What was the Chicago Plan
Chicago Plan and Sovereign Money as an Alternative to Loan Money: A Path to Steady Growth? –
Almost ten years ago, the financial world was on the brink. In order to diversify their own real estate lending business and for reasons of speculation, international banks co-financed a real estate bubble, which has now burst. Many banks were subsequently bailed out by states, and the financial and economic crisis took its course. As a result, the national debt increased massively.
Critics are now repeatedly warning of a new crisis triggered by banks. The reason is that then, as now, almost all money in circulation was created by private commercial banks by granting loans. Private credit is still granted by simply extending the balance sheet. Commercial banks monetize credit claims on non-banks by crediting them with a claim on themselves (Loans make Deposits). The legal requirements (in particular Basel III) are essential for the extent to which the credit money can be expanded and refinanced. In addition to these requirements, the only thing that matters is the degree of conviction on the part of the creditors that the lending bank will not have any massive losses on its claims (assets) that would consume equity, and consequently its payment obligations in the event of a rush by customers on their deposits Can meet the liabilities side. 1
Critics of the current credit economy believe that the decentralized lending of the commercial banking sector can hardly be controlled by the existing regulation. A banking market left to its own devices, however, regularly produces too many loans independently of the depositors' loanable funds and generally tends to be unstable.2 The money creation capacity of the commercial banks, which is independent of the deposits, is therefore linked to the cheap money of the central banks the central cause of destabilizing boom-bust cycles, financial market bubbles and subsequent financial crises.
The desire to put an end to the supposedly perverse elasticity of the commercial bank loan supply unites a heterogeneous group of critics3 consisting of supporters of the Austrian school with new interpreters of the Chicago Plan, the English movement "Positive Money" and the sovereign money reform together with the Swiss sovereign money initiative. In extreme cases, these “enemies of the modern credit economy” want to go back to the gold standard4 or completely abolish banks. Less far-reaching proposals aim at at least a radical separation of the deposit business and the lending business and thus to restrict the banks to the role of intermediary. What all schools of thought in this area have in common is that they want to prevent commercial banks from creating money by lending or buying assets.
However, the mere fact that certain activities are fraught with risk is not necessarily a justification for a blanket prohibition of these activities. We use a lot of things like cars or airplanes that, despite our best efforts, are not 100% safe. Regulations are always preferable to a blanket ban if the benefits of the activity in question or the system to be regulated in themselves exceed the costs.5 The critics' proposals must therefore be measured by the extent to which a ban on credit creation by banks and thus more disintermediation is one Enables an increase in welfare for society. Simons, one of the creators of the Chicago Plan, soon realized that the market would create its own money in the form of substitutes, while Schumpeter and Minsky came to the conclusion that there is no economic development without bank credit
Common Basic Ideas of Chicago Plan Revisited, Positive Money, and Sovereign Money
During the Great Depression, a group of University of Chicago economists, including Fisher, Knight, Friedman, and Simons, put forward a bunch of proposals for monetary reform. The recommendation to require banks to cover 100% of all balances they allow with central bank money later became known as the Chicago Plan or 100% Reserve.7 In the wake of the current financial and economic crisis, the proposals of the Movements Positive Money and Sovereign Money as well as in the work "The Chicago Plan Revisited" by Benes and Kumhof on a renaissance of the idea. The new proposals differ in detail.8 However, the Renaissance unites the basic ideas of the Chicago Plan Revisited, Positive Money and sovereign money (hereinafter also referred to collectively as “the proponents of monetary reform”) in the following outlined form: 9
After a reform, it is the task of money service banks to dispose of the depositors' existing stock of sight deposits. Credit deals with the private sector would not go away, however. They would only be contracted off the balance sheet of the money service banks. Two alternatives are conceivable: On the one hand, loans can be created by issuing bonds directly on the capital market; a transfer of sight deposits from saver to debtor then takes place on the accounts of the money service banking sector. On the other hand, investment trusts or “wide banks” can grant loans10 to the private sector, which are refinanced through the issuance of equity and long-term debt, with creditors exchanging their demand deposits for claims on lenders who participate directly in losses in the event of bankruptcy. New money would only be issued by the central bank on the basis of a money supply rule by way of financing a certain part of government spending.
