Starter Savings Accounts

So, here’s a thing I think we should do.

The Federal government should offer inflation-protected savings accounts to individual citizens, but with a strict size limit of, say, $200,000. These accounts would work like bank savings accounts, and might even be administered by banks. But deposits would be advanced directly to the government (reducing borrowing by the Treasury), and the government would be responsible for repayment. The accounts would promise a tax-free real interest rate of 0% on balances up to the limit. Each month, accounts would be credited with interest based on the most recent increase in the Consumer Price Index (adjusted for any revisions to estimates for previous months).

The purpose of this plan would be to offer a no-frills, low risk savings vehicle for middle-class workers. Ordinary bank savings accounts no longer do the job. They already pay negative real interest rates, and those rates might well get worse if we experience more inflation. TIPS don’t do the job. They expose savers to interest rate risk and liquidity risk. Small savers must compete with large savers for the same very limited pool of securities, resulting in negative yields. The option implicit in the floor on principal isn’t easy to price. It takes a degree of risk-tolerance and sophistication to manage a portfolio of TIPS that we ought not demand of waitresses and schoolteachers. They should be able to just open an inflation-protected savings account at their local bank.

Republicans should love this proposal. It would reward “virtuous” savers who are currently punished by negative real rates, and the benefit would be tilted upwards towards the relatively prudent and productive. People with substantial savings gain more from the tax and interest rate subsidy than people putting just a few dollars away. Democrats should love it too, as rewarding savers is a bipartisan trope, and the $200,000 limit keeps it a middle-class program, preventing a huge giveaway to the top 1%.

These “starter savings accounts” would be a popular vehicle for ordinary people who want convenience and safety with as little entanglement as possible in casino finance.

But the real benefit would be macroeconomic. “Market monetarists”, MMTers, and old-fashioned Keynesians love to squabble with one another, but they have a great deal in common. By whatever combination of monetary and fiscal policy, in a depression, all these groups agree that some manner of expansionary intervention should be pursued to maintain spending and effective demand. But any such policy increases the risk of inflation, and so is opposed by people holding debt or fixed-income securities. The people with the most to lose from inflation are the very wealthy, who hold a disproportionate share of financial claims. But middle-class savers value their small nest eggs just as dearly, and make common cause with multibillionaires to oppose inflation. By providing means for small savers to protect themselves from inflation when intervention is called for, we can stop the very wealthy from using middle-class retirees as human shields, and thereby create political space to adopt expansionary policy.

The existence of these accounts would be mildly contractionary, as smaller savers could no longer be scared into spending by the threat of inflation. But while pushing small savers to spend their way into precarity might contribute to short-term GDP, the overall costs of that approach probably exceed the benefits. Expansionary policy should encourage consumption and investment by people with the means to bear risk rather than threaten the savings of people who cannot afford to spend.

The limited size of “starter savings accounts” would leave the wealth of large savers at risk, and with fewer places to hide. That is as it should be. The risk of the aggregate investment must be borne by someone. Patterns of aggregate investment are determined by the behaviors of savers, or the people to whom they directly or indirectly delegate investment decisions. If we want a high quality of investment, we have to ensure that these investors bear the cost when aggregate investment disappoints. All savers would enjoy protection of their “starter savings”, but people trying to push large sums of wealth into the future would have to take responsibility for directing the use of their capital, and for monitoring the quality of the institutions through which capital is allocated generally. When the process fails, when capital allocation goes badly awry, large savers would bear the costs directly via writedowns or indirectly via inflation. It will be hard to push for bail-outs when middle-class nest eggs are insulated from the vagaries of capital markets and banks. It will be hard to push for austerity when middle-class nest eggs are immune from inflation. Wealthier savers would still be protected from penury, if they wisely max out their starter savings accounts before piling into CDOs and auction-rate securities.

The program proposed would, for now, be a subsidy to small savers, since real risk-free interest rates are negative. In better times, the program would impose a small “tax”, because the government would pay less to depositors than the positive real rates it pays on other borrowings when the economy is growing. But this would not actually be a tax, because participation would be optional. When times are good, banks and brokers will relentlessly encourage savers to migrate into higher yielding assets. Savers may choose to buy whatever Wall Street is selling, or to stick with what is simple and safe. Even in good times, a guaranteed, perfectly liquid, inflation-protected savings vehicle would be popular with many savers. Starter savings accounts would be a useful and voluntary program with a negative fiscal cost.

Some practical considerations:

  • Limiting the size of the accounts is absolutely crucial. Failing to do so could put the finances of the state into dangerous jeopardy. A currency-issuing government’s nominal “debt” is best classified as equity. Inflation-protected debt is much more debt-like, and can put the solvency of the state into question. Nominal debts can always be repayed in extremis by printing money. But that is not true of inflation-protected debt, on which a government may be forced to default, overtly or tacitly (by corrupting the inflation indices). The US government, very wisely, keeps its TIPS issuance very small. It should keep the aggregate size of the starter savings program small as well. At $200,000 per person, the program could succeed catastrophically if the relatively well-off take to it en masse. To manage this, the government might set a ceiling on the aggregate size of the program (perhaps 25% of GDP), and adjust the limit of inflation protection as necessary to remain beneath the ceiling. (The government would announce periodic adjustments, up or down, to the limit. The government would pay the ordinary 30-day Treasury bill rate on balances above the inflation protection ceiling.)

    Alternatively, the government could discourage overuse by publishing a diminishing real-interest rate schedule, so that the first few thousand dollars in an account would accrue interest at a sharply positive real rate while “late” dollars are punished with ever more negative real rates.

  • The accounts would have to be nonhypothecable. To put that in English, loans and other contracts that pledge the contents of these accounts as security should be prohibited and unenforceable. Otherwise, when real interest rates are negative, financial engineers will bundle loans secured against many poorer individuals’ accounts into unlimited sized accounts for rich people. This sort of indirect use of the accounts is impractical if the loans are unsecured and their repayment is at the discretion of the borrower. (Every sort of contractual encumbrance or automatic withdrawal should be prohibited, to prevent schemes where administering banks enforce security arrangements that the law would not.)

Often my proposals are pie-in-the-sky, after-the-revolution sort of affairs. But this one strikes me as practical, achievable within the present political context. “Starter savings accounts” would represent a form of middle class social insurance that I think a lot of people are thirsting for. They would have a small near-term fiscal cost, and would likely pay for themselves over the long-term. Since the program would be structured as personal savings, it flatters the American policy establishment’s devotion to “bourgeois virtues“. I think the existence of these accounts would open up a great deal of political space for better macroeconomic policy. They would reduce resistance to expansionary monetary/fiscal intervention. They would reduce the press for bailouts and corrupt reflations when the stock market swoons or some megabank coughs blood. Shouldn’t we do this?

 
 

89 Responses to “Starter Savings Accounts”

  1. D writes:

    In cases of deflation, do money get taken out? Or are we assuming the Fed will never let that happen?

    Also in my mind, I think of inflation as partially psychological, almost like a bank run where people try to beat everyone else to get rid of their ever less valuable currency. Would a creation of such an account be in of itself inflationary? Perhaps I’m way off with this.

  2. Steve Randy Waldman writes:

    D — Yes, accounts would be charged a fee in the case of outright deflation. Which would enhance the political consensus against tolerating deflation.

    Inflation definitely is like a bank run, and in a sense this proposal encourages people to flee nominal dollars for claims on a basket of consumer goods. But those claims are synthetic and not redeemable. it’s hard to see how people putting funds into a savings account (or buying TIPS) drives up the dollar price, of say housing rentals (which constitute a big part of CPI). If people fled nominal dollars into redeemable claims on apartments, then apartment rents in dollar terms would rise as the portfolio shift bid up limited supply. But no apartment supply is used up by purchasing a claim on CPI, and since no one can take a short position in the account, there’s no arbitrage that involves buying up the real goods in the CPI basket and then selling claims to saver. The only mechanism I can see that would contribute to inflation is the higher-than-market interest rate (when market savings rates are negative in real terms).

    You’re certainly not way off. It’s an interesting point, a serious issue worth addressing.

  3. [...] Why we need a simpler, expanded version of I Savings Bonds. (Interfluidity) [...]

  4. jean writes:

    What you propose sounds very close to the french “Livret A” http://www.french-property.com/guides/france/finance-taxation/banking/savings/regulated-savings-accounts/

    The ceiling amount is much lower but you can’t loose money in case of deflation.

  5. Steve Roth writes:

    Damned interesting. Random thoughts:

    Maybe unintentionally, you’re hitting on a notion that I’ve asked your opinion on — full-reserve banking. See my comment here:

    http://shewingthefly.com/2012/01/30/richard-williamson-smackdown-watch-richard-williamson-edition/#comment-847

    Also available through post offices? Certainly not unheard of:

    http://www.postoffice.co.uk/counter-services/counter-money-services

    Who provides the online services — the web site — for these accounts? The intermediary banks (post office)? Treasury?

    Seems like this would be a big step toward effectively, in a sense, re-instating Glass-Steagall — or even a (big?) step beyond? Separating deposit-taking/storage/account services from lending. People would withdraw their deposits from lending institutions in favor of effectively lending it to the government. Effect on private-sector lending, and interest rates?

    This gets me into the depths of the monetary-policy/deficit-spending game-theory implications of this change, which will require quite a bit more thinking….

    But I did come to this tentative conclusion (with JKH’s help) in the comment linked above:

    “I think this answers my question: yes, the ecosystem would probably result in enough bank capital and associated lending that credit outstanding would end up being approximately the same.”

  6. Steve Roth writes:

    Damned interesting. Random thoughts:

    Maybe unintentionally, you’re hitting on a notion that I’ve asked your opinion on — full-reserve banking. See my comment here:

    http://shewingthefly.com/2012/01/30/richard-williamson-smackdown-watch-richard-williamson-edition/#comment-847

    Also available through post offices? Certainly not unheard of:

    http://www.postoffice.co.uk/counter-services/counter-money-services

    Who provides the online services — the web site — for these accounts? The intermediary banks (post office)? Treasury?

    Seems like this would be a big step toward effectively, in a sense, re-instating Glass-Steagall — or even a (big?) step beyond? Separating deposit-taking/storage/account services from lending. People would withdraw their deposits from lending institutions in favor of effectively lending it to the government. Effect on private-sector lending, and interest rates?

