lending ‘agents’, student loans, etc. nuff said?

    as to hard lessons, closing down 4000 of 8000 US banks in 1933? the gold standard is a policy to regulate the liability side of banking, for example.
    May 5, 2013 at 9:28 AM
    Clint Ballinger said…

    (Mosler): “closing down 4000 of 8000 US banks in 1933”

    Warren – I am not clear on the connection here – the PM (Positive Money) type proposals are designed precisely to avoid the early 1930s situation.

    “the gold standard is a policy to regulate the liability side of banking, for example”

    Mitchell also associated PM type proposals with the gold standard. But there is a fundamental difference – the Gold standard limits the money supply. PM (Positive Money) type proposals do not at all – sovereign currency issuers can issue as much money as needed (unlike the gold standard, of course) and thus can do all the things a sovereign non-convertible floating currency issuer is capable of (a job guarantee etc).

    PM proposals are not at all like a gold standard; the sovereign issuer can issue as much currency needed to achieve fiscal policy goals, limited chiefly by inflation, of course.

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