Time

Occupy Krugman’s Tension

 

During the Occupy Wall Street protest of 2011, famed economist Paul Krugman used his New York Times op-ed column to explain that If Banks Are Outlawed, Only Outlaws Will Have Banks:

“The crucial thing is to understand what banks do. And it’s not mostly about money creation! Instead, what banks are for is helping to improve the tradeoff between returns and liquidity.

Actually, what banks do is mostly about money creation. Of a sort. See here, here, and here. But I digress.

“Like a lot of people, my insights draw heavily on Diamond-Dybvig (pdf), one of those papers that just opens your mind to a wider reality. What DD argue is that there is a tension between the needs of individual savers — who want ready access to their funds in case a sudden need arises — and the requirements of productive investment, which requires sustained commitment of resources.

Banks can largely resolve this tension, by offering deposits that can be withdrawn on demand, yet investing most of the funds thus raised in long-term, illiquid projects. (…)

The problem, of course, is the vulnerability of such a system to self-fulfilling panics: if people believe that a bank will fail, everyone will in fact want to withdraw funds at the same time — and because the bank’s assets are illiquid, trying to meet those demands through fire sales can in fact cause the bank to fail.

This then leads to the need for policy: deposit insurance and/or lender of last resort facilities to head off bank runs, and bank regulation to reduce the moral hazard from these explicit or implicit guarantees.

So, according to Professor Krugman’s defense of Bagehot banking, the alleged purpose of banks is to resolve this “tension” between the need of individuals for ready access to their funds, and the “sustained commitment of resources” required for “productive investment”. The banking system — designed in the 17th century — can “largely” resolve this tension, but is vulnerable to bank runs, and so requires complex regulation, and deposit insurance and/or central banks to support it.

Here is an alternative solution to the Diamond-Dybvig-Krugman “tension” problem.

Make everyone their own central banker.

By giving everyone a tool to create ‘money’ in the same way that banks do — by simple double-entry bookkeeping — individuals can always have ready access to funds, and make sustained commitments to productive investments. No vulnerability to bank runs. No need for complex regulation, deposit insurance, or a “lender of last resort”.

“Tension” problem solved.

This is, after all, the 21st century Paul. Things have moved on a bit.

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2 thoughts on “Occupy Krugman’s Tension

  1. thefinancedude says:

    if one reads the law, that power is conferred and authorized for the reasonable man of god…simply claim one’s divine nature and move on in life…

  2. Kevin Moore says:

    How I see it –

    Matthew 10:8 (NKJV)

    8 Heal the sick, cleanse the lepers, raise the dead, cast out demons. Freely you have received, freely give.

    So are profits immoral?

    The General Epistle of Barnabus chapter 9 “………wherefore it is not the command of God that they should not eat these things; but Moses in the Spirit spake unto them, …….neither says he, shalt thou eat the eagle, nor the hawk, nor the kite, nor the crow; that is thou shalt not keep company with such kind of men as know not how by their labour and sweat to get themselves food; but injuriously ravish away the things of others; and watch how to lay snares for them; when at the same time they appear to live in perfect innocence………so these birds alone seek not food for themselves, but sitting idle seek how they may eat of the flesh others have provided; being destructive through their wickedness……..”

    Bankers fraud‭ ‬–

    Signing a promissory note means that the‭ ‬“borrower‭”‬ finances their own loan‭ ‬-

    ‭”‬money‭ ‬” includes:‭

                        ‭ (‬a‭)‬ ‭ ‬currency‭ (‬whether of Australia or of any other country‭); ‬and‭

                        ‭ (‬b‭)‬ ‭ ‬promissory notes and bills of exchange‭; ‬and‭

                        ‭ (‬c‭)‬ ‭ ‬any negotiable instrument used or circulated,‭ ‬or intended for use or circulation,‭ ‬as currency‭ (‬whether of Australia or of any other country‭); ‬and‭

                        ‭ (‬d‭)‬ ‭ ‬postal notes and money orders‭; ‬and‭

                       ‭ (‬e‭)‬ ‭ ‬whatever is supplied as payment by way of:‭

                                 ‭ (‬i‭)‬ ‭ ‬credit card or debit card‭; ‬or‭

                                ‭ (‬ii‭)‬ ‭ ‬crediting or debiting an account‭; ‬or‭

                               ‭ (‬iii‭)‬ ‭ ‬creation or transfer of a debt.‭

    However,‭ ‬it does not include:‭

                         ‭ (‬f‭)‬ ‭ ‬a collector’s piece‭; ‬or‭

                        ‭ (‬g‭)‬ ‭ ‬an investment article‭; ‬or‭

                        ‭ (‬h‭)‬ ‭ ‬an item of numismatic interest‭; ‬or‭

                         ‭ (‬i‭)‬ ‭ ‬currency the market value of which exceeds its stated value as legal tender in the country of issue.‭

    http://www.austlii.edu.au/au/legis/cth/consol‭_‬act/antsasta1999402/s195.1.html

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