Taken from the comments on my last post on MMT/Chicago Plan/FRB & several similar pages the Questions below seem to be the central questions/objections between FullRB & MMT (or Post Keynesian, or MR).

QUESTIONS

1. Would Post Keynesians and/or Modern Monetary Theorists favor the elimination of endogenous money (bank credit-money creation)?
2. If so, by what means (FullRB or other)?
3. If not, why not? What positive or necessary purpose does endogenous money serve?
4. Do Full Reserves actually even stop credit-money creation? [Scott Fullwiler writes “(Aside from the fact that 100% reserves doesn’t eliminate banks’ abilities to create deposits out of thin air–but save that for another time after they’ve at least come to grips with accounting)”]
5. Does stopping credit-money creation have serous negative effects which outweigh the positive effects Benes & Kumhof, positivemoney.org etc. claim? 

SOME OBSERVATIONS ON POST No. 1:

•  Pro-Full Reserve people. You would do well to abandon trying to claim money is not debt. It is not a needed argument, and not a winnable one. (I’m looking at you, Zarlenga/AMI).

[Update-After a comment by Musgrave—I am not referring to FullRB criticism of endogenous money being debt, more or less the raison d’être of AMI etc.; I am referring to criticisms of AMI & similar groups that they seem to think the government can somehow issue {exogenous} money that is not debt]

“(STF) If they would just say “govt money only” or “pvt debt free money” they wouldnt sound like they have no clue what they are talking about.”  And “(“all they’d have to do is just have to stop saying “debt-free money.” What they want is a world of fiat money only and 100% reserves–is that so hard to just say?”

• But MMT people, I think it is fair to recognize that under the system Full Reserve proposals call for, money would indeed act differently than what we usually think of as debt. Basically, the debt claim would hit a wall with the Government (or “the people”). In effect saying “we have created a common good by fiat and declare it to function not like debt” (and yes, this is do-able). Now, technically, ultimately it is a debt (and Zarlenga wrong), but that would only ever become evident if the (let’s say U.S.) Government became so weak (war, revolution, whatever) that it could no longer back up its claim that the circulating greenbacks had value simply “because-we-say-so-end-of-story” [& the power to tax of course, which amounts to the same thing]. As I pointed out before, Fullwiler likes the way the platinum coin resolution to the Fiscal Cliff highlights a basic MMT point about  money. But I also think it highlights a basic Full Reserve point – we can essentially have the last word on debt by the Gov/people bound up in a symbolic platinum coin (to be clear, I am not advocating a “platinum standard”. The platinum coin is a just a somewhat hilarious loophole Beowulf taught us all about that technically would work, but could be achieved more directly by just letting Treasury issue notes). “The Buck Debt Stops Here” in way, somewhat literally. Technically that platinum coin is a claim of trillions of dollars against the U.S. people, but in practice it represents the end of the line on debt claims for the greenbacks it would represent.

So on debt, I do think the two sides are talking past each other– yes money is always debt  but yes a system can be made where fiat money acts as if it is the end of the line on debt claims and acts as if it were a token and can function as a token in a banking system. Indeed, Full Reserve people are saying that is what we need to have a stable, fair system.

Beowulf writes “It would make life simpler if Tsy issued consols [consolidated stock]— the lack of a guarantee to repay principal would seem to put outside the debt ceiling– which is nothing more or less than a cap on total amount of principal guaranteed repayment.