    This gets me into the depths of the monetary-policy/deficit-spending game-theory implications of this change, which will require quite a bit more thinking….

    But I did come to this tentative conclusion (with JKH’s help) in the comment linked above:

    “I think this answers my question: yes, the ecosystem would probably result in enough bank capital and associated lending that credit outstanding would end up being approximately the same.”

  7. anon writes:

    The nice thing about your plan is that it promises a _tax-adjusted_ return of 0%, which is more than can be said of most safe investment opportunities. However, I think putting a floor on returns is a bad idea, even for individual accounts–there’s nothing wrong in principle with negative real rates. Instead we should change the way of computing investment income so that returns up to the long-run inflation rate are untaxed. And use monetary policy to boost real growth: excessively tight money is actually bad for savers (even bond savers, to an extent) since it tends to depress natural rates and make systemic crises more likely.

    (As an aside, this is an argument against your “finance as a con” argument. The financial system can minimize idiosyncratic risk, and systemic risk is actually EXTREMELY rare; it’s mostly about e.g. oil shocks and the like. Most of what is blamed as “systemic risk” is really due to bad macro policy.)

  8. I love this idea, but I don’t think there is much chance Republicans would go for it. It’s a big new government program, and as as we all know, government is in each and every instance the problem. Plus, if Obama even mentioned it favorably, it would instantly get branded as the latest freedom-destroying socialist boondoggle in the Democrat War on Capitalism, even if we could find some Heritage Foundation paper from 2007 proposing the very idea.

    Perhaps if you played it right–get a couple of backbenchers from each party to propose it, thereby anointing it with the sacred oil of bipartisanship–but I doubt it.

    Worth a shot, though.

  9. Detroit Dan writes:

    The use of the term “solvency” is unfortunate, IMO…

  10. RichL writes:

    The main problem I see is that the unsophisticated investor will yawn at the “opportunity”.

    If you wish to promote savings, and also appeal to man’s baser instincts, you could do worse than the UK’s premium bond scheme, which basically offer a lottery-style return.

    see- http://en.wikipedia.org/wiki/Lottery_Bond

  11. Patrick Earnest writes:

    My back of the envelope calculation for 300 million Americans has the total savings limit being $60 trillion. At 25% of GDP, with last year being $14.58 trillion, we’re talking about $3.6 trillion, so maxing the accounts of about 18.2 million Americans.

    I might suggest a limit of $100,000, or even $50,000. I think working this idea into Lifetime Savings Accounts would also be a good policy idea.

  12. [...] Starter Savings Accounts – via http://www.interfluidity.com – The Federal government should offer inflation-protected savings accounts to individual citizens, but with a strict size limit of, say, $200,000. These accounts would work like bank savings accounts, and might even be administered by banks. But deposits would be advanced directly to the government (reducing borrowing by the Treasury), and the government would be responsible for repayment. The accounts would promise a tax-free real interest rate of 0% on balances up to the limit. Each month, accounts would be credited with interest based on the most recent increase in the Consumer Price Index (adjusted for any revisions to estimates for previous months). [...]

  13. Max writes:

    “Limiting the size of the accounts is absolutely crucial. Failing to do so could put the finances of the state into dangerous jeopardy.”

    GDP linked debt would be safer. That protects you from inflationary growth, but not an inflationary depression.

  14. [...] Starter Savings Accounts – interfluidity [...]

  15. Nick Rowe writes:

    Hmmm. Doesn’t this add a Zero (Real) Lower Bound to the existing Zero (Nominal) Lower Bound?

  16. Ramanan writes:

    SRW,

    You are thinking of a “fair” rate of interest I guess.

    While your post is about the implementation – because of there being a difference between the central bank rate of interest and that on bank deposits – here is one idea about fair rates itself (without the implementation part).

    “The real interest rate could be set at its fair level, which, according to Pasinetti, is equal to the trend rate of growth of labor productivity. With such a fair rate of interest, the earnings of one hour of labor, when they are saved, allow its owner to obtain a purchasing power that is equivalent to that obtained with the earnings of one hour of labor in the future.”

    I guess since the paper talks of the real interest rate net of taxes, the above would also be so.

    http://www.levyinstitute.org/pubs/wp_494.pdf

  17. Jean — Very interesting. I didn’t know about those regulated savings accounts in France. They look like an effort to ensure some kind of “decent” simple savings vehicle for the general public, although without an inflation linkage, they don’t prevent accountholders from having reason to oppose inflationary macro.

  18. Steve R — Anyone could really provide “front-ends” for these accounts: independent websites, post offices, Wal-Mart, etc. They’d be accounts held with the state, but the state’s not in the business of high quality UI or customer service. I suggested legacy banks, because that is where people are accustomed to going for this sort of thing, and because it might co-opt away at least a bit of the lobbying by bankers who will naturally hate competition from a “public option”. If banks themselves provide access to the public option, they at least have opportunities to create relationships for payments and checking, and to try to “upsell” customers on other savings vehicles. But that’s just politics: I’d be just as happy or happier to see a universe of startups run the front-end of these accounts, maybe with a Western Union style bricks-and-mortar component that ends up turning grocery stores and pharmacies into banks.

    This is a kind of full-reserve banking, but note that it leaves the “fractional reserve” system in place. It would reduce the availability of deposits to the traditional banking system, but the traditional banking system is not deposit constrained (as the MMTers love to remind us). There would be little reduction of credit availability, because banks can still acquire liquidity at the central-bank-set interbank rate. There would have to be a shift in regulatory norms. Regulators pay attention to retail deposits as a marker of the stability of bank funding, and retail deposits would become scarcer to private banks, so they’d have to tolerate lower quality. But ultimately, insured retail deposits tell regulators nothing about the quality of a bank’s lending or its solvency, only the probability to which a bank might have to rely on liquidity support from the interbank market or the Fed discount window. Making “sticky deposits” harder to come by doesn’t really affect bank safety or create extra risk for the deposit insurance system.

    Ultimately, this proposal would not bring the safety and transparency that full-reserve banking proponents would like, where funders of banks either hold claims on government obligations or else knowingly assume the risk of the bank’s lending portfolio. It would increase the degree to which the funders of banks are businesses and/or wealthy individuals rather than retail savers, but those businesses and wealthy individuals would still have “money in the bank” that was mostly lent away, and would still expect their deposits to be “safe” despite being lent for investment. Again, this would add a “full reserve” option to the banking system, but it wouldn’t replace or eliminate the existing system.

  19. anon — There is very much nothing in principle wrong with negative real rates, but there is something wrong with them in practice: savers bitterly resist them, and resist the inflationary policies that would provoke them. This is a proposal to buy off the multitudes of small savers with immunity so that economically necessary negative real rates for the marginal saver — high-net-worth and institutional money &mdashl can be made politically tolerable.

    Whether “excessively tight” money is bad for savers depends very much on the individual saver. The argument that “everyone benefits from expansionary policy because real rate will rise” is oversimplistic, often not true, and too indirect to persuade nervous savers even when it is true. Savers hold assets with duration, so the benefits of an increase in real rates may be overwhelmed by capital losses. Further, many savers have an asymmetric risk profile: their savings are sufficient to cover their needs under price stability. Even where the modal result of expansionary policy would be an improvement in their position, they rationally prefer to avoid the risks associated with looser money or fiscal stimulus. Why risk a 10% chance of an inflation that would seriously harm you, if you are pretty much set under the status quo?

    This is a reorganization, not a contradiction, of my “opaque finance” argument. “Starter savings account” would very much be opaque finance: savers would have no idea of the use or purpose of their “investment”, would deem themselves to be “deserving” of no risk of loss, and would struggle against rather than accept any part of systemic losses one tried to impose upon them ex post. Funding the state is always opaque finance. This is more opaque than usual, because ordinary investors in government securities accept to some degree the risk of loss of purchasing power due to inflation (although of course they do not consider policies that would impose those losses “legitimate”, politically work in favor of tight money, and might try to demand accommodation ex post if “normal” inflation rates were exceeded). Funders of “starter savings account” would not acknowledge even assuming any risk of loss due to inflation.

    Not all “opaque finance” is normatively equivalent. The sine qua non of opaque finance is that allocation of costs in the event of loss occurs ex post via social and political conflict, as no one has willingly assumed the risk ex ante. Opaque finance via the state is in a sense the most transparently opaque form of finance, because it is obvious that the allocation of losses, if the state cannot make good on all of its obligations in real terms, will be a matter of political struggle. With private opaque finance, politically determined loss allocations are shabbily disguised as market processes, which strikes me as much more dangerous and corrupting than overtly political contests won or lost.

    Systematic risk is always with us, and systematic shocks are not infrequent. Poor quality allocation of capital whose suppliers were promised positive real returns leads to games of musical chairs where not all promises can be kept. I agree that poor macro policy makes systematic shocks more likely, and it is often the case that energy price shocks attend negative systematic shocks, because the process of investing poorly is often energy intensive, and because when bad outcomes are revealed, claims on “simple” commodities become more attractive as wealth stores than claims on potentially shoddy investment projects. All that being true, we’re very far from being done with poor macro policy, and can expect continuing adverse systematic shocks going forward. The period from 1945 to the middle 1960s where there seemed not to be many systematic disappointments was the exception, not the norm that our collective intuitions try to pretend it should be.

  20. Ryan — I won’t pretend to know what can and can’t be sold politically within our dysfunctional and often detestable political institutions. Perhaps you are right. I’m used to concocting schemes knowing that the best I can hope is that they’ll be remembered and kept in collective reserve when a severe crisis makes real change possible.

    Still, I am more optimistic about this one. Republicans do have a long history of supporting tax-advantaged individual savings programs, which this would be. From a Democratic perspective, this is a public option in banking. As you suggest, there’s an art to generating simultaneous support under two very different framings, without having the other-side’s framing generate knee-jerk hostility. But the common cause made between progressives and Ron Paul “sound money” types in pushing for transparency at the Fed gives me at least a bit of hope. (After all, the Ron Paul types want to end the Fed in favor of a gold standard, something that progressives would oppose aggressively.)