Proponents of monetary reform expect the following advantages: 11
- Banks could no longer trigger economic fluctuations simply by increasing or contracting credit volumes.
- The financial system would be stabilized: Since the sight deposit business of the money service banks is completely covered with government bonds or central bank balances at 100% reserve, there is no longer any reason for a run on banks.
- Since new money would only be created by the central bank by making the funds available to the state to finance the state budget, the state financed this expenditure free of interest and repayment. The interest burden and national debt would fall after the reform was introduced.
- Money would again become a publicly controllable commodity that the central bank, as a real supply monopoly, would issue with a fixed rule while maintaining price stability. An active and discretionary monetary policy would no longer be possible.
But right at the beginning of the publication of the original proposals, there were serious concerns. For example, Hayek writes, referring to an article by Simons, one of the authors of the Chicago Plan: “It has been rightly observed by the most critical mind among the plan's creators that banking is an ubiquitous phenomenon, and it is happening the question of whether, if one prevents it from appearing in its traditional forms, it is not merely driven into other, less verifiable forms. ”12 Simons and Hayek's common concern was also whether we would still be able to do so are to “draw a sharp line between what should be considered money and what is not” 13. An innovative market can create its own money.
The market creates its own money substitutes
The market then creates its own money when economic entities other than regulated banks can also put financial assets into the world which - like 100% reserve - or sovereign money can be used as a means of payment. To do this, however, the following hurdle must be overcome: In each of these cases, the issuer or issuer must convince a sufficiently large number of other economic entities to accept promissory notes or promissory notes instead of money accept, then a new loan arises which, depending on the creditworthiness of the debtor, can be further assigned and thus also become money.
If the monetary system were to be reformed on the basis of proponents of a monetary reform, it would very likely lead to increased issuance of private promissory notes, which would serve as money substitutes. Outside the banking system, many new bank-independent financing companies would also emerge immediately, granting long-term loans and raising the majority of the funds required for this through the revolving issue of short-term (or callable by the owner), tradable, near-cash credit assets for which the outstanding pool of receivables as collateral serves. 15
Such a shadow banking system cannot create additional purchasing power by creating new sight deposits.16 Instead, non-bank finance companies would place near-money debt instruments with non-banks, which they would then pay with existing deposits (M1). The M1 received would in turn be forwarded by the finance companies to their borrowers for payment. The existing M1 money supply in a national economy is such a revolving fund that is redistributed by financing companies when additional loans are granted. As a result, the bank-independent finance companies create credits by issuing tradable, near-money debt instruments against existing sight deposits with the increasing speed of money circulation.
Instead of banks, financing companies independent of banks could trigger economic fluctuations by increasing or decreasing loan volumes. Compared to commercial bank deposits, the only disadvantage is that the near-money debt instruments created by finance companies are not covered by government bonds or central bank deposits like sight deposits at money service banks. The near-money debt instruments would be more default-prone and buyers would have to do their own credit analysis. The bank-independent financing companies can compensate for this by paying higher interest on the money substitutes. There would be no credit brake even after a reform of the monetary system based on the common basic ideas of the Chicago Plan Revisited, Positive Money and sovereign money. If the bank-independent financing companies are involved, corporate financing is at best more complex and expensive than in the current credit economy, where the loans-make-deposits business of the elastic banking system creates the loans by simply extending the balance sheet.
