Monday, 28 April 2014

Krugman's c**p argument against 100% reserve banking

A few days ago the FT's Martin Wolf  wrote an article supporting 100% reserve banking. Good! About time too.

Then Paul Krugman responded with a short article entitled "Is A Banking Ban The Answer?"

This article made an argument (that I've seen before) which suggests that under a 100% reserve system, anyone with spare cash that wanted to use their money to lend out and earn interest would be unable to use a "bank" and would therefore be forced to employ some dubious unregulated "shadow" institution. See for example this sentence from his article:

"First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier."

First of all I suggest that even with 100% reserves, the institutions that manage saving and lending should be called banks. They will still take in people's savings and lend them out to borrowers. The only difference with today's banks being that the deposits will have to be properly enforced "time deposits" rather than "demand deposits".

Secondly, even if they are not given the name "banks" (lets call them alt-banks for now), a switch to 100% reserve banking would have to involve new regulation. This means that alt-banks could (and should) be regulated to whatever degree a government deemed necessary. So Krugman's argument is just drivel.