  21. Detroit Dan — In this case, I think the use of “solvency” is appropriate. When a government issues inflation-protected liabilities, it is no longer issuing securities payable in its own currency, but in a basket of goods and services. A basket of goods and services is like a foreign currency, something the liability issuing government cannot just print. So a government that funds itself primarily with inflation-protected liabilities is more like a European country with debt in Euros than a sovereign currency issuer. So it is very important, in order to maintain the accuracy of the MMTish intuition that solvency is not an issue for sovereign governments, that the degree to which the state issues inflation-protected debt is small relative to the real capacity of the sovereign to tax. If the US were to fund itself 100% with inflation protected liabilities, solvency would be an issue in a very conventional sense. If the US funds a modest fraction of its debt with inflation-protected liabilities, it can retain the privileges of sovereignty that render “solvency” a very loose and flexible sort of constraint.

    (There is some play even with inflation protected liabilities in the fact that the government gets to define what inflation means. But the fact that a government which has issued inflation-protected liabilities can ensure its solvency by fudging the inflation indices shouldn’t be too comforting.)

  22. RichL — Poor savers quite rationally prefer lottery-style returns to low interest rates on savings, and that’s a fact we should pay more attention to and make more use of, independently of this proposal.

    This proposal is intended for middle-class savers, people who are politically enfranchised already and who hold nest eggs 50K, 100K, even 200K of liquid savings that they wish to protect. It is not a solution for the poor directly, and it is almost cynically pragmatic about status quo politics in the US. People in the fourth decile of wealth currently side with “the 1%” in opposing expansionary policy. This is an attempt to protect those peoples’ interests in order to get them to switch sides. People with 100K of wealth often do not want lottery-style returns: they are desperate to retain the purchasing power of their nest eggs. Some of those people are willing to bear investment risk in hope of achieving high real returns, but many “savers” are compelled to throw their nest eggs into long-term bonds or index funds and whatnot just to preserve the purchasing power of their wealth. This gives those people another option, one that is immune from the hazards of policies like NGDP targeting.

  23. Alan writes:

    Steve:

    This type of treasury offering already exists, albeit in limited size, in the form of Series I U.S. Savings Bonds, available through a TreasuryDirect account (and in paper form as an alternative to an income tax refund). Annual limit per person is $10,000 and $5,000 respectively. A few details: monthly compounding, adjusts semi-annually, can’t redeem for first year and thereafter can redeem at will but forfeit last three months’ interest if redeemed prior to 5 years, 30 year max. term, pays un-seasonally adjusted CPI-U plus a fixed spread (currently 0.0%). Cannot go down in value month to month (i.e., even if sum of CPI and spread is negative it will be treated as zero). Interest income can be postponed to time of redemption or paid as you go annually. These are good today and were really good when the spreads were 3.6% several years ago!

    Alan
    Livingston NJ

  24. Patrick — Your back of the envelope math is the same as mine, but it’s a tricky empirical question. Most users of these accounts wouldn’t max them out at $200K, for the simple reason that relatively few people have that kind of money as liquid, non-retirement assets. Some fraction of retirement assets would be deposited in these accounts, but much less than nonretirement money. Retirement money enjoys the benefit of a guaranteed real return, but doesn’t benefit from the tax and liquidity advantages of the account, and with a long time horizon, is more risk-tolerant than other sources of funds. So while near-retirees and very conservative retirement investors would take advantage of these accounts, it is the nonretirement savings of middle class professionals that would fill these accounts, and most of them wouldn’t have 200K to put in them. (Most middle class professionals’ retirement accounts are less than 200K, unfortunately.) Many very wealthy people would undoubtedly max out their accounts, but they are a relatively small fraction of the US population. Some attention would have to be paid to abuse of children’s accounts, but there is already a 13K per parent limit on tax-free gifts to kids, so the kids of the very wealthy would fill their accounts only slowly. Plus, if and when real interest rates on other investments rise above zero, the risk-tolerant very wealthy will likely flee, while risk-fearful middle class savers who cannot afford much risk of loss would keep using them.

    It’s certainly possible that 200K will prove too generous. I think it essential that the Treasury retain the right to adjust the inflation protection limit (or to publish and periodically revise a diminishing real-interest rate schedule) and be given a mandate to limit the scale of inflation-protected borrowings. If necessary, the inflation-protection limit can be reduced to 100K or even 50K. There’s a tradeoff between the objective of protecting as many middle class savers as possible (and thereby increase the space for expansionary policy) and the objective of protecting the capital structure of the state. Only practice will find the limit or interest rate schedule that best manages that tradeoff, that accomplishes both objectives sufficiently well.

  25. Max — I think GDP-linked debt is less protective of the solvency of the state. Historically, a 0% real return is much less than real GDP growth, so unless we are in for a very long, very bad period, issuing debt at this rate “pays itself down” over time. GDP-linked debt never does pay itself down over time, and should I think be strenuously avoided. (Unless the linkage is to a small fraction of GDP growth, in which case it could be a very good deal for the state. But risk-averse middle class savers would then have no assurance of a positive real return and fluctuating yields/losses associated with GDP. I don’t think it would be an attractive vehicle.)

  26. Nick — Absolutely not. This proposal segments the savings market, and is designed to prevent any arbitraging away of that segmentation. This puts a zero real lower bound on some households’ savings, but it does not put a zero real bound on interbank or term Treasury market rates, or therefore on the real rates available to high quality borrowers. If the central bank increases the quantity of reserves in the banking system, there is no means by which a bank can lend those funds at a guaranteed 0% real rate without taking on the credit risk of a borrower.

    This creates a new lower bound only to the degree that real interest rates in the interbank market fall beneath the credit spread associated with unsecured lending to individuals. That’s the sort of problem proponents of expansionary policy can only dream of ever experiencing. If it happened, banks would prefer to lend to individuals rather than lend interbank or hold reserves. The existence of the program would create an arbitrage individuals willing to take these loans.

    But as a practical matter, people who are wealthy enough to be charged, say, a 4% credit spread on unsecured lending are wealthy enough to max out their accounts without borrowing. Most savers would be charged a much steeper credit spread. So the “floor” on real interest rates this proposal creates would be pretty deep in the basement. If real rates need to go to -8%, then this proposal might be counterproductive, because by then it becomes worthwhile for banks to assume individuals’ credit risk and worthwhile for individuals to borrow and save in their protected account. I guess you start running into trouble when the real interest rate on prime mortgages turns negative, because then people borrow against their homes to fill their protected accounts. But even there, that’s a game only so many homeowners would be willing to play, and the size limitation on the account means that the arbitrage is exhaustible. Nothing prevents the marginal dollar of bank reserves from earning a more steeply negative rate if the central bank is willing to power through a barrier at the prime mortgage rate with sufficiently loose policy. And just getting to the prime mortgage rate as a negative real interest rate is politically unthinkable now, because of the effect it would have on savings. So while it may be that, for a sufficiently deep desired negative real interest rates, the program would introduce some not-insuperable frictions, it is only with the help of this sort of program that we could ever go deep enough to have to worry about those frictions. On net, I think it’s a clear enabler of expansionary policy.

  27. Alan — Thanks! I didn’t know that. As you’ve described it, it’s not liquid, large, or convenient enough to serve the role that I want, but what I’m after might be termed an expansion and streamlining of an existing program than doing something totally new.

    Thanks again.

  28. Dan Kervick writes:

    Perhaps I don’t I understand fundamental purpose of this policy proposal. The idea seems to be that by offering an instrument to protect middle class savings against inflation, one will buy their political support for expansionary policies, since the opposition to such policies is grounded in inflation fears.

    But what percentage of their incomes do middle class families currently save in each period? How do they believe they are they protected against inflation if they are consuming almost all of what they earn, and they anticipate a rise of consumer prices? Great – their minuscule savings get a 0% real rate rater than a small negative real rate. But that’s a drop in the bucket.

    The eroding savings people care about are in their retirement accounts. How does this proposal help with those?

    I’m not opposed to this idea, because it moves in the direction of banking as a public utility. But the argued political payoff seems negligible.

    I worry that this proposal is of a piece with the security-for-free thinking that is afflicting Europe’s creditor class right now. Ultimately the rate of return on monetary investments depends on the underlying health of the real economy. You can’t kill an economy and at the save time guarantee that the real value of savings will not shrink, must less continue to grow.

  29. drfrank writes:

    Issued by the states, so double tax free, guaranteed by the Federal govt., available with laddered maturities 1-15 years, max per resident per maturity 50k, total max 1 mil, 5% interest, with inflation adjustment tied to the market price of gold or oil or corn, but not a statistical fiction like CPI.

    So that any small saver can construct a decent retirement without a rake off to the financial services industry.

    Even without running the numbers, I might consider taking these bonds in exchange for the NPV of my presumed Social Security payout, just to avoid the politics. Hahahaha.

  30. Dan — This proposal can be used to protect retirement accounts, but in practice is probably more attractive for people near retirment than younger savers, as younger retirement savers tend to be more risk-tolerant. But for people near retirement, this would be a very attractive vehicle.

    Obviously, this would be useless to the part of the middle class, perhaps the majority of the middle class, that is unable to save very much. But that is not the group of people most desperately concerned and politically active about inflation. (Of course non-saving workers with little bargaining power rationally fear inflation will lead to a pay cut, and most people object to inflation because they perceive rising prices as more certain than a raise in their own wages.)

    It is retirees and near-retirees with savings who are most desperately concerned with inflation, as well as the wealthier half of the middle class who do build nest-eggs of both tax-advantaged retirement savings and general savings. These groups, retirees, near-retirees, and let’s guesstimate the 60th through 90th percentile of workers by income in the US, are extremely potent politically. The US is democratic enough that “the 1%” can’t own our politics alone. They have to persuade more numerous groups to support their positions. The tight-money lobby is, I think, a coalition of the very wealthy and these groups of petit rentiers. If we immunize retirees, near-retirees, and affluent-but-not-rich professionals, I think we can break this coalition.

