The remaining first paragraph of section 3.1 highlights that trust in commercial banking institutions is degraded or demolished by crises like the one that occurred in 2007/8. However the authors have a great solution for the second option problem. But that “state backing” is a subsidy of the private banking system!
And it is broadly accepted in economics that subsidies misallocate resources (unless there are overwhelming social reasons for a subsidy as is the situation with for example children’s education). The Sheffield section of economics perhaps needs to be reminded that economics is all about the allocation of resources. To be more accurate, deposit insurance in the UK is funded by taxpayers, whereas deposit insurance in america regarding small banking institutions is self-funding: banks pay a premium to the Federal Deposit Insurance Corporation. As to bigger banking institutions, it’s essentially taxpayers that have to foot the costs: see the billions if not trillions of public money used to prop up those large banks during the recent turmoil.
And the reason behind that is that there’s only one entity that can save large banks, namely the state itself. And even some states (e.g. Ireland) were near bankrupted by their tries to rescue their banks. The next paragraph of this section criticises FR on the lands that “the availability of safe possessions would be reduced…”.
That’s a reference to the fact that taxpayers no more underwrite loans or investments which involve more risk that that involved with government debt. As visitors will notice probably, that’s essentially a repetition of the point made in the FIRST paragraph of this section: that is, the Sheffield authors are asking for loans and investments to be supported by (i.e. subsidised by) taxpayers. And if that’s the actual Sheffield authors want, perhaps they can describe why they don’t advocate the whole stock market being made risk free gratis the taxpayer. Next, the Sheffield authors make this claim according of traditional bank or investment company debris: “Bank or investment company debris thus perform the money function of means of payment.
In addition they act as a store of value, so long as there is open public trust in bank or investment company debris. ” No: wrong again. The mistake there is certainly that for every pound of commercial bank issued money there’s a pound of debt. And incidentally it’s not only advocates of FR who make that time: advocates of Modern Monetary Theory (MMT) have made the same point numerous times. For example as Bill Mitchell place it, “…horizontal money nets to nothing”.
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Thus reducing commercial bank or investment company deposits does not reduce the stock of “safe assets”: it has no effect on the NET stock of such property AT ALL! You will find three mistakes there Now. First, as already pointed out, the prevailing commercial banking system does not offer the public a genuine way of saving, or even more accurately a means of “net saving” in that for each pound of saving, there’s a pound of debt.
Second, since FR consists of REPLACING commercial bank or investment company money with bottom money or “sovereign money”, FR would INCREASE the scope for risk free saving actually, since foundation money is a kind of risk free keeping from the public’s perspective. About the only faintly valid idea in the second option passing by the Sheffield authors is the idea that members of the public should have a very safe method of saving open to them for individuals who want that. Well FR provides that just. First (as mentioned above) there is the safe half of the bank industry that exists under FR.
Second, and in regards to the riskier fifty percent of the industry, people under most variations of FR have a CHOICE in regards to what to place their savings into. If they need something that resembles a normal British building society, that sort of thing certainly should be made available. Zero interest on safe accounts?