So, here at last are the comments of one extremely well placed expert in the economy. (S)he said that I could put the comments on my blog, as long as I did not reveal their identity, or the organization for whom they work. But I can confirm that this is someone who works for a very significant internationally important organisation.
First there is the original invitation, followed by four of the main replies that I got. I actually have a long list of points that I used in my replies that I could also post. But for the timebeing, I just wanted to give an idea of the sort of argumentation used by experts in banking and finance to defend the status quo. Enjoy....
30 November 2014
(Note : this is the original invitation sent by Niko - it refers to my Youtube presentation that proposes that we should put an end to money creation in the Eurozone by commercial banks, and move that responsability to a public authority - essentially Positive Money's proposals, but at the level of the Eurozone)To: XXX
Subject: brain scientist on banking
our colleague simon thorpe has been developing an interesting proposal for the european economy...
https://www.youtube.com/watch?v=P1gcd8CYEEU&index=10&list=UUBzcvWOt_GeQM8hldUZxuIQ
any economists among us who could comment?
03 December 2014
( Note : this is the first reply that Niko got back from this well placed and knowledgeable specialist in banking and finance)
I don’t know who the guy is but after
checking on google scholar it seems he has more than 5k citations in his field.
Quite an impressive achievement. As such, he would be much better off staying
in his field without pretending to know something in economics.
The (ugly?) truth is that this guy ignores the very basic principles of monetary economics (on top of basic algebra.. like when he compares 1$ in year 1 with 1$ in year 20 pretending he’s talking about real quantities rather than nominal). In the video I think I lost count of the number of mistakes, some being so big that I came to the conclusion that he must have never open a single book of macro/monetary.
Let me give you one example. Let’s consider the very first slide (everything else being a direct consequence of this initial misunderstanding). The guy is arguing that the global financial crisis was generated by some issues in the way money is created (which, in turn might be true although in a completely different way with respect to what he thinks). In his opinion commercial banks create (from ’thin air’) 97% of the money supply which they then lend and charge an interest rate on it (by the way.. what about the remaining 3%? I guess it’s created by the aliens...). This constitutes an issue because, according to some (utterely wrong) back of the envelop calculations, the system would not allow private individuals and firms to pay back the debt. The solution according to Mr. Thorpe is to replace this system with an ‘interest-free money creation under the control of central banks and governments’.
So, in no specific order:
- Mr. Thorpe ignores that 100% of the money base is indeed already create by central banks. And that’s it.
- ‘Money’ (which loosely speaking is =
N times the monetary base) is indeed ‘created’ by financial intermediaries (not
only commercial banks as he said) but still (at least in normal times)
the central bank controls (directly or indirectly) the money in circulation
(typically by setting the interest rates.. actually one specific interest rate
- the ‘repo’, or overnight - and trying to influence the long term ones).
- Mr. Thorpe ignores that central banks
(at least in serious countries) are independent (although they remain public
entities) from governments and political power in general. The decision to
guarantee independence to central banks is based on 200 years of research, by
the way. The reason is to try to limit the incentive to monetise fiscal
deficits generating high levels of inflation and discouraging some sort of
fiscal discipline.
- Mr. Thorpe ignores (completely) what
economists generally call ‘the transmission mechanism’, meaning the mechanism
that indeed ‘transmits’ money created by the central bank to financial
intermediaries (first) and private institutions (second). The mechanism is
quite complicated (it’s generally split between a direct effect via money
markets and inflation expectations and an indirect effect via the so called
‘uncovered interest parity’ and the exchange rate… but you can forget about
this).
- Mr. Thorpe ignores that a
zero-interest rate policy (btw, is he talking about *nominal* interest rates or
*real*? and does he understand the difference? I guess he doesn’t) might not be
optimal. Actually, it might generate the very kind of excess risk-taking
behaviours he is pretending to solve.
- Mr. Thorpe ignores that what we call
‘money’ is an asset for anyone holding it, therefore it is a liability for
someone else (clearly, for the central bank). Therefore, it is a ‘debt’ (just a
special form of debt).
- Mr. Thorpe ignores the fundamental
reason for charging an interest rate (that he perceives as a theft). If you’re
curious why it is reasonable to charge an interest rate when lending some
money, there are 2 basic reason: first, it’s risky (the borrower might
default), second if agents are impatient (they prefer one egg today than the
chicken tomorrow), then 1$ today is not 1$ tomorrow (which instead is worth
**less**). Therefore you charge an interest rate in order to give up 1$ today
against 1$+something tomorrow.
