Tuesday, 18 November 2014

Banking proposals for the EZ a la Warren Mosler and Yanis Varoufakis

1. The ECB to provide unlimited guarantee for euro deposits.

2. The ECB to lend unsecured to member banks, and in unlimited quantities at its target funds rate, by simply trading in the funds market.

3. Make a zero interest rate policy permanent. This minimizes cost pressures on output, including investment, and thereby helps to stabilize prices. It also minimizes rentier incomes, thereby encouraging higher labor force participation and increased real output. Additionally, because the non government sectors are net savers of financial assets, this policy hurts savers more than it aids borrowers, so a fiscal adjustment such as a tax cut or spending increase would be appropriate to sustain output and employment.

4. Banks should not be allowed to have subsidiaries of any kind. No public purpose is served by allowing banks to hold any assets ‘off balance sheet.’

5. Banks should not be allowed to accept financial assets as collateral for loans. No public purpose is served by financial leverage.

6. EZ banks should not be allowed to lend off shore. No public purpose is served by allowing EZ banks to lend for foreign purposes.

7. Banks should not be allowed to engage in proprietary trading or any profit making ventures beyond basic lending. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets.

8. Use ECB approved credit models for evaluation of bank assets. I would not allow mark to market of bank assets. In fact, if there is a valid argument to marking a particular bank asset to market prices, that likely means that asset should not be a permissible bank asset in the first place. The public purpose of banking is to facilitate loans based on credit analysis, rather than market valuation.

9. Banks should not be allowed to buy (or sell) credit default insurance. The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks. If a bank instead relies on credit default insurance it is transferring that pricing of risk to a third party, which is counter to the public purpose of the current public/private banking system.

10. EZ banks should not be allowed to contract in an interest rate set in a foreign country, with a large, subjective component that is out of the hands of the EZ member state governments.

11. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to governments regarding the regulation and supervision of those activities.

12. The ECB should buy EIB (European Investment Bank) bonds, financing thus projects of public interest in and among member states - without there being a need for further deficit spending for member state governments. The later have the liberty to focus on fiscal policy (deficit spending included) for their own domestic purposes.

PS: The bulk of the proposals belongs to Warren Mosler. Number 12 belongs to Yanis Varoufakis, and not just to him but to S. Holland and J.K. Galbraith.

1 comment:

  1. This piece is excellent. If these rules were followed 90% of our bank problems would be solved. We shouldn't give these rules to private banks though - we should have a State Utility Bank that is based on these guidelines.