    You are absolutely right that someone must bear costs, and creditors’ insistence that they should not be at risk forces costs to be borne by current workers and the unemployed. This is a somewhat paradoxical proposal, that attempts to put the wealthiest creditors at-risk by absolving the somewhat less wealthy of the same risks. But given current wealth distributions (especially but not only in the US), I think it’s the right approach. There is plenty of room to allocate losses to people with more than 200K each of savings. That group, though small in number, owns (I think, no time to verify just now) the majority of total wealth! So immunizing the much more numerous modest savers, as counterproductive as it seems to play into the creditor-class’ sense of entitlement, can be a politically and economically effective means of isolating and putting on the hook very sizable creditors.

  31. Ashwin writes:

    I’ve been loathe to endorse an inflation-protected “public option” in banking – primarily because real rates can obviously turn negative in many scenarios for entirely valid reasons. But your point on how this could enable us to enact better macroeconomic policy has convinced me that the idea is good. I would probably want a lower limit – maybe $100k max but that is detail.

    FYI, there was a similar govt-backed launch last year in the UK which the banks absolutely hated – limit of £15k only though. http://www.guardian.co.uk/money/2011/sep/07/nsi-pulls-inflation-linked-savings-national-savings

  32. drfrank — I think you’re suggesting something pretty different from what I’m suggesting. But fundamentally, I think a lot of us are desperate for some way “any small saver can construct a decent retirement without a rake off to the financial services industry”. I think a lot of people would sacrifice some expected NPV for a bit of certainty in savings outcomes and isolation from a world that seems increasingly sketchy and distasteful.

  33. Ashwin — I think we pretty much agree. I’m proposing this precisely because I’m in favor of either tolerating negative real interest rates or else more direct policy that would generate sufficient demand to make the full-employment interest rate positive. In either case, we need more inflation-risk tolerance than our polities are willing to bear. So, like turning into a skid, it may be necessary to protect some people from the risk of negative real rates in order to gird our collective selves to assume that risk.

    I’m certainly not wedded to the $200K. In a US context, you need it to be high enough so that it captures groups of savers numerous enough and affluent enough to be politically relevant, but not so high that it becomes a burden to public finance.

    I think the banks would absolutely hate this in the US too, even if we let them be a front-end to the program. Thank you for the link re the UK program, which I didn’t know about.

  34. vlade writes:

    UK has something sort of like that – NS&I inflation “bond”.
    It pays RPI (which is the old, usually higher-than-CPI, inflation measure) + spread (currently around 1% I believe), but is in form of a zero-coupon (3 o five years, but then turns into sort of rolling-monthly). In reality you can withdraw anytime, but there are penalties (say first year you get only principal back).

    There’s limit of 15k per-issue (issue can be open for a couple of years).

    The main problem with them is that they were so popular last few years that they presented a significant drain from the banking sector to the gov’t.

    So your another potential downside is draining the funding from banking sector (IIRC banks were actually considering suing UK govt in EU court for an anticompetitive behaviour). Not too bad if you do it overtime, but overnight, you just exchange one problem for another.

  35. JKH writes:

    SRW,

    Interesting proposal – short duration tax free TIPs for retail distribution – eliminating liquidity and marked to market risks that would appear in a locked in term version.

    Those who are attracted to the prospect of disembowelling commercial bank interest margins tend to overlook the operating costs (premises and wages) that are associated with retail deposit gathering. That is why there is a difference between wholesale deposit rates and retail deposit rates. So your proposal should be seen as paying, not only a TIPs rate on short duration retail deposits – but a wholesale TIPS rate. There’s a big difference between those two. And the government would have to pay additional “front end” distribution costs.

    With the cap, the net flow of funds should not upset the whole ship. I have no idea, but $ 1 trillion steered from bank deposits into Waldman inflation protected deposits seems like a ball park starting point in the current environment. Given the cap, the population of small depositors is probably too large to see this getting up to 25 per cent of GDP.

    Ceteris paribus, the flow into W. deposits would be offset by an accounting identity, reverse flow from existing bill and bond holders back into banking system liabilities of some sort – probably some combination of term structured retail and wholesale deposits, bonds, whatever. Conversely, real rates would have to move quite high in a monetary tightening cycle for the W. deposit migration to reverse direction, given the retail margin that is required on bank funding.

    I don’t see insolvency as a problem from an MMT perspective or otherwise. The contingent solution is always more taxation or interest rate tightening in the face of inflation pressure. If there is no inflation pressure, there is no problem and no tightening requirement.

    It’s full reserve banking to the degree that any government liability is full reserve banking.

    BTW, MMT would regard the effect as expansionary in the current environment, because it increases the interest expense component of the deficit.

    I think you’re (still) drawing too close a nexus between the form of saving and the investment result. Changes in the form of saving are diffused more through a flow of funds portfolio rebalancing, than they are translated to changes in aggregate investment. This is mostly about capital income distribution, not investment consequence.

  36. K writes:

    Great! So we continue to allow commercial banks to hold massive deposits at the CB at the policy rate. But nobody else! That would be very, very bad!

    And I’m not saying that the availability of unlimited publicly guaranteed inflation guaranteed (or inflation targeted) deposits wouldn’t be bad. But then, we already have that problem, and indeed, it is the principle cause of the paradox of thrift instability in our economies. The solution is to *get rid of* publicly guaranteed returns, not create more of them. I can think of good ways to do that, but this proposal isn’t one of them.

    Arbing your proposal, by the way, is pretty trivial. Just find lots of old people with ample unencumbered real-estate or securities holdings, but no significant deposits. Take their assets as collateral against $200K loans at the real rate minus a (tiny) fee. Presto! Unlimited accounts at the real rate minus a (slightly less tiny) fee. Now I’m sure you’ll come after me with your next, best regulatory fly swatter. Game on, as usual.

  37. North writes:

    Outstanding work. I wish the FEDs had a tenth of the operational capabilities of your mind.

  38. Andrera writes:

    What do you think explains the fact that the market cannot provide these bonds? Is it excess concentration? Hard to believe. If the market cannot provide it, who is going to pay to fund the losses these accounts will incur?

  39. Max writes:

    “But then, we already have that problem, and indeed, it is the principle cause of the paradox of thrift instability in our economies. The solution is to *get rid of* publicly guaranteed returns, not create more of them.”

    If there is more than one asset, then there’s still going to be unstable risk premiums, right? Removing government assets doesn’t change that. You need to somehow stabilize the risk premiums to have a stable economy.

  40. K writes:

    Max: I don’t agree. The problem is that government provides the forward consumption contract (inflation targeted unit of account) and sometimes sets the forward price too low (and sometimes can’t raise it due to the zero bound). Then everyone rushes into consumption forwards (bonds) and the paradox of thrift is on. The problem is that everyone tries to get out of both investment *and* consumption, which is only made possible by the artificial exogenously priced contract with government providin the consumption insurance. I can’t see any problem if we were stuck choosing between risky long term investment and low risk short term investment, ie inventory, which is really a proxy for near term *available* consumption. Under those conditions, I believe the truly risk averse would move into the longer term investments which are the only instrument that have the potential to provide long term consumption. The perceived ability to move out of current consumption *and* investment simultaneously and in aggregate is the truly dangerous illusion that destroys aggregate income.

  41. K writes:

    This is why I have advocated (elsewhere) the money ought to be a broad pool of capital assets (like an ETF) redeemable for the underlying assets. Then the choice between investment and consumption would be clear and unequivocal. And the paradox of thrift would disappear (I think).

  42. maynardGkeynes writes:

    How about an “end financial repression” Act of Congress that says the short term FF rate can be no lower than the CPI?

  43. vlade — Although I know banks will hate this plan, I don’t consider that much of a downside. Ultimately, in a central-bank-based fiat banking system, any reliance on retail deposits for funding is nothing more than a regulatory choice, and not a very defensible one. There is no real correlation between a bank’s ability to attract retail deposits and the quality of its risk-management or loan portfolio. All retail deposits do is provide some insurance to regulators that they won’t be called upon to make the difficult choice of whether to extend liquidity support or not, because retail deposits are less likely to run than other financing sources for reasons that have nothing to do with the quality of the bank’s balance sheet. Frankly, it’s better if more bank funding were “hot” and regulators were frequently on the hook to choose between support or resolution of banks. It’d require regulators to much more actively involve themselves in the asset-side of bank balance sheets. I think it was Minsky who pointed out that, back in the day, monetary policy consisted primarily of discounting against bank loans as collateral, and that fact meant that central banks had a much richer and deeper understanding of the bank activities than in today’s regime, where direct lending to banks is frowned upon. The current regime lets regulators usually feel pure (since they’re not lending to banks directly), and let banks pretend they are private businesses without direct state support, but good feelings among regulators and bankers don’t necessarily serve the public.

    All this is to say, let the retail deposits slip away from the banking system, let them fund themselves from a combination of hot “wholesale money” and high-touch central bank lending, and we’ll get a more careful and better regulated banking system that is much more transparent about its (quite necessary) dependence upon the state.

  44. JKH — Wildly off-topic, but I returned too late to the discussion to congratulate you on how great your S = I + (S – I) discussion was. (Michael Sankowski did a service by highlighting it.)

    You are right to point out that I didn’t address the costs of retail deposit management. Clarifying those costs is an empirical question that might be addressed by this proposal. Namely, suppose there was a price-competitive market where incumbent brick-and-mortar banks can compete with Johnny-come-lately websites as front-ends on these “full reserve” savings accounts. The government rates are published, and the government would stipulate that front-ends had to charge any service cost in the form of a single scalar fee on assets under management expressed in basis points. The government would make management easily portable: you could easily switch who provides the interface to your account.

    I suspect that incumbent brick-and-mortar banks would easily “win” the competition for account-management despite their much higher overhead compared to pure internet front-ends. Incumbent banks have sunk a lot of costs into physical branching, and a lot of people value being able to talk through savings decisions with their local banker. Although the total cost of account management is high, the incremental cost of managing these accounts along with ordinary checking accounts and other traditional bank products would be quite small, I think. And brick-and-mortar banks, though they might resent the diversion of deposits to the government, would really want to compete for relationships with the kind of people who would take advantage of these accounts. By definition, they will be savers, and they’ll be skewed to the affluent side of the mass market. People using these accounts won’t be the very wealthy, very coveted “private banking” customers. But they’ll still be a strong cut above their base population of checking/direct-deposit/credit-card-and-payments customer. I think, given the low incremental costs of management and the high quality of customers to whom they might “upsell” higher yield products (or offer lucrative loans), incumbent banks would manage these accounts for very nearly free (as long as the interface with the Federal government is simple and efficient). Am I wrong?