- If Mr. Thorpe is seriously interested
in contributing to monetary economics he’s welcome. But he should avoid
watching the widely known ‘non-sense videos’ youtube is full off.
I think I could go on for a couple of hours but I guess there is no need (right?). So I better stop here, given also the fact that the video gets worse and worse as the minutes go by.
So bottom line is the following: there is an interesting line of intersection between neuroscience and economics. It’s called ‘neuronomics’. One of the best theoretical economist in the world (Michael Woodford, New York University) has been carrying out some important research and the results are simply brilliant (btw, Woodford might get - as I wish - the Nobel prize at some point although for very different contributions). Here is one example: http://www.columbia.edu/~mw2230/DDMASSA.pdf Everything else, at least to me, seems a non-sense. Being very explicit: this guy should study first. Or maybe he should stay in his field where, once again, he seems to be quite successful.
For the rest you can sleep being relaxed. There is no international conspiracy against you or the private sector. I am not paid by some commercial banks to ‘prevent you to know the truth’ (as Mr. Thorpe argues..). Finally, I should stress that the debate about the origin of the crisis (btw, what crisis are we talking about? The financial crisis? The debt crisis of the Eurozone?) and the possible solutions is open. However, I guess we can’t really take seriously the opinion of some random guy that never solved a single problem set. At least in the field where he pretends to make a revolution.
05 December 2014
( Note : this is the first mail that was addressed directly to me)
Dear Simon,
I took a moment and I checked your blog. It reminded me a scene in a movie (this one: https://www.youtube.com/watch?v=xKpYBStDLVA). So let me be as honest as the young Ernesto Guevara.
I took a moment and I checked your blog. It reminded me a scene in a movie (this one: https://www.youtube.com/watch?v=xKpYBStDLVA). So let me be as honest as the young Ernesto Guevara.
Man, it’s a disaster. As such,
you’d be much better off closing it. Clearly, this has nothing to do with your
reputation in your field where – as you kindly reminded us – you’ve been
extremely successful.
Now, unfortunately I don’t have the time to
reply to all your points. So I will pick up the first one and pretend I replied
to all of them (similar reasoning applies). You refer to this post (http://simonthorpesideas.blogspot.fr/2014/11/the-biggest-racket-in-history-how-banks.html) in which you say that the interest payments on the UK sovereign debt is
‘the biggest racket in history’. Here are my comments:
1) The most striking thing is that you really seem to ignore the difference between *nominal* interest rates and *real* interest rates. For this reason you assume that the high (nominal) rates in some periods was due to a ‘scam’ (quote: ‘the scam was most succesful in 1817 when they managed to extract over 10% of GDP in interest payments’). Oh, Key!!
2) You completely ignore the
difference between the fiscal side and the monetary side (the parallel for a
Doctor would be to ignore the difference between the heart and the stomach).
That’s why you put on the same level Bank loans and the public fiscal deficit
(when talking about G. Osborne).
3) You assume that the
interest payments are paid (from tax payers) to private banks only. Man, this
is UTTERELY WRONG.
The answers to the three points are as follows:
1) Nominal rates are set as a function of two components: the output gap and inflation. In modern economies the central bank has typically a mandate (sometimes a dual mandate) as stated above. When real rates (btw, do you really understand the difference?... well actually, do you know the difference at all?) are too low (or possibly negative) we have observed an excessive risk-taking behavior which was – according to many experts (I’m not on this point) – one of the roots of the financial crisis. You should realize that asking for a zero nominal rate as you do implies asking for a negative real rate, which in turn would exacerbate the issue. Full stop.
2) Here I’m not even sure what you mean but I guess you say something like ‘if Banks can create money so the treasury should do the same!’. Technically, what you’re saying is simply to monetize the debt: the treasury issues debt and the central bank buys is by issuing new money (please note that this *saves* tax payers money by avoiding to reimburse interest payments.. typically on the web people say the opposite but – again – ‘there are only 2 infinite things, the universe the ignorance [A.E.]’).
3) This point is the funniest. Man, at some point (at the beginning of the 1990s) in Italy the public debt was hold almost exclusively (95%) by…. ehm… Italian households. So basically tax payers were transferring money to creditors, essentially to themselves. This also explains why nobody ever tried to stop the crazy debt accumulation. If you think Italy is a special case, you’d better think again (ask to your friends how many hold some treasury bills (in Italian ‘BOT’, ‘CCT’, etc..)). And if you think that holding the public debt of your own country is a good idea, you’d better think again (it’s called ‘international risk sharing’ and I wrote my PhD on this). Think about it, it’s not difficult at all.