However, aside from political framing, it doesn’t really make a difference whether you call outstanding Treasuries “equity”, “debt” or (as banks are wont to do) “deposits”.”

~~~

Overall, I still don’t see where the split is once the details are looked at between much MMT and the smarter Full Reserve People (unless it is political – yes, Full Reserve people do want to smash the power of the banks, to make that clear, and it seems that at least some MMT people do not).

On MMT and FRB getting along – Scott Fullwiler writes in a comment “AMI’s policy proposals–as Neil points out above–could only work as they want them to in the context of monetary operations that MMT’ers have actually been arguing in favor of for some time.” 

So what is the problem?

Every time I look closely at FullRB and MMT, it seems to me like they reinforce each other, not contradict each other. FullRB creates a simpler, more direct system to achieve MMT functioning; MMT principles fill-in the missing details of FullRB proposals.

A note on Post Keynesian/Steve Keen on FullRB

As far as Post Keynesian and/or Steve Keen’s position, I think it is worth emphasizing Keen’s position:

“There are many other proposals for reforming finance, most of which focus on changing the nature of the monetary system itself. The best of these focus on instituting a system that removes the capacity of the banking system to create money via “Full Reserve Banking”…

The former could be done by removing the capacity of the private banking system to create money.

Technically, [AMI and Positivemoney] proposals would work.”

Keen then goes on to list some objections that I think are pretty weak (that is for another post), I also agree with Ralph Musgrave on the weakness of those objections.

I HAVE DISTILLED THE KEY POINTS IN THIS POST TO A SET OF QUESTIONS IN POST No. 2 HERE (Also the thread here is long; easier to comment there)

[This is part of an ongoing effort to understand and explain differences and points of agreement between Modern Monetary Theory, Full Reserve Banking, Post Keynesianism, Steve Keen’s work, and related approaches in as simple of terms as possible (difficult, as the debates hinge on complex and subtle concepts at times, but I will try). The goal is to create a resource for the general public to better understand these areas of study and why neoclassical economics fails, and to foster clearer communication between MMT, FullRB, and PK proponents.]

Ever since the Financial crisis of ~2008, there has been a real opening for improving economic theory & the financial system.

An ongoing project here is to better understand (for myself) and help put into clear language (to help effect change and to help the public better understand economics in general) important areas of economic advancement.

Two important strands of economic understanding have been waxing lately, which is a very good thing. These are Modern Monetary Theory (MMT) and Full Reserve Banking (FRB).

A simple Google search will suffice to find numerous good MMT resources.

FullRB is a little more tricky.

There are innumerable monetary crackpots out there, especially in the blogosphere, and it can be difficult for the novice to judge the quality of discussions of our monetary system. This is of course true of the net in general. But it is especially a problem with any discussion of money.

Also, a significant number of informed people interested in economics have been dismissive of FullRB for a variety of reasons in the past.

However, there has been a marked trend towards more serious discussion of Full Reserve Banking. And recognition that FRB has long been highly regarded by very well-respected economists. It is important to note that these have spanned the ideological range of economics, from those with “progressive” views concerned with equitable distribution to arch- free-marketers (I think this is a hint that there is indeed something to FRB.) At any rate, the work associated with Laurence Kotlikoff (Boston U.), Richard Werner (Southampton), Jaromir Benes (IMF), Michael Kumhof (Modeling Division, IMF) and others, and recently the buzz-creating “The Chicago Plan Revisited” released under the auspices of the I.M.F. (almost shockingly to some, a “magic wand”), has helped put Full Reserve Banking back into respectable conversation.

In the future I will begin to outline this project from first principles for anyone to read. For the moment, however, I am going to jump right in.

QUESTION (for MMT & FRB proponents):

In a 2009 post by Scott Fullwiler (leading expert on the details of our banking system, something mainstream economists ignored at all of our peril, and one of the leading MMTists) is answering a number of questions about FRB (The main relevant previous comments are by “RebelEconomist” and “RSJ”)

Fullwiler,  in the comments section, writes:

“Sorry for the delay responding, RSJ (and I’ll get to the others as time allows . . . apologies).1. Regarding 100% reserves, like Ramanan, I’m very skeptical that they will be able to constrain anything. Certainly under current operating procedures, they wouldn’t have any effect aside from the usual “tax effect” of RR, as the Fed provides reserves at stated rates. A much more constrained regime that required banks to only hold Tsy’s on the asset side would be different, but then you’ve just moved the endogenous creation of loans and their corresponding liabilities outside the banking system. The question there becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”

Fullwiler’s first point, so extemporaneous, seems worrisome for any FRB proponent. Does he have some argument that FRB just wouldn’t achieve what most view as its primary purpose, stopping the creation of vast pools of credit-money (that lead to asset inflation and instability among other problems?)

He then discusses a “much more constrained regime”. I think this shows what many see as a problem with some MMTists. Its followers rightly criticize mainstream economists for ignoring how the banking system works. MMT focuses on the real-world details because 1. they know they matter, and 2. because mainstream economists have neglected this critical area in the extreme. But sometimes MMT seems to fall in love so much with how the system actually is, and MMTists so tired of mainstream economists’ imaginary (delusional?) world, that they view negatively any imagined economy, even when, unlike mainstream economics, these possible economies are being designed on sound principles for good purposes. There is a big difference between the strange imaginary world of mainstream economists and the desire to change the Rube Goldberg dysfunctional system we have now. Back to FullRB –  Of course the point is to make money creation no longer endogenous, i.e., to move the credit-money creating power out of the banking system  That is where the benefit is! Fullwiler seems reluctant to move to it, I guess for the reason I mentioned, but I can’t imagine what he thinks Full Reserve s about  if not that.

So, let us imagine we have changed to a system where banks are not creating their own (endogenous) money. An agency of the gov spends it into the economy, with the legal mandate to target inflation, which without endogenous money creation it can very effectively do. Taxes and spending work in MMT prescribed ways.

Fullwiler then writes “The question…becomes who provides these latter institutions with overdrafts as they settle payments daily. If either banks or the Fed do, then you haven’t changed much, aside from regulatory structure. If nobody does, then you’ve set yourself up for a payments crisis at some point in the near future”.

Now, I am pretty certain that The Chicago Plan (even the old versions like Fisher 1935 or  Milton Friedman’s work {?} or Werner or others by 2009) have addressed these issues.

I am not sure, but I think part of the answer is that the part of the banking system that would be allowed to loan would operate separately, and with money largely obtained by others foregoing its use, so no “credit-money” is created. There is enough “play” in such a system as long as there are multiple entities that daily settlement is possible with no net credit-money creation (I know, “money like” instruments are always a problem, more on that later). So you have indeed “changed much” – radically much, a vastly more stable system, less risk of asset bubbles, and greatly facilitating the government’s ability to carry out other MMT approaches and keep inflation as close to zero as desired (basically, Milton Friedman’s monetarism actually works under a Full Reserve system – here we have the progressives and the free marketers happily combined). So as far as I can see, MMT and FRB get along just fine here.

At any rate, the question is:

Can pro- Full Reserve Banking people explain this better than I?

And/or, can Fullwiler or other Modern Monetary Theory proponents explain where the 2012 Chicago Plan or similar plans by Werner etc. are in error as Fullwiler 2009 believes above?

Cheers,

Clint Ballinger

UPDATE I have to note that the MR paper Cullen Roche suggests (this is from comments below) concludes “The Chicago Plan and Mosler/MMT both prescribe massive reserve funding of the negative state equity position. The difference is that the Chicago Plan focuses on the negative equity that has been created by the debt jubilee. The MMT plan focuses on the more typical balance sheet component created by deficit spending. Those two pieces are complementary and additive…”