Importance of bank loans for economic development
We live in a modern credit economy in which the supply and demand for savings do not meet by way of an exchange in kind, but instead meet with the help of money as the only accepted medium of exchange. In Schumpeter's theory of economic development, the banker already plays the role of the “ephor of the market”. Instead of controlling the king, as in antiquity, modern bank ephores limit the power of the kings of the market economy, the dynamic entrepreneurs. Both sides are closely intertwined at Schumpeter: Without bank loans, innovative entrepreneurs cannot tear the economy out of its stationary state, without entrepreneurs there would be no credit banks. 17
The discussion as to whether savers could not replace bank loans through direct corporate financing in the capital markets and whether banks are only the intermediaries of loanable funds in any case was already a controversial topic in the Keynesian discussion of the loanable funds theory. Without start-up financing with bank loans, investment financing becomes very difficult in a growing money economy. Keynes wrote: “Prof. Ohlin seems to be suggesting that the supply of liquid finance is forthcoming from those individuals who have the intention to save at some future date. But if so how do they do it? They must deplete their cash balances, overdraw their accounts [...]. The ex ante saver has no cash but it is cash which the ex ante investor requires. On the contrary, the finance required during the interregnum between the intention to invest and its achievements is mainly supplied by specialists, in particular by banks, which organize and manage a revolving fund of liquid finance. "18
In the Keynesian tradition of analysis, investment expenditures and savings adapt to one another up to the full utilization of resources.19 Interestingly, starting from a Walrasian equilibrium with full utilization of resources, Schumpeter arrives at the same result.20 For him, “the bank-like creation of new purchasing power is ad hoc not only one of the sources of the credit supply, but fundamentally the most interesting, without which the financing of modern industrial development would have been impossible at all, and the pace of this development would have been considerably slower. [...] The savings capital, which is constantly being created, moves up, so to speak, to the creation of purchasing power and continuously replaces it. But that doesn't change the fact that besides him there is another very elastic fund in the economy, given the possibility of purchasing power procurement, which is available to finance new transactions regardless of the existence of savings capital and which actually penetrates everywhere where there is something new to finance. "21
By the elastic fund of the economy, Schumpeter, like Keynes, means the loans-make-deposits business of the banking system. It creates productive loans very flexibly by simply extending the balance sheet. In both cases, the savings follow the investments, if necessary refinance loans on the capital market and there is no sustainable inflation with productive loans even in the special case of full resource utilization.22 However, a correspondingly equal supply elasticity in corporate financing can only be achieved after the introduction of full reserve banking or sovereign money give when the speed of circulation reacts accordingly (turnover of available savings capital of the public in the form of existing sight deposits M1). With increasing disintermediation, non-banks would therefore have to act just as efficiently in the selection and monitoring of borrowers as banks regularly do when granting loans.
Today's financial theory, however, considers banks, due to their business model, to be particularly well suited to keeping the information costs associated with lending low compared to private individual investors. In the modern credit economy, banks have more functions than those of mere intermediaries, while at the same time the following functions can only be replicated at great expense or only partially by savers: 23
- Banks have a high level of expertise in the selection of borrowers. With the accepted lot sizes and risks and the associated regulation by the legislature, a powerful monitoring system has been created for potential and current borrowers, in which the banks realize economies of scale and reduce monitoring costs.
- Due to the accepted lot sizes of loans, banks can internalize the costs of credit analysis, also against the background of a possible cross-selling income, and thus better control and diversify credit risks.
- Thanks to the typical link between the deposit business and payment transactions and the lending business, banks are better able to transform deadlines than individual investors.
- Banks are able to give tailor-made loans to small and medium-sized enterprises (SMEs) that neither have the group financing that is customary on the capital market, nor are they able or willing to manage debt investor relations and the associated debt investor relations for the capital market Build publicity for business results. 24
That means: At banks, the management of credit risks from corporate finance is in professional hands. In the case of increasing disintermediation, in a crisis, for example, individual investors, on the other hand, may find themselves sitting on small, illiquid lot sizes without their own credit expertise, which they would have to sell at fire sale prices in the event of a crisis. The panic that followed would devastate the corporate finance market for smaller businesses and create a credit crunch
A large number of studies confirm the relationship between the performance of the banking sector, the share of bank financing-dependent SMEs in value creation, economic development dynamics and the international competitiveness of an economic area, as already described by Schumpeter in the theory of economic development. Economic development requires an efficient financial sector.26 A reform of the monetary system would make it more difficult for smaller companies in particular to finance investments if they tried to focus on direct financing by savers and to reduce the banks to the function of credit intermediaries. A reform of the monetary system based on the common basic ideas of the Chicago Plan Revisited, Positive Money and sovereign money would be associated with considerable losses in growth, while the credit brake due to the possibility of creating money substitutes would not work anyway.
Outlook and alternative approaches to crisis prevention
The advocates of a monetary reform would achieve a single goal: If the sight deposit business of the money service banks were completely covered with government bonds or central bank balances with 100% reserve, there would be no more reason for a run on banks. The monetary system would be more stable. Achieving this goal would, however, be bought at a high price. Bank depositors can be protected against a run with lower economic costs.