Finally, let me tell you that the Bank of England document you are referring to is indeed right. Everything written on that document is right. The problem is not the document. The problem is your ideological bias (as for people claiming there is an ‘international spectre’ or ‘ international conspiracy’, etc..). For this reason, I do not pretend to change your mind, I’m sure you wouldn’t no matter how hard I could try (btw, is this really what we should expect from a scientist? To me looks like a case of Dunnin-Kruger effect).
The answers to the three points are as follows:
1) Nominal rates are set as a function of two components: the output gap and inflation. In modern economies the central bank has typically a mandate (sometimes a dual mandate) as stated above. When real rates (btw, do you really understand the difference?... well actually, do you know the difference at all?) are too low (or possibly negative) we have observed an excessive risk-taking behavior which was – according to many experts (I’m not on this point) – one of the roots of the financial crisis. You should realize that asking for a zero nominal rate as you do implies asking for a negative real rate, which in turn would exacerbate the issue. Full stop.
2) Here I’m not even sure what you mean but I guess you say something like ‘if Banks can create money so the treasury should do the same!’. Technically, what you’re saying is simply to monetize the debt: the treasury issues debt and the central bank buys is by issuing new money (please note that this *saves* tax payers money by avoiding to reimburse interest payments.. typically on the web people say the opposite but – again – ‘there are only 2 infinite things, the universe the ignorance [A.E.]’).
3) This point is the funniest. Man, at some point (at the beginning of the 1990s) in Italy the public debt was hold almost exclusively (95%) by…. ehm… Italian households. So basically tax payers were transferring money to creditors, essentially to themselves. This also explains why nobody ever tried to stop the crazy debt accumulation. If you think Italy is a special case, you’d better think again (ask to your friends how many hold some treasury bills (in Italian ‘BOT’, ‘CCT’, etc..)). And if you think that holding the public debt of your own country is a good idea, you’d better think again (it’s called ‘international risk sharing’ and I wrote my PhD on this). Think about it, it’s not difficult at all.
Finally, let me tell you that the Bank of England document you are referring to is indeed right. Everything written on that document is right. The problem is not the document. The problem is your ideological bias (as for people claiming there is an ‘international spectre’ or ‘ international conspiracy’, etc..). For this reason, I do not pretend to change your mind, I’m sure you wouldn’t no matter how hard I could try (btw, is this really what we should expect from a scientist? To me looks like a case of Dunnin-Kruger effect).
In the meanwhile, I will read – with great pleasure – some of your great scientific contributions.
Take care,
XXX
P.S. Please feel free to put whatever on your
blog. However, my name cannot be displayed since I would violate my contract
(we cannot make any public statement). Thanks.
7 December 2014
(Note : this is a reply to a mail where I strongly recommended reading the
paper by Jaromir Benes and Michael Kumhof from the IMF called
"The Chicago Plan Revisited". It's a paper that critically
examines the proposal made by
several prominent economists in the 1930s, notably Irving Fisher, to end
fractional reserve banking and move to a 100% reserve system in which
banks can only lend money that they actually have).
Oh God,
You must be kidding (byt, now I understand some of the funny mistakes you made in your video.. they come from the fact you really did not understand the IMF paper!).
So let me recap: first you say that the system is obscure and that there is a some sort of secret that someone is not willing to reveal (because (s)he is paid not to..). THEN, in order to support your idea you quote.... ehm.... an IMF working paper talking about a Chicago proposal!!
Man, you're a great joker!
So, first of all let me remind you (given that you called me an 'hortodox economist') that the IMF is the kingdom of hortodoxy. Moreover, among academic schools, the Chicago school is notably the most extreme (right-wing) liberal (hortodox and neoclassical!) school.
Essentially, you've just shoot on your feet without knowing it. Well done.
In any case, about the proposal (as I mentioned earlier) I am not an expert (rather, I work on fiscal issues). However, the proposal has been dismissed for a large number of issues which the model you pointed at did not consider (any model has to simplify somehow the reality.. as such, before reaching consensus we typically require hundreds of models to be examined.. hundreds of rats need to die before we can say something for 'sure' and test it in the real world).