    Note the specifics of my claims with respect to the effect of this vehicle on aggregate investment. I think you are right to point out that forms of savings vehicles and quality of aggregate investment are very, very loosely coupled, especially given the indirection and opacity of most savings. I don’t think funds invested in these accounts will be invested “well”. They’ll be invested no better than funds in Treasury securities or CDs, which as you say, they will partially displace. But my claim and hope is that these accounts would make it politically possible to ensure that other investment is transparently at-risk, by reducing support for bailouts and increasing inflation-risk tolerance. My hope is that, if much financial risk-bearing must necessarily be opaque, we can at least create a “equity tranche” of investment that is transparently at-risk, and force those with the capacity to bear risk to participate in that tranche. That would, I think, improve the quality of aggregate investment. It’s not the funds invested in these accounts that would do any good, it’s the wealth that would be left out of these accounts, whose owners would come to realize that they have no alternative but to invest with care, there is no safe place to hide.

  45. K @ 36 — Lending against old people’s estates strikes me as not a very safe workaround. Lenders usually fear death as leading to defaults on unsecured loans. No loans can be secured against the protected accounts. People can and do already lend against other property, e.g. older people’s real estate and “reverse mortgages”. But the existence of the savings accounts adds no extra security. If a lender lends an old person more than the value of their home, assuming that upon death they’ll collect from the protected savings account, little prevents the old person from taking the money and giving it away to family and friends, or spending it on lavish luxuries knowing that they’ll be gone when the bill comes due. If the borrower does give the money away, in theory, the creditor might be able to sue the recipients under “fraudulent conveyance” law, but that’s a pretty serious transaction cost to bear trying to arb a couple percent on a 200K loan, and since these accounts are very liquid, the old person might have just taken the money as cash and given it away with no documentation. (Sure, the IRS hates that too, but so what?)

    I’m sure there are workarounds and clever schemes that people will devise to try to let wealthy people workaround the size limit, and regulators will undoubtedly be playing a game of whack-a-mole to prevent that. The intent of the law has to be stated very clearly, that access to inflation protection is a benefit conferred by the state to individual citizens in limited quantity and prohibiting means of circumventing the limit. But there is nothing in finance that is not gamed to some degree. But this plan is I think a lot more regulable and a lot less gamable than, say, capital and leverage restrictions on status quo banks. Yet we still let banks exist.

  46. K @ 36 — With respect to this:

    The solution is to *get rid of* publicly guaranteed returns, not create more of them. I can think of good ways to do that, but this proposal isn’t one of them.

    That’s the core issue. In theory, I’d like to agree with you. In a better (and very neoclassical) world, we would get rid of pubicly guaranteed returns, and privately guaranteed returns that lead investors to not understand and accept the risks they necessarily bear. All saving would be investment with transparent risk-bearing, risks agreed ex ante, costs accepted ex post. But, per my whole opaque finance trauma, I don’t think any functioning financial system has ever worked like that. People crave safety so much, they’ll accept swindles that promise it before they accept a reality in which all wealth is perishable and all investment necessarily at risk. Given that assertion about human nature, the question becomes how to organize the mix of quasi-“safe” opaque bits (whose failure provokes social conflict) and transparently risky bits, so that the transparent parts bear enough risk that the opaque parts very rarely need to fail. It’s in that spirit that this proposal is offered. Again, my first-best preference would be the neoclassical finance in which all savings is investment-at-risk, all savers knowingly purchase contingent claims on different states of the world and accept however the cookie crumbles. But I don’t think that is achievable without either severely impairing capital mobilization or offering sufficient social insurance to diminish the stakes. This proposal represents a form of social insurance whose purpose is to enable greater space for at-risk investing (whose risks are actually internalized by investors even when the investments go sour).

  47. North — Thanks!

    Andrera — In the short-term, this is a subsidized insurance scheme, the private-sector could not provide it except at a loss, as the savings account pays higher than the market real rate of return. Over the long-term, I claim that it is probably fiscally neutral to profitable, but even if that’s right, it’d be very difficult for private-sector actors to provide, however long their investment horizon. A private-sector bank offering this sort of account now, when it would be a “loss leader” has no way of ensuring that later, when these accounts are profitable to offer, the customer won’t switch providers. If the private-sector bank tried to use a contract to ensure persistence through good times as well as bad, it breaks the product, as the savings account is no longer on-demand liquid. The government faces the same issue in theory: these accounts would be very popular now, when real interest rates are negative, but most savings will flee to higher yields when real rates turn positive, sticking government with the near-tern cost but depriving it of the long-term benefit. BUT, because the government is the government and its ultimately the single most creditworthy borrower in the dollar economy, some significant fraction of risk-averse, simplicity-seeking money will stick with these accounts even when higher yields are on offer elsewhere. (This is analogous to how banks make money from noninterest-bearing payment accounts.) This will diminish the fiscal cost of the program, as long as we are not stuck in a chronic era of negative interest rates. Over time, the foregone positive yields by risk-averse holders of these accounts will repay the subsidized yields from the hopefully brief era of negative interest rates. But no single competitive private-sector provider could rely upon reaping that long-term repayment.

  48. maynardGkeynes — You will hate me, but the sense of this proposal is quite opposite from eliminating what Reinhart calls “financial repression”. On the contrary, the idea is to give small savers shelter from negative interest rates precisely so that the state has the freedom to recoup the costs it bears from a malinvestment boom via negative interest rates on larger pools of savings. In my world, large savers who wish to preserve wealth in an era (like now) where aggregate losses must be allocated must do so via actual investment in wealth producing projects. They should not be able to hide in any form of quasiguarantees savings (Treasuries, bank CDs, AAA-rated securities) and earn a positive real rate of return.

  49. vlade writes:

    Steve (and to some extent JKH) – it’s not only about stickiness of the deposits, but also about the costs.

    The real cost of on-sight retail deposits to the bank tend to be very low, sometimes running on 100s of bps lower than a similar (average) term of wholesale funding (and so it should be, since for wholesale investor there are no benefits of transactional banking unlike for retail one)

    Moving the retail deposits somewhere else is thus a cost to the banking sector (JKH’s people moving from bonds and treasuries to bank paper would require risk adjustment = higher returns).

    Now, I’m NOT arguing that this is a bad thing (or a good thing) – but I’d believe it’s going to hit small banks (who rely on retail funding) much more than large JPMs Citis etc. That will have impact on how the banking sector evolves. I.e. competitive advantage if you can get easy access to the wholesale money – which tends to be easier for the larger banks than the minnows, and as a result will skew the field towards larger banks even more.

    It will also push the banks to look for cheap sources of funding somewhere else (because of the behavioural momentum – it’s not like banks will just grit their teeth and take it on the chin. Just look at how hard it is for them to get used to the lower ROEs), and who knows what they will invent?

    Or, beware of unintended consequences. Again, it doesn’t mean one should NOT do it.

  50. K writes:

    Steve: “But, per my whole opaque finance trauma, I don’t think any functioning financial system has ever worked like that.”

    I’m pretty sure nobody’s ever tried to make one. Your proposal just takes us further down the road to nanny state investment where nothing can ever go a bit wrong. It only all blows up at the same time. It’s the road to hell and your good intentions are paving it and I, for one, do not partake in your Faustian bargain! It’s time to shake the PTSD, pick yourself up and join the fight for a world that’s actually worth fighting for. Your fatalism is sooooo depressing.

  51. Detroit Dan writes:

    srw — Thanks for the response regarding insolvency. Your point that guaranteeing the purchasing power via an inflation index is like issuing debt in a foreign currency or redeemable commodity is a good one, in my opinion. At any rate, I like the proposal and the cutoff point for the amount an individual could save with such a plan is good for other reasons in addition to the solvency issue…

  52. MikeC writes:

    This is ridiculous:

    1. There is NOT SUPPOSED TO BE ***ANY*** inflation…EVER.

    http://www.federalreserve.gov/aboutthefed/section2a.htm

    Inflation is supposed to be matched to economic output (in the real sense) in which case you cannot get a loan without offering a skill, talent etc.

    2. .gov has turned our monetary system into a deficit financing ponzi which now REQUIRES perpetual inflation! There is literally no way to protect savings in this environment BECAUSE IN REAL TERMS THE SYSTEM IS NOW A PONZI so you would need greater energy expenditures on the input side to sustain the absorbtion of energy on the output side!

    Run the system PROPERLY with STRICT lending standards, full capital backing for new money (loans), zero inflation and BALANCED BUDGETS or this suggestion is literally impossible over time!

  53. MikeC writes:

    EDIT: meant “money creation” is supposed to match economic output not inflation.

  54. Bondinvestor writes:

    Brillant idea. However, I must take issue with one claim you made in your post, namely that the US government has kept its TIPS issuance small.

    That statement is technically true. TIPS issuance as a % of total US government obligations is in fact, very small.

    But you are ignoring two very large off balance sheet liabilities of the US government: Social Security and Medicare. Both are inflation linked. And moreover, both are “contractual” obligations of the government in the much same ways that a US Treasury bond is

    In fact, one could argue that the contractual obligation of the government to make good on its Social Security/Medicare promises to its citizens is stronger than its obligation to its creditors. the former vote in large numbers. the latter less so.

  55. Steve Roth writes:

    @SRW: “This proposal represents a form of social insurance”

    That reminds me of the other realization I had re: this full-faith-and-credit/no-reserve/full-reserve government banking:

    It basically what Social Security is. Loosely, at least.

  56. Steve Roth writes:

    @K: “Your fatalism is sooooo depressing.”

    I feel the same about utopianism. Millennia of historical experience suggest that what you’re calling “fatalism” is realism. As demonstrated by the endless march of failed utopias.

