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The Forum > Article Comments > Government is no Santa: the costs of stimulus > Comments

Government is no Santa: the costs of stimulus : Comments

By John Humphreys, published 23/7/2009

The long term consequence of the financial stimulus will be upward pressure on interest rates, fewer jobs and higher taxes.

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The problem is not giving out money but it is borrowing money and then not spending it on new investments that creates new productive assets. Everyone agrees we need more money in the system. Everyone agrees we have too many bad loans. Everyone agrees we need more productive assets.

Here is a way to achieve these results without involving the government.

Create a special banking product that fits alongside other banking products. It has the following characteristics.

Depositors get zero interest on their deposits.
A depositor is allowed to get a loan for up to say 5 to 10 times the deposit at zero interest - this will keep the bank within its fractional reserve obligations.
The bank must not use the deposit for any loan other than to the depositor.
The loan MUST be invested from a range of approved investments where the money is spent building a productive asset that has a guaranteed income stream. e.g. a new solar thermal power station.
The loan is repaid from the money generated by the asset. The loan terms might be 50% of income generated to the borrower and 50% to lender. The bank may require that 120% of the loan is returned.
Until the loan is repaid the zero interest deposit is not redeemable.
The bank keeps track of exactly how the money is spent and is able to ensure it gets its return when the investment starts to generate income.
If the investment is a dud and does not give a return then the deposit is forfeit if the loan is not repaid and the bank writes off the loan.

If there is a banker reading this that wants to fix the financial system and at the same time reduce greenhouse gas concentration in the atmosphere then contact me. I will build them this banking product and I will show it works by financing it with deposits of $500K at zero interest.
Posted by Fickle Pickle, Friday, 24 July 2009 7:13:41 AM
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I think we've been here before, Fickle Pickle.

There is a step in your process that you persistently ignore.

>>A depositor is allowed to get a loan for up to say 5 to 10 times the deposit at zero interest - this will keep the bank within its fractional reserve obligations<<

You omit to tell us where the money needed to provide the loan itself comes from.

You take in $100, and put it in a safe place. Fine. You should be able to class that as the deposit you need to satisfy the reserve requirement.

But then you lend, say, $500.

Where does that $500 come from?

You are not allowed to print it. You will need to borrow it from somewhere. And the chances are, that "somewhere" will require interest payments, and your system starts to experience some stress.

That is why you don't have a queue outside your door, clamouring to learn about your magical money machine.

And Arjay, I'd be careful which guru you listen to.

If you listen right to the end of the Jim Rogers rant (was he drunk, or does he always interview that way?), you will hear the question "so, how do you make money Jim"

To which he replies "shorting"

And when pressed further, he states that he will short "I dunno, IBM, GE, JP Morgan..."

That was on February 11th, when IBM closed at $94.67, GE at $11.50 (with a dividend of $0.31c a few days away) and JP Morgan at $26.01.

At yesterday's close, IBM were $117.06 (up 23.6%), GE were $11.63 (up 4%) and JP Morgan closed at $36.83 (up 42%).

Now, if you understand the concept of shorting stock, you will notice that his investment strategy had a few holes in it..

Japan is not a completely realistic comparison, by the way, for the simple reason that they were pretty much on their own. If the US had had to pick itself up in the same way, while other trading blocs continued to boom, the decisions might have been very different.
Posted by Pericles, Friday, 24 July 2009 9:08:02 AM
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Pericles you are wrong. The money does not have to come from somewhere. Banks can create bank money by a simple entry in a ledger.

Banks do not have to have money on deposit to make a loan. They create money by making a deposit into an account.

All a bank has to do to satisfy its obligations to the regulators is to have some "real money" to back a fraction of the loan. They then create what some people call "bank money" to make up the difference. To all intents and purposes bank money looks like "real money". To satisfy the book keepers and regulators it has to be backed by a loan.

Surely you are not saying that banks have to have 100% of the money they loan on deposit before they can lend it?

Anyone can create their own money it is just that few people will accept it for trading purposes. Banks are allowed to create Australian Dollars provided it is backed by a loan and this is a great privilege.

There is no requirement for banks to charge interest on the loan and there is nothing to say they have to pay interest on deposits.

What I am saying is 100% correct and can be done.

(I also say that a government does not have create a loan to create money if it doesn't want to as it controls the currency. Banks however are required to balance their books with loans but no one says they have to charge or pay interest).
Posted by Fickle Pickle, Friday, 24 July 2009 9:38:45 AM
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This line this article takes is the latest propaganda from the right wing neocons with their economic "theories" that bear no resemblance to reality. Were is the tiniest shred of evidence put forward in this article?
There is no basis for this argument (apart from scaremongering).

Lenders will lend when they think it is worthwhile. The oh so great private sector is a pretty abysmal bet at the moment so I would suggest that all the moneylenders out there are cheering that there a few gov bonds lying around they can put their lucre into. The fact they wont lend to the capitalists is the proof that the private sector is a failure and needs an overhaul.

The tories would of preferred massive unemployment to have flowed from the financial crisis thereby not endangering their leverage driven exploitation and giving them another stick to beat their opponents with. It not only doesnt matter to them what happens to the working classes they would be happy, no deliriously happy, to see unemployment rise and poverty and deprivation so as to put the working plebs back in their place.

It is fun to see them frothing at the mouth trying to come to terms with their loss of their supremacy in economic matters. They just cant imagine that a left wing government could manage the economy well so they come up with grasping, surreal arguments such as this.

Its all a bit sad how loss of power has hit the tories. They need counseling, they show all the signs of having suffered a touch of post traumatic stress syndrome. Thats what happens when those who are bred to rule us are made to feel the lash of democracy.

Neither a slave nor a master be!
Mikk
Posted by mikk, Friday, 24 July 2009 10:27:06 AM
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*The money does not have to come from somewhere. Banks can create bank money by a simple entry in a ledger.*

Wow, I'm goint to have to email Gail Kelly at Westpac about this
amazing possibility. No longer will she have to worry about the
cost of funds, competing for deposits etc.

My Westpac shares will go through the roof, once she understands
her apparent new amazing powers!

Fickle Pickle, you should be a consultant to the big banks, to
explain to them why they have it so wrong :)
Posted by Yabby, Friday, 24 July 2009 11:16:44 AM
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Pericles -- the better alternative to the stimulus was to not have the stimulus. It is not true that the government must always act. If their actions will make the situation worse, then they shouldn't act.

I think the RBA was right to loosen monetary policy last year, in response to the drop in the credit multiplier. This policy has increased spending power by more than double the stimulus, without the negative side-effects. (I might not have done the last rate cut, but that's a different issue.)

I don't believe we had a near-meltdown of the financial system. The reality is that we still had savers and we still had borrowers, and that they still had a very strong incentive to find each other and they were always going to find ways to continue the flow of funds. Indeed -- that is exactly what we have seen. No surprise there.

This is not an issue of hardening your heart. It's not like one side of the debate wants to do good, and the other side wants to do evil. Intentions aren't the problem. The problem is correctly understanding the consequences of policy.

I also disagree that this downturn in Australia is caused by excessive credit in Australia. We have imported this recession from world. And in America this recession was caused by lax monetary policy, poor regulation, moral hazard and bad risk management. That's 3/4 government mistakes.
Posted by John Humphreys, Friday, 24 July 2009 1:29:31 PM
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