Wednesday, 21 May 2014

What nobody is saying about the housing market...

Its seems incredible to me that amongst all the talk about the housing market by Mark Carney, George Osborne and the media, there is scarcely any mention of its connection with the money supply. As readers of this blog should know by now, new loans increase the money supply whist repayments of existing loans shrink it. In the UK, lending is dominated by the housing market. Far more money is lent for house purchasing than for business. Putting these facts together means that the total amount of money that circulates in the economy as a direct function of the state of the housing market. A housing boom corresponds to a growing money supply, whilst a bust would shrink the money supply, just like in 2008. We are now in a very unstable situation. If regulators succeed in bursting the current housing bubble it would either lead to an immediate recession (this is what a shrinking money supply does), or alternatively quantitative easing would have to start all over again.

With this precarious situation, why are the words "money supply" not on everybody's lips?

Sunday, 4 May 2014

Does a switch to full reserve banking equate to “banning banks”?

Ever since Martin Wolf came out in favour of full reserve banking, there have been several follow-up articles (1,2,3) in which the authors describe a move to full reserves as “banning banks”. I take issue with this...

When Dave Fishwick, made famous by the television series Bank of Dave, wanted to start his own bank, he was surprised to discover that his proposed business of taking people’s savings and lending that money to people that wanted to borrow it, was not allowed to be called a “bank”. I can sympathise with Dave because by almost any definition of the word bank you may find in a dictionary, his institution was most definitely a bank. It’s just that the financial regulators have an unreasonably pedantic definition of the word. Its as if the word “car” had been defined as a Volkswagen Golf, and any “vehicle” that wasn’t a VW Golf was barred from calling itself a car, and had to be advertised as a “motorised people transportation device”.

There are many precedents for dictionary definitions of words being different from that which pedantic lawyers would insist upon. For example, take Champagne and Velcro. Champagne is simply sparkling white wine, but woe betide you if you make some white sparkling wine outside the Champagne region of France and label your drink Champagne. Similarly with Velcro. If your “hook and loop material” was not made by Velcro Corp. and you describe it in your sales material as velcro, you will have a letter from their lawyers soon after.

So if you are a pedantic lawyer type, then yes, full reserve banking is indeed banning banks. But if you are a normal human being, armed with a normal dictionary, then full reserve banking does not involve banning banks. It's merely switching to a different model of bank, like a different model of car.