    Understand: SRW came from just the place you’re at. He actually tried to *code* the system that you imagine. But when he got right into the depths of it, he realized that it can’t work, and *why* it can’t work:

    http://news.mortgagecalculator.org/interview-with-interfluiditys-steve-waldman-the-government-has-chronically-oversubsidized-mortgage-lending-and-homeownership/

  57. Oliver writes:

    SRW, the topic of this post is orthogonal to the issue of the general stability of the banking system. Your ‘opaque’ series touched on the reasons why there might be a function for irrationality in finance. But for some, the more pressing point than whether some built in irrationality may be a good thing or even necessary, is whether there are sensible ways to keep it from going bonkers. A little craziness, fine, but not too much. Some believe the markets are all you need, others find tougher regulatory fencing more promising. From what I understand, Glass Steagal was one such attempt to separate virtuous saving from irrational gambling and thus also provided a demarkation line beyond which there was no government intervention to be expected. Would you like your proposal above to have such a feature? What would the other side of the coin look like? Is it compatible with something like this: http://www.tnr.com/print/article/politics/98659/wall-street-term-out-panic, found via here: http://www.economonitor.com/lrwray/2012/01/26/the-fetish-for-liquidity-and-reform-of-the-financial-system/ ? It would be elegant to have an all in 1 savers vs. gamblers, government vs. markets, but all together naturally risk containing sort of thingy.

  58. [...] a Judge’s Awesome Statement Expanded Access to Contraception? No Wonder the Right is So Scared Starter Savings Accounts What’s, Uh, The Point? Why the Right Wing Is Petrified of Letting Voters, Instead of the [...]

  59. K writes:

    Steve Roth: “Understand: SRW came from just the place you’re at. He actually tried to *code* the system that you imagine. But when he got right into the depths of it, he realized that it can’t work, and *why* it can’t work”

    Dear SRW,

    Steve Roth says you already coded the model of everything and proved that all hope is futile. Is that true?

    Best regards,
    K

  60. winterspeak writes:

    srw: I don’t know why you keep asserting that MMT, monetarists, and keynesians have much in common. None of them are Mellonists, but that’s it.

    I would disagree with the assertion that a currency’s sovereign extant liabilities should be considered “equity”. That’s gold-standard thinking and I thought we all agreed that Austrians were beyond the pale.

    By guaranteeing a “real” rate of return, you remove an automatic stabilizer and replace it with an automatic de-stabilizer, an instrument that will make inflation and deflation worse when and if they arrive. When a cure is worse than the disease, it suggests that one might be barking up the wrong tree.

    Much better to have unlimited FDIC insurance, with no inflation protection at all.

  61. vlade — You are certainly right: something that siphons away retail deposits is going to hurt small banks more than big banks, as big banks can rely on cheap interbank and wholesale finance but small banks cannot. Small banks’ cost of funds would rise, as savings deposits are drawn away.

    There are ways of dealing with this. I’ve proposed capping interest on reserves, to encourage big banks to deposit excess deposits with small banks. Or, as the MMTers sometimes suggest, no-stigma-attached liquidity at the interbank rate could be made available to small banks from the central bank. (But there’s a lot to debate about that, it could be very risky, although proponents point out the state is on the hook for retail deposits too, so what’s the difference?)

  62. K (addressing both comments) — I don’t take this proposal as fatalistic. I think you are taking an overly Manichean view of what a decent financial system would look like.

    You and I both start, I think, from similar priors, a neoclassical view in which financial systems are information systems, people “save” by purchasing risky claims on real projects which, if successful, carry their wealth into the future and enrich them, but the cost of whose failures they must bear if the projects do not succeed. The ever evolving prices of claims on projects represent the “market’s” estimate of project success and the value of the real production (or storage) the project enables.

    In a “state of nature”, you can imagine something like this occurring with no social intermediation whatsoever. If I hold purchasing power today and want wealth next year, absent a financial system, I might purchase seed to grow crops, or gold to store, or computers to run a web startup. If my project works out, I’ll have wealth next year. If not — if the crops fail, or gold becomes untrendy, or no one likes my Pinterest clone — then I will be poor.

    In an idealized world, the introduction of a financial system — organized and regulated markets for claims on projects, intermediaries who sell claims on opaque portfolios of claims — wouldn’t fundamentally change this “natural” state of affairs. In the end, people purchase real projects, and the consequences of those projects must be borne.

    But in fact, I think that the existence of a financial system very much does change the circumstance, because as soon as claims become ever indirect, losses become repudiable. Even in the most “transparent” bit of our organized financial system, direct holdings of corporate equity by individuals, investors try, and occasionally succeed, at arguing that losses they experience were not “fairly” theirs to bear. Shareholders sue, claiming that intermediaries or managers (the hiring of whom they, in theory, decide!) did not behave as they were supposed to, and so they should be immunized from losses. Once we get to more intermediated sorts of claims, especially bank deposits and government bonds, investors disclaim all responsibility for risk and loss, as those opaque intermediaries pretend to offer “risk-free” assets, despite the fact that real activities and outcomes are always at risk. This bugs the hell out of you. It bugs the hell out of me too.

    But let’s switch perspectives. From the point of view of an “investor” in our heavily intermediated financial system, two things are often true: 1) she cannot really judge to what degree any losses she experiences are real or a matter of being snowed by intermediaries into bearing losses that ought to be allocated to someone else; and 2) she feels that she has little choice but to delegate preservation of wealth that she will absolutely require in order to merely subsist into this financial system. These two characteristics are a recipe for social conflict over the allocation of losses.

    In the investing world, there are plenty of people who accept losses with equanimity: direct stockholders (usually, when they don’t sue) and traders who ostentatiously accept risk. You and I both think that these kinds of investors are what the financial system “ought” to be made of — they are people who have full incentive to price benefits against risk and thereby direct capital to high quality projects. But if we look around, these kinds of people share a common characteristic: they are usually pretty financial secure. People who are financially insecure gravitate to the savings vehicles they can pretend are risk-free, and whose losses they can struggle to repudiate in the court of public opinion and through the political and legal system. People who are frightened of real poverty, of becoming unable to support what they have come to understand as a decent lifestyle, are desperate for safety.

    Your first impulse, and sometimes mine, is to tell those people, “no”. There’s no peace or safety this side of the grave, deal with it. That’s accurate, but is it the right thing to do as a matter of human organization? Do “ordinary” people who desperately wish to eschew risk, and who absolutely cannot afford to bear it, but who are forced to undertake risk investment, allocate capital productively? I think the answer is no. I think when people who really cannot endure losses are given no choice but to bear transparent investment risk, they put their capital into very low return projects. In poor countries with weak financial systems, stockpiled commodities and things like jewelry become savings vehicles, and a lot of purchasing power is diverted to “durable consumption” like home improvement, because investing in someone else’s business is way too risky a thing to do. People direct their capital “rationally” to very low risk projects, because they cannot afford a loss, but collectively, these choices are foolish. The desired benefit of putting people at risk, that capital will be directed in a wise and discriminating manner, is not achieved. Investors discriminate, against risk regardless of return because the risk is simply unbearable.

    I want what I think you want, which is an investment universe in which people do take “good risks” — projects whose potential costs are outweighed by great returns if successful, but where accountable investors weigh the potential costs and returns to direct capital with care. My claim, the one that you consider fatalistic, is that people who cannot bear losses at all will never be this sort of investor. They will accept low-return projects rather than assume risk. If they are put at risk, rather than accept losses that mean starvation, they will use the political system or violence to try to recoup them. “Good” investing is something of a gentleman’s game. Risks are only weighed against benefits by people who believe BOTH that they can be forced to bear a loss and that they can nevertheless survive it. You (me too!) bristle against the idea that people might “save” without having to bear the cost if their savings is misused. Obviously there’s a lot of moral hazard there. But people for whom any loss is existential also make exceedingly poor investment choices, either overconservatism or else devil-may-care dice throws (because if you lose you lose, so you might as well try to win big).

    My “fatalism” is that I’ve come to believe that the second issue is a real concern, not just the first. So what I want is a class of investors who can allocate capital well, investors who can accept losses without violence or social conflict, to whom the political system will be capable of imposing losses despite their preference not to, for whom those losses are important but not existential. I think to get that, you need some degree of social insurance, some degree of assurance that losses will be bearable. Of course, claiming to provide such insurance is inherently a lie. If an asteroid strikes the planet, all investors and “savers” will face existential losses. But I do think that there is a kind of “optimal” degree of social insurance that persuades the relatively poor that they are OK and not at great risk, and that enables the relatively wealthy to genuinely assume the risk of loss for the transparently risky projects they must undertake if they wish to preserve or expand wealth beyond the limit of that insurance. If this is arranged well, those who can afford to invest will do so transparently and in a discriminating way, and the success of their projects will ensure that the social insurance that they along with everyone else rely upon as a safety net “works”, despite the fact that it overpromises.

    I think this is the best way to get rid of what I think both you and I detest: Vehicles whereby people who can afford to bear risk — people who do invest for and accept profits in good times — are able to disclaim information work ex ante and shirk losses ex post. I want a very clear separation. I want guarantees, zero-real-return vehicles for people of modest means, and transparently risky, take-your-profits-or-your-lumps vehicles, for people with a lot of wealth, or people who simply choose to go for broke. Status quo finance mixes up “safe” and “yieldy” vehicles in such a fine marbling, that where one in along the spectrum is always blurry and contestable, and when there are losses, their allocation becomes a gigantic political contest. I want to eliminate that marbling entirely. I want two clear categories, because I think that is the best way to enable high-quality, transparent risk investing.

    I don’t think that’s “fatalism” at all. This proposal is acknowledgement that the world is more complicated than I once thought. But it is also a means of creating an institutional context in which transparent, high-return at-risk investing could thrive and promote discriminating allocation of capital despite the complications that result from desperation for safety and an inclination to repudiate losses. It is an attempt to understand why it is finance is always so opaque, and reorganize things so that those purposes are served with as little corruption and unmerited risk-free return as possible. I’m trying to overcome fatalism here.

    BTW, Steve Roth is, as he often is, unduly kind to me. But I make no claim of authority or of having “proved” anything. I’m just some motherfucker on the internet saying what I think. Take it for however much or however little you think that it is worth.

