Thoughts on Monetary Policy

With respect to the last post, I'd like to make some further comments.

Two aspects of the video stand out as proposals for monetary reform:
1. Who controls the money supply? The video says the government should.
2. What kind of leverage in the banking system? The video says no leverage at all.

With respect to the first, I think the government already controls the money supply even though the Federal Reserve is said to be private. If it were truly private, the profits from operations would go to private individuals, but it goes to the Treasury. Therefore, it isn't truly private.

The video makes a big deal out of the debt, and it is true that debt is a problem because there's too much of it. However, when the government monetizes the debt, which is precisely what this video advocates, the interest on the debt goes to the Federal Reserve, which, in turn, remits it to the Treasury. The debt, therefore, goes out of one pocket into another. Both pockets belong to the government, so there is not net exchange.

For the other debt that isn't monetized, the interest goes to private hands. It is this that video proposes to do away with. I'm not so sure that is a good idea. Debt is a way to impose discipline upon the system. If money can be printed to fund everything, what reason would the government have to impose economies upon operations? When there are debts, the government is required to set priorities and behave responsibly. Therefore, I am against the removal of debt from the system.

The government still controls the system and can impose inflation upon its creditors. There's no loss of control. For all intents and purposes, we already have the "greenback system" that the video speaks so well of. In my opinion, that has its limitations and is not a panacea by any means.

As for the second proposition, how much leverage in the banking system, I'd tend to want to focus in on that a bit more than the first. Why? Leverage is inherently risky. With less leverage, there's less risk. With no leverage at all, there's little risk. But once again, do you really want to go that way and remove all risk to the system? No risk also means little reward.

By the way, the Federal Reserve already has authority over leverage or reserve requirements. The reserve requirements, which means how much the bank must keep on hand to pay depositors on demand, determines the leverage. Economists like to call it the "multiplier effect". As leverage increases the multiplier effect also increases as the reciprocal of the reserve requirement. For example, if the reserve requirement is 10% of deposits, the multiplier effect would be 1/.1 or 10. That means the banking system is leveraged ten to one. That is a lot of leverage and it may be the amount of leverage currently in the system.

If you want to reduce risk of financial meltdowns, you may want to adjust the risk by having the Federal Reserve increase the reserve requirements. This reduces leverage and makes the system a bit more stable. But to go all the way and require 100% would eliminate all risk to the system. Would this be a good idea? To be honest, I don't know what would be best. The video showed some examples of no leverage and extolled its advantages. I'd think this would require some extensive study in order to determine if this is the way to go or not. I'm not so sure that the entire system should be run this way.

In short, the proposals indicated in the video are not too far from what we already have. The government has effective control over the money supply, and the amount of leverage in the system. What is different is the removal of all leverage from the system and all debt. This should not be jumped into without carefully examining the consequences, which may not be what the authors of the video believe.