A bank run is initially characterized by the simultaneous withdrawal of all deposits with a simultaneous drying out of the self-issue window. The contractual maturity of liabilities is irrelevant if a bank is considered solvent and can therefore refinance itself on the liabilities side at any time. It is therefore important to have the degree of certainty that market participants can expect that a bank will remain solvent even in the event of a run on its accounts - in other words, the expectation that the bank will not suffer any losses on the assets side that would consume its equity cover. The long-term intrinsic value of bank assets is the result of successful management of price, interest rate and default risks. The decisive factor here is statutory banking regulation with requirements for risk management, which ensure that banks can be avoided in the event of a bank run simply by being able to convincingly point out sufficient assets to active and potential lenders.27
However, it is precisely this trust that many banks have forfeited in the last financial crisis through a failed credit policy. It is true that none of the leading industrialized countries experienced a boom in corporate investment financed by bank loans before the crisis. However, the ratio of bank loans to gross domestic product rose significantly in the decade before the financial crisis. The ratio was around 50% in 1945, around 100% in 1997 and 160% ten years later. Deregulation and financial innovations had caused the banks, now left to their own devices, to produce too many loans of the "wrong" kind. Instead of dedicating themselves to the financing of productive corporate investments, the international banks are mainly committed to the financing of (existing) real estate. Spurred on by a persistently low credit default rate, many banks in a booming real estate market lowered their credit standards with increasing loan-to-value ratios, up to 100% and more.28
To refinance the boom, a huge securitization machine had developed within the global financial system, which resold credit pools in the form of asset-backed security papers (ABS papers), particularly from US mortgage borrowers, on the basis of historical default probabilities. Willing buyers were, for example, German state and specialist banks, who bought the papers with off-balance structures without capital backing as a credit substitute to increase returns.29 They made the necessary capital export, which was the consequence of the ongoing German current account surplus.30 When the house prices then did not increase further, many real estate securitisations went into distress, as low-income families in the USA could not afford interest or repayment of the loans taken out without an increase in the value of the real estate loaned and without the availability of cheap follow-up financing. Many banks with a corresponding exposure were subsequently bailed out by states, which resulted in a massive increase in national debt. In Europe there was a Faustian pact between banks and states. Chained to one another in a solvency crisis, “rescued banks” with still low capital levels finance over-indebted states and over-indebted states continue to try to stabilize crisis banks through potential promises of aid.31
The Basel III requirements, which have already been gradually implemented (increase in capital requirements for core capital, introduction of capital preservation and countercyclical capital buffers) are not sufficient to prevent banks from getting into trouble again. Further measures are necessary:
- Improved stress tests for banks, which also adequately take into account the risks of the securities in the investment portfolio.
- Introduction of an upper limit for the relationship between loan amount and property value (lending limit), which means that 100% financing is no longer possible; In addition, binding maximum values for the share of interest and repayments in the borrower's disposable income (debt servicing ability) - cumulative over all loans taken out -; 32 further prohibition of home equity loans for consumption purposes or financing of other assets, 33 since these loans are not included in the Modernization of the property flow and thus dilute the collateral.
- The solution to the moral hazard problem with ABS securitisations: Incorrect incentives in the structuring and rating of ABS securitisations carried the US real estate crisis into the global banking world. Today there is a threat of repetition in smaller volumes for car, credit card and student loan securitizations. In its current form, loan securitization does not provide enough incentive for the initial borrower to conduct a thorough and unbiased credit analysis. Since the securitization of the loans takes place in several steps, each actor in the chain only holds a temporary credit risk that only exists until they have resold the paper. Under these conditions, an interest in investigating whether the borrower can really (fully) repay the loan exists at most for the respective investor, on whose balance sheet the finished investment product will ultimately end up permanently. However, this does not have the information equipment that would be necessary for a corresponding analysis. Since a stricter liability for rating agencies has already come into effect for the financing they have accompanied, banks will have to be legally obliged in future to retain an even higher share of the issue or an even larger part of the first loss tranche for securitisations.