The criticisms to the Chicago proposal are publicly available (you can easily find dozens of papers). Some of them are more technical (like this one: http://www.uni-wh.de/fileadmin/media/w/w_i_wiwa/Money_Credit_Banking_Paper/1_b_Baeriswyl.pdf), some of them are less technical (such as this one: http://static.squarespace.com/static/515eaee9e4b0daad6e7d3fac/t/52dbc153e4b0a15b94a2b432/1390133587751/On+BenesKumhof+The+Chicago+Plan+Revisited+Jan+2014.pdf), others are non technical at all (such as this one: http://ralphanomics.blogspot.com/2012/08/imf-authors-get-full-reserve-wrong.html).
Also, please note that under the Chicago proposal the money base would need to EXPLODE to sustain economic growth (in comparison QE would be like buying peanuts..). The technical implications of this measure are discussed in some of the papers you can find on-line.
Finally, let me also stress something that is driving me crazy. I guess that your confusion between NOMINAL and REAL interest rates comes from the fact that in the IMF model the **STEADY STATE** inflation is zero (in that case nominal and real rates coincide). If so man, you better think again. A zero **STEADY STATE** inflation rate does NOT imply a zero inflation rate in the world!!!!!!! This is just a simplifying assumption in models which is done to better see the consequence of a shock (you shock the model and they ask 'how inflation deviate from its natural level (which is POSITIVE)?). This point has also been discussed technically by this paper: https://www.ifw-kiel.de/ifw_members/publications/trend-inflation-taylor-principle-and-indeterminacy/kap1332.pdf.
Guys, I'm done. Really, I'm done. [...].
Take care,
You must be kidding (byt, now I understand some of the funny mistakes you made in your video.. they come from the fact you really did not understand the IMF paper!).
So let me recap: first you say that the system is obscure and that there is a some sort of secret that someone is not willing to reveal (because (s)he is paid not to..). THEN, in order to support your idea you quote.... ehm.... an IMF working paper talking about a Chicago proposal!!
Man, you're a great joker!
So, first of all let me remind you (given that you called me an 'hortodox economist') that the IMF is the kingdom of hortodoxy. Moreover, among academic schools, the Chicago school is notably the most extreme (right-wing) liberal (hortodox and neoclassical!) school.
Essentially, you've just shoot on your feet without knowing it. Well done.
In any case, about the proposal (as I mentioned earlier) I am not an expert (rather, I work on fiscal issues). However, the proposal has been dismissed for a large number of issues which the model you pointed at did not consider (any model has to simplify somehow the reality.. as such, before reaching consensus we typically require hundreds of models to be examined.. hundreds of rats need to die before we can say something for 'sure' and test it in the real world).
The criticisms to the Chicago proposal are publicly available (you can easily find dozens of papers). Some of them are more technical (like this one: http://www.uni-wh.de/fileadmin/media/w/w_i_wiwa/Money_Credit_Banking_Paper/1_b_Baeriswyl.pdf), some of them are less technical (such as this one: http://static.squarespace.com/static/515eaee9e4b0daad6e7d3fac/t/52dbc153e4b0a15b94a2b432/1390133587751/On+BenesKumhof+The+Chicago+Plan+Revisited+Jan+2014.pdf), others are non technical at all (such as this one: http://ralphanomics.blogspot.com/2012/08/imf-authors-get-full-reserve-wrong.html).
Also, please note that under the Chicago proposal the money base would need to EXPLODE to sustain economic growth (in comparison QE would be like buying peanuts..). The technical implications of this measure are discussed in some of the papers you can find on-line.
Finally, let me also stress something that is driving me crazy. I guess that your confusion between NOMINAL and REAL interest rates comes from the fact that in the IMF model the **STEADY STATE** inflation is zero (in that case nominal and real rates coincide). If so man, you better think again. A zero **STEADY STATE** inflation rate does NOT imply a zero inflation rate in the world!!!!!!! This is just a simplifying assumption in models which is done to better see the consequence of a shock (you shock the model and they ask 'how inflation deviate from its natural level (which is POSITIVE)?). This point has also been discussed technically by this paper: https://www.ifw-kiel.de/ifw_members/publications/trend-inflation-taylor-principle-and-indeterminacy/kap1332.pdf.
Guys, I'm done. Really, I'm done. [...].
Take care,
XXX
8 December 2014
(Note : This final message where our specialist was clearly getting more and more exasperated at having to explain to someone as stupid as me everything that I got wrong).