  63. Detroit Dan — Thanks. I’m glad that makes sense to you, and that you don’t hate the proposal.

    MikeC — There’s not supposed to be any inflation. And we are all supposed to have ponies. You suggest that there is a kind of conservative banking/monetary system under which there would never be inflation. I don’t think that’s right. Too conservative a banking/monetary system would lead to scarcity of real goods and services, as humans and other resources that could be generating capital sit unemployed. Over a medium term, fiscal and monetary conservatism prevent inflation and ensure the value of a currency. Over the long term, the value of a currency is overwhelmingly a function of the productivity of the economy for which the currency enables commerce. Organizing the real economy well is the name of the game. If the real economy is organized well, low-risk real interest rates will be positive and “inflation” will be a nonissue. If the real economy is organized poorly, there may be price stability or deflation for a while, but eventually what there will be is widespread scarcity. We are better off risking the inflation if it helps us to mobilize resources we would otherwise squander, and heal balance sheets undone by loans that ought never have been made.

  64. Bondinvestor — You are very right to point out that the US government has made a lot more real promises than those embedded in its formal TIPS issuance. But I’m not sure it’s right to say that those promises are more debt-like than formal inflation protected bonds because they have such numerous constituents. If the costs of overpromising really bind (which they have not at all thus far, the US government recruits real resources by issuing nominal currency and debt without any problem at all), there will be serious constituencies that prefer to pare back the programs rather than endure taxation and inflation. I don’t know how that conflict will work out, but it will be a political contest that will end in compromise, a mix of winners and losers but no clear regime change.

    Formal debt, on the other hand, is “full faith and credit”. There are two clear regimes, full payment and default. Compromise or intermediate outcomes aren’t possible. They are scored as default. This binarism, I think, makes formal inflation-protected debt more dangerous than all the other “real” promises that we’ll fight over and partially reneg upon.

    This is a bit too strongly stated, because there is a no-default safety-valve for formal inflation-protected debt: the price indices can be modified. I’m sure that will happen some, whether or not a proposal like mine is passed, as there are already lots of payments bound to price indices. Indeed, downward jiggling of inflation indices has already has happened, several times. Still, I think if you push that valve too much, you really call into question the quality of your institutions in a way that an honest fight over more taxes vs scaling-back programs does not.

  65. Steve Roth — Yes, social security can be viewed as a kind of “full reserve” banking, although it’s a bit complicated and opaque since people enjoy different “returns” payroll taxes, and they can’t track an individual “account”. There are really a lot of different ways to deliver social insurance. A basic (inflation-protected) income could serve a lot of the purposes that this proposal intends to serve, but is politically much more difficult a sell in the US than a market-rate-insulated savings vehicle. And “full reserve” banking, or, equivalently to depositors, FDIC-guaranteed banking, is inherently social insurance to the degree that the state ensures the real value of the fiat reserves that stand behind accounts.

  66. Oliver — There are lots of proposals that try to divide finance into safe, regulated “narrow banking” on the one hand and unregulated speculative finance on the other. I’m sympathetic to those sorts of proposals, but in practice I think most of them define the “safe” sector too unsafely. The proposals you point to are fine examples of that. “Terming out” is way insufficient to define a safe island of finance. Maturity risk is far from the only risk that opaque institutions take with regulated, ultimately public, money. Sure, crises almost always take the form of refunding panics, but even if refinancing is not an issue, opaque intermediaries will make bad loans for yield and eventually those loans will make credit losses. “Terming out” might prevent some of the collateral damage from those credit losses by eliminating panicked contagion within the regulated system, but during an incident like last decade’s credit bubble, the sheer losses on bad lending would have taken down big, regulated banks without extraordinary intervention by the state. In what is now a cliché, it was a solvency crisis, not a liquidity crisis, and old-fashioned maturity matched commercial banks are perfectly capable of lending themselves into insolvency.

    There is a terrible bit of nostalgia, mostly on the “progressive left”, for a past that never was in which “traditional banking” was a safe enterprise. Banking has always been fraught with failures and panics and bankruptcies. The postwar quiet period lasted two decades before instability began to show, and was very much an exception to the rule of turbulence. It is an artifact of when the people responsible for making policy grew up, I think, that the quiet period is taken as “natural”, as a baseline we’d achieve if only we made a few reforms or fixed a few problems. Banking is a harder problem than that.

    My view is that, where we need opacity, we’re better off using the transparently opaque state rather than private institutions that pretend to be “investments” and pay corrupt yields despite hiding and ultimately socializing risk. Terming out commercial banks isn’t enough. In fact, it’s not even enough for the state to offer safe returns. The state has to really inculcate the notion that safety only comes via the state-managed vehicles, and that the unregulated sector is only for the risk-tolerant. The state has to be vigilant about prevent things like money market funds and AAA-tranches from emerging, vehicles whose safety is not formally insured by the state, but whose investors are unwilling and incapable of bearing loss, leading to political and social conflict, and then bailouts, when losses arise. The wise state promotes volatility in the unregulated sector and prevents machinations that appear to mitigate the risk inherent to the underlying real projects in which funds are invested. No one should be able to play in the unregulated sector without directly experiencing themselves to be perpetually at risk. The state cannot help but stand behind large groups of people for whom any loss would be catastrophic and impose wide-ranging social costs. So bankers try very hard to attract those groups. Volatility is the best disinfectant there.

  67. winterspeak — Not so unusually, we’ll disagree about a lot.

    I think MMTers, market monetarists, and Keynesians have almost everything in common other than tribe and affiliation. You don’t think that. So we disagree.

    I think fiat money and debt denominated in that money should very much be understood as equity rather than debt claims against the state. I’ve never encountered that as an Austrian view, and would be interested in a source there. If it is, it doesn’t trouble me. I hardly consider Austrians beyond the pale. Though there are some positions associated with some branches of Austrian economics that I dislike, on the whole I am very fond of the Austrian perspective and find it a very useful complement to Keynesian and post-Keynesian thinking. Again, I find it lamentable how easily we focus on tribes rather than finding ways to synthesize the useful parts of different perspectives.

    Unlimited FDIC insurance with no inflation protection at all is effectively what we have now. (Circumventing FDIC inflation limits is trivial, and there are commercial products — CDARS — that make it perfectly convenient.) That does nothing to soothe the concerns of people with small nest eggs over policies that are potentially inflationary. I would prefer we place hard, per-person limits on deposit insurance, for the same reason that my proposed inflation-protected accounts are limited. Social insurance is useful but costly. It should be offered, but rationed, not made available in indefinite quantity.

    There are costs to having government offer inflation-protected savings, but there are also benefits. My view is that the benefits, particularly with respect to making expansionary policy politically possible, would outweigh the costs, as long as the scale of the program is limited to protect government solvency.

  68. winterspeak writes:

    srw: I’m afraid I cannot point you to a clean Austrian link that fiat money should be thought of as equity. There are “amateur Austrians” who hold that view, but I don’t know if such a link exists in the cannon.

    Nevertheless, the notion that any additional money printing represents an dilution of extant currency is certainly Austrian, and Mellonist. It is also common sense if you think of money as something “real” (ie. an asset without a corresponding liability) instead of seeing it as just a number in a spreadsheet, and purely nominal (ie. an asset with a corresponding liability).

    Unlimited FDIC insurance with no inflation protection is NOT what we have now at all. We have limited FDIC insurance with no inflation protection, and the limit changes on occasion (or not) due to politics and chance. I would formalize the unlimited FDIC insurance and be done with it. I was not aware of CDARS, but as all they are doing is letting a government number not change, why enrich a middle man here? Nevertheless, learnt something new, so thanks.

    I would like it, before creating destabalizing financial structures (as you propose) that we at least try to educate people on how inflation actually occurs. The notion that QE or low rates are inherently inflationary, for example, flows straight from (incorrect) monetarist notions of how lending works, how reserves work etc.

    Instead of trying to actually explain to folks what is inflationary or de-inflationary, you are instead re-creating the kind of inflation-causing instrument that we had in the 70s, where inflation linked compensation structures automatically ratcheted up with inflation, making the whole thing worse. I am supportive of social safety nets, but not at the expense of the real economy.

    If people want real inflation protection, then they need to buy real assets. This has been well understood in every third world economy that has inflation problems and it’s worked fine there for generations.

  69. K writes:

    Steve,

    I like your comment and agree with *almost* all of it, though I am probably not quite as unsympathetic to the needs of poor, credit constrained, uninformed and unoptimizing economic agents as I think you suspect. I just happen to think there are engineering solutions that address some of the most serious agency/externality problems that we face.

    There is just no reason why we need to depend on private institutions to create our medium of exchange (while at the same time rigging the payments and credit systems to ensure the maximum possible float/supply). If we allowed everyone to keep electronic money at the CB, banks could raise capital (like everyone else) by issuing securities. Investors would create money by repoing liquid securities at the CB (with huge haircuts). If anyone still wants to keep (uninsured) deposits at banks, they should be free to do so, and bank capital should be unregulated. That solves the bank instability problem, but it doesn’t solve the savings/investment paradox of thrift and asset bubble problems.

    So how do we get sufficient investment capital? Well, like in whatever happens to be your favorite pure exchange economy model, it is capital assets, and capital assets *alone*, which have the ability to transport consumption from the present to the future. Money should be capital assets. In a modern economy, that means the CB would simply be very large *open ended* broad market ETF, and not credit/repo based. We use the units of said ETF as the medium of exchange. If a given investor doesn’t have the sophistication to be involved in relative value trading (i.e. 99.9% of all investors) they should just hold money. Everyone, in fact, should just hold money plus an overlay of assets about which they have particularly sophisticated knowledge or to which they require customized exposure. In a third world economy, I would suggest backing money with land, or with the revenues from a land value tax. Given such a system, there would be no
    flight-to-fraudulent-consumption-guarantee because there wouldn’t be one. Just the choice between consumption and investment. So, while I totally respect and agree with your goal of providing most people with the safest possible savings vehicle, I don’t agree with your approach. Capital assets are the *only* savings vehicle. Any explicit consumption commitment is a dangerous placebo.

    I’ve laid out this proposal before in a lot more detail, like here, and in the comments that follow on Nick Rowe’s blog. If you are
    interested, you might also read this post by Ashwin and the comments that follow. And this post too. Ashwin says I shouldn’t just scatter my ideas in random blog comment sections, which is a good point. Some day…

    As far as social insurance goes, the problem is that we are born destitute and disenfranchised. The earth’s natural bounty and the product of our ancestors are already fully claimed. The solution is to fully tax and equally distribute the ground rents. Given *that* (and a few other small changes) we could dismantle the worst parts of the modern crony,
    clientelist welfare state.

