Sunday, September 7, 2014

The Economist — A Prominent Financial Columnist Is Calling For Radical Reforms To The Global Economy


Review of "The Shifts and the Shocks: What We've Learned--and Have Still to Learn--from the Financial Crisis" By Martin Wolf. Penguin Press; 466 pages. Allen Lane.

To make finance safer, Mr Wolf suggests replacing a fractional reserve banking system, which takes in deposits and lends most of them out in longer-term loans, with a system of "narrow banking", where deposits must be backed by government bonds. To sustain demand without relying on dangerous asset bubbles, he proposes permanent "helicopter money", where governments run deficits that are financed by the central bank. For a man of the mainstream, this is brave stuff.…
Pushing his analysis to its logical conclusion, he argues that the only way to deal with today's underlying problems--a fragile financial system and a secular weakness in demand--may be to move away from bank-based credit altogether and rely on permanent budget deficits financed by central banks. 
Forcing banks to match their deposits with safe government bonds would reduce the risks of bank crashes and encourage a healthier reliance on equity finance. Permanent money-financed deficits would, in turn, provide a safer way to sustain spending than private-asset booms and busts. If done responsibly, they need not cause inflation.
Business Insider
A Prominent Financial Columnist Is Calling For Radical Reforms To The Global EconomyThe Economist

4 comments:

Dan Lynch said...

Abba Lerner would agree.

The problem with functional finance is that it's not realistic to expect a congress/parliament to agree on a wise economic policy and to act swiftly.

A more realistic approach might be to have more automatic stabilizers (a strong means-tested safety net), index tax rates to the unemployment rate, and index the retirement age to the unemployment rate.

Dan Lynch said...

Either that or else pass legislation MANDATING functional finance budgeting.

Tom Hickey said...

Automatic stabilization is part of functional finance, recognizing that the fiscal balance is not discretionary but rather based on responding to a dynamic context, e.g., hence beyond the ability of budgeting in advance to handle adequately.

The aim is to structure as much fiscal policy, both spending and tax policy, into automatic stabilization as possible to enable the fiscal balance to adjust to changing context.

The MMT JG with a flexible buffer stock of employed is part of automatic stabilization.

Detroit Dan said...

Martin Wolf is one of the good guys -- his proposals and talking points seem to be in line with MMT thinking. The Economist gives his book a favorable review.