Guys,
Now, I don't want to sound rude but I think I'm done. With respect, I think I have already spent too much time correcting your mistakes and wrong beliefs. It would take me another 3 hours to reply to all the mistakes that I read in the reply e-mails (such that the point about the ECB.. for your information the ECB is buying government securities at an unprecedented pace.. so what the hell are you talking about???? You don't even understand the difference between a policy mistake - the previous constrain of the ECB which was indeed true but not anymore at least on the secondary market - from a general rule which is not existent (!) since the FED, BoE, BoJ etc.. can buy whatever whenever and indeed they do so your statement as usual is just misinformed populism). As I specified earlier, I don't want to convince people that do not want to change mind on top of not having a clue.
Yes, I sound arrogant. And I am arrogant.
However, before saying good bye let me copy and paste some comments of Professors of Economics made on Facebook (you can check on my wall although I tagged some people copied here) when I shared Simon's video. Please note that I do not do this for any particular personal reason. I do this for you guys, so that you can understand what kind of reactions you can have by the people you call 'hortodox economists' (although they are really not). Again, it's for you hoping that you might reconsider the way you deal with econ issues.
Now, I don't want to sound rude but I think I'm done. With respect, I think I have already spent too much time correcting your mistakes and wrong beliefs. It would take me another 3 hours to reply to all the mistakes that I read in the reply e-mails (such that the point about the ECB.. for your information the ECB is buying government securities at an unprecedented pace.. so what the hell are you talking about???? You don't even understand the difference between a policy mistake - the previous constrain of the ECB which was indeed true but not anymore at least on the secondary market - from a general rule which is not existent (!) since the FED, BoE, BoJ etc.. can buy whatever whenever and indeed they do so your statement as usual is just misinformed populism). As I specified earlier, I don't want to convince people that do not want to change mind on top of not having a clue.
Yes, I sound arrogant. And I am arrogant.
However, before saying good bye let me copy and paste some comments of Professors of Economics made on Facebook (you can check on my wall although I tagged some people copied here) when I shared Simon's video. Please note that I do not do this for any particular personal reason. I do this for you guys, so that you can understand what kind of reactions you can have by the people you call 'hortodox economists' (although they are really not). Again, it's for you hoping that you might reconsider the way you deal with econ issues.
- One Professor of Economics wrote: "One thing is that the guy is a lunatic, the really scary thing is that a lot of people buy this nonsense... He sounds like a creationist mumbling his way against evolution"
- Another Professor wrote: "This is absolute horseshit. If you have a society in which people are allowed to lend and borrow, debt will exist. Now banks, as we know them, have created a secondary market for this debt meaning that any creditor can pass on his credit already today, even if the debt will mature at some other time. However, by making this secondary market extremely liquid through bank guarantees (which are credible because of capital and reserve requirements), the debt effectively creates "money". But this is NOT out of "thin air". Banks are not Jesus. They turn illiquid assets into liquid, and that's it. Wtf is wrong with people?"
I guess the reply is that they 'defend the system' in which Banks create money 'out of thin air'.. or that 'M0 outside the UK is really obscure' (when in fact, it's absolutely transparent) and so on. If you want to continue thinking that you are right fine with me. You are right, you are the good guys that act for the people, we are the bad guys defending the system and 'protecting' the bankers (despite the fact that hundreds of Banks in the US fail each year.. yes, each year: http://www.online-stock-trading-guide.com/2010-us-bank-failures.html).
I tried to tell you the ugly truth before: your blog - unfortunately - together with your videos are a non-sense. As such, you should close them and re-start from zero. But it's your name and your reputation so you know better than me. The good news is that in your field you are an excellent scientist, you should be glad of your success (something I guess I will never reach in my lifetime in my field).
Guys, if you want to understand monetary economics go to the faculty of economics and sit for undergrad courses. Do not pretend you understand econ because you watch a youtube video or read something somewhere on the web. Otherwise you will always make the same mistakes and it will be useless trying to make you update your beliefs. I've always been a terrible teacher (that's why I choose policy against academia) and I am arrogant so I guess I am really not the person you want to talk to.
But again, it's me. I am arrogant (which is indeed true) and I defend the current system in which Banks create money 'out of thin air' and make a lot of profit on the shoulders of tax payers (which is just a populist statement).
Take care and if you publish a paper let me know, I'll read it with pleasure.
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