    “Take it for however much or however little you think that it is worth.”

    Lots. Along with Ashwin’s, your posts are by far the most eagerly anticipated on my list of innovative and thought-provoking blogs.

  70. Steve Roth writes:

    @K and @SRW:

    I didn’t say Steve “proved” it; I did suggest that he proved it to himself, which seems reasonably accurate.

    Steve’s explanation as usual puts it much better than I could. I’d just add:

    His assertion of how humans behave is pure Kahneman/Tversky prospect theory: humans are risk-seeking in the domain of gains, risk-averse in the domain of losses. (And I think most will agree that they and their successors have “proved” that?)

    So what we’re seeing here are two competing versions of “fatalism”:

    1. “Life is unpredictable and risk is unavoidable. Deal with it.”

    2. “This is the way human beings behave. Deal with it.”

    The difference is who those imperatives are directed to. The first is directed to all individuals, and is a moral dictum. The latter is directed to those constructing the system in which those individuals (must) operate, and is a practical, policy dictum.

    I would suggest that the latter imperative has a greater chance of delivering widespread well-being.

  71. Yancey Ward writes:

    Well, it wouldn’t change anything. Inflation has a benefit for those entities that it does because it allows the subversive transfer of real value from those unprotected from inflation to those who are protected from it. If you protect too many from inflation, then there is no reason to resort to inflation in the first place, or you must undermine the protection afforded, such as rigging the CPI measurements, for example.

  72. K writes:

    Steve (Roth),

    Those don’t actually sound like fatalism to me. I’d agree if you were inclined to call those realism. Fatalism is to accept corruption, fraud, theft, or gratuitous and dangerous instability as the price of investment and growth.

    Steve (RW),

    BTW, I should have included Nick Rowe in my list of favorite bloggers, even if I don’t always share his political inclinations. Nick is full of deep, thought provoking questions.

  73. Richard H. Serlin writes:

    “They expose savers to interest rate risk and liquidity risk. Small savers must compete with large savers for the same very limited pool of securities, resulting in negative yields.”

    You wonder why the government doesn’t just issue more TIPS, and less standard fixed bonds, when this happens. That just looks win-win. The government finances at a lower real rate, and more people get the opportunity to put money into a really safe vehicle at a decent real rate.

    It is is so unfortunate, too, that Republicans have made US government debt no longer virtually 100% safe, with their craziness making them willing to seriously contemplate causing a default. It really hurts not having an option that’s virtually 100% safe. So, here’s another suggestion, some kind of new law to make it super hard for the Republicans to make us default on our debt.

  74. Richard H. Serlin writes:

    “The option implicit in the floor on principal isn’t easy to price. It takes a degree of risk-tolerance and sophistication to manage a portfolio of TIPS that we ought not demand of waitresses and schoolteachers.”

    It takes the reverse of risk tolerance if you’re just going to hold the TIPS to term. Assuming the Republicans won’t cause a default, that’s the least risky thing you can do. Buy a 30 year TIPS and you know your real cashfolws are guaranteed for 30 years (as long as you don’t think you will need to sell the TIPS early).

    A big problem, though, is that these aren’t that easy to buy for laypeople, and limited supplies can make the rates very poor. So it would definitely be very nice if the government increased supply of TIPS like options and made them a lot more convenient. I don’t see why the real rate has to be zero, though. It could be the greater of the current TIPS rate (maybe 1 year) and zero, or just a flat 3% (or the long term average real GDP growth rate), with some limit like $200K (or better yet an amount where retirees could live middle class off of the interest with Social Security, like $1 million)

  75. Richard H. Serlin writes:

    “Republicans should love this proposal. It would reward “virtuous” savers who are currently punished by negative real rates, and the benefit would be tilted upwards towards the relatively prudent and productive.”

    You have an incentive to be diplomatic. I can be truthful here. The Republicans care little about anything that doesn’t help the very rich. Certainly, they don’t want anything that uses up resources for the middle class. Those same resources could have gone into more and bigger tax cuts for the rich. And with a $200,000 limit, the rich (the kind of rich the Republicans live for) don’t give a crap about this.

    But, like with the payroll tax cut, they don’t want the general public to know this, so they may be forced to support it if it ever gains traction.

  76. [...] Steve Randy Waldman at Interfluidity, a typically intriguing and thoughtful post: The Federal government should offer [...]

  77. Michael Chini writes:

    @Steve-

    “MikeC — There’s not supposed to be any inflation. And we are all supposed to have ponies. You suggest that there is a kind of conservative banking/monetary system under which there would never be inflation. I don’t think that’s right. Too conservative a banking/monetary system would lead to scarcity of real goods and services, as humans and other resources that could be generating capital sit unemployed. Over a medium term, fiscal and monetary conservatism prevent inflation and ensure the value of a currency. Over the long term, the value of a currency is overwhelmingly a function of the productivity of the economy for which the currency enables commerce. Organizing the real economy well is the name of the game. If the real economy is organized well, low-risk real interest rates will be positive and “inflation” will be a nonissue. If the real economy is organized poorly, there may be price stability or deflation for a while, but eventually what there will be is widespread scarcity. We are better off risking the inflation if it helps us to mobilize resources we would otherwise squander, and heal balance sheets undone by loans that ought never have been made.”

    Factually not true at all. When capital formation is backed by collateral at one to one ratio, then the “money” becomes what we do and will always match our economic output. Defaults get written down and assets maintain value pegged to a star currency. Inflation itself is excess liquidi by its very nature. If everye chasing that inflation is the propellant for economic growth such growth is limited over time because the hoarding of allocatable capital increases exponentially with the top of the food chain.

    Banks should not be fractional lending at all and central banks should not be involved at all with regards to backstopping deficits and encouraging excess liquidity. Look…it is game over for those who see things clearly. When the Fed targets inflation it is targeting wage cuts and that is game over order time.

    I would implore you to reread the part of the deal reserve act which *mandates* that credit aggregates grow in tandem with the economy’s ability to grow ie credit vs. GDP should be in sync. Instead, we have a parabolic growth in credit and said credit must find collateral to which it must attach itself over time or write itself off.

    Or….we get a new monetary system.

  78. Michael Chini writes:

    Edit: “stable” currency

  79. [...] of, say, $200000. These accounts would work like bank savings accounts, and might even be …Read More… [Source: saving accounts – Google Blog [...]

  80. Peter K. writes:

    @ 60 winterspeak

    “srw: I don’t know why you keep asserting that MMT, monetarists, and keynesians have much in common. None of them are Mellonists, but that’s it.”

    They all believe there is an output gap and that government action could and should close the gap as quickly as possible. They differ on how to go about closing the gap.

    Mellonists are very evident in the media these days (and in Japan and Europe policymaking circles). Bernanke seems more focused on preventing deflation than actually closing the output gap in a timely matter.

    Personally I believe that fiscal policy give the most bang for the buck but it’s being blocked by Republicans. Monetary policy can still work at the zero bound via expectation changes and inflation helping with delevegaing. But as SRW points out, the banks are using grandma as a human shield against this policy.

  81. John Hawkins writes:

    Don’t the rich have the most to GAIN from inflation because they hold the most assets?

  82. [...] (From a comment to the original post.) [...]

  83. Mike C. writes:

    “John Hawkins writes:
    Don’t the rich have the most to GAIN from inflation because they hold the most assets?”

    AMEN.

    Somebody gets it.

    It is more subtle than that however John. Anyone who makes an above average wage and has more than is typical wealth, favors the Fed and loose monetary policy. So everyone from economists to news anchors, to investors and of course, politicians, ALL want more inflation because a typically higher than average % ends up in their pocket!

    But this sort of thievery (and it IS thievery) can only bring chaos with it over time.

    Slowly and surely, the private sector of the USA is being decimated by BOTH the left (public unions, property taxes, tuition increases, gvmt bailouts to everyone at their expense) AND the right (Bush – enough said).

    The next recession will be worse than the last and will last years. It will show how decimated people have been.

    We pushed things past their breaking point and now rely upon monetization, lies, scams and inflation (!!!!) to help “fix” things.

    If you mean, neutered, then you are correct because mass neutering of the population is coming.

    We NEED – Balanced Budgets, an end to MMT nonsense AND goldbuggery, REAL fiat – meaning enforced 0% inflation policy – aka credit aggregates MATCH GDP to the T and everything needs to be strictly audited and all rules enforced.

    Or we are finished.

  84. Mike C. writes:

    Short version:

    The ‘top’ turned the Federal Reserve into a deficit-spending, outsourced-jobs-masking, counterfeit, wealth-transferring apparatus for themselves. Those who make six-figure wages and up want to perpetuate a system that favors them.

    Let the good times keep a rollin’ on! – has to be a good blues tune like that somewhere…

  85. Jay writes:

    ““Market monetarists”, MMTers, and old-fashioned Keynesians love to squabble with one another, but they have a great deal in common. ”

    Yeah, their ideas are popular on blogs and a joke to real economists.

  86. Diane Abe writes:

    I’ve been surfing online more than three hours as of late, yet I never found any interesting article like yours. It’s pretty worth enough for me. In my view, if all webmasters and bloggers made just right content material as you did, the internet might be a lot more helpful than ever before. “Now I see the secret of the making of the best persons.” by Walt Whitman.

  87. winterspeak writes:

    peter k: No, republicans block DEMOCRAT fiscal policy, which is larger G. Democrats block REPUBLICAN fiscal policy, which is lower T. G-T=fiscal policy.

    jay: you get the cigar!

  88. Oliver writes:

    What’s the difference between your proposal and the effects of the Taylor rule? Seems that is already in place and more or less guarantees positive or at least 0 real interest rates for $ savings held in all bank accounts, no?

  89. Steve Roth writes:

    @John Hawkins and Mike C.:

    No. Inflation transfers real buying power from creditors to debtors.

    With tens of trillions in debt out there, 1% extra inflation transfers hundreds of billions of dollars in real buying power from creditors to debtors.

    This effect on stocks utterly dwarfs the flow effects you’re referring to.

    And there are many, many more debtors, and far, far fewer creditors. So the effect is far more concentrated on individual creditors.

    And the Fed is run by creditors.