- Maximum limit for the leverage buy-out lending business of banks: Buy-out loans are not only associated with a higher risk than normal corporate loans, they are also regularly not a trigger for further economic growth as a risky, procyclical and interest-sensitive refinancing business for company sales. The guidelines published by the ECB on dealing with so-called “leveraged transactions” can only be a start.34
- Abolition of the regulatory privilege of government bonds on bank balance sheets: The financial and economic crisis has shown that there are no risk-free assets. The majority of eurozone countries, for example, are far from having an AAA rating. As a consequence, macroprudential instruments must, as repeatedly called for by the Deutsche Bundesbank, force banks to back government bonds with equity capital.35 In addition, there must be an upper limit for the concentration of exposure in a single country, as is already the case with every private borrower is required by law.
- Greater current account imbalances must be reduced through better coordination of monetary and fiscal policy: In Germany, for example, current account surpluses must be reduced. This would mean, among other things, that less money would flow into foreign loans subject to default risk to current account deficit countries.36
All of the macroprudential instruments listed here are far better suited to preventing a renewed financial and economic crisis emanating from banks than "panglossian economics" in the form of full reserve banking, positive money or sovereign money.
In an uncertain world, however, neither all future events are known, nor can an objective probability of occurrence be assigned to every basically expected event. There is no way of anticipating all future difficulties in the financial system and using preventive measures to prevent them. Higher capital requirements for core capital and the introduction of capital conservation buffers and countercyclical capital buffers make the financial system much more robust, at least in the event of shocks.37 Upper limits for the ratio of loan amount and property value and for leverage in leveraged buyouts are particularly suitable, as the banking sector is particularly suitable To protect the consequences of what is currently the most likely event after the return of the central banks to a more neutral monetary policy: that interest rates rise faster than the expectations reflected in the yield curve suggest.
- 1 Cf. also the analysis of the German financial system as a modern form of Wicksell’s credit economy, in which the following applies: “loans make deposits”; O. Schlotmann: The German time structure of interest rates in the light of Wicksell's credit theory, Frankfurt 1997, pp. 103-110.
- 2 A. Turner: Between Debt and the Devil, London 2016, p. 174; and Z. Jakab, M. Kumhof: Banks are not intermediaries of loanable funds - and why this matters, BOE Working Paper, No. 529, May 2015.
- 3 See J. H. de Soto: The Austrian School: Market Order and Entrepreneurial Creativity, Cheltenham MA 2008; J. Benes, M. Kumhof: The Chicago Plan Revisited, International Monetary Fund, Working Paper, No. 12/202, Washington 2012; A. Jackson, B. Dyson: Modernizing Money: Why our Monetary System is Broken and How it Can be Fixed, Positive Money, London 2013; and J. Huber: Monetäre Modernisierung, Vollgeld und Monetative, 5th edition, Marburg 2016.
- 4 O. Schlotmann, S. Siddiqui: Golden Illusions, Dangerous Consequences: Why a depoliticized, rule-based gold standard is not a viable alternative to the current monetary system, in: Kredit und Kapital, 50th vol. (2017), no. 3, p. 281 -298.
- 5 M. Wolf: The Shifts and the Shocks, London 2014, p. 235.
- 6 Cf. J. A. Schumpeter: Theory of Economic Development, 5th edition, Berlin 1952; and H. Minsky: Stabilizing an Unstable Economy, New York 1986, p. 278.
- 7 See R. J. Phillips: The "Chicago Plan" and New Deal Banking Reform, Levy Economics Institute, Working Paper, No. 76, Annandale-on-Hudson 1992.
- 8 A. Jackson: The Chicago Plan & Positive Money's proposals - what is the difference ?, 23.1.2013, http://positivemoney.org/2013/01/the-chicago-plan-versus-positive-money/ ( October 1, 2017); and J. Huber: Many roads lead to Rome - not all of them by the shortest route. Considerations on the Chicago Plan Revisited compared to a sovereign money reform, https://www.vollgeld.de/kumhof-plan-viele-wege-nach-rom (October 1, 2017).
- 9 M. Wolf: The Shifts and the Shocks, loc. Cit., Pp. 210-213; M. Wolf: Strip private banks of their power to create money, in: Financial Times from April 24, 2014; and M. King: The End of Alchemy, London 2016, pp. 262-264.
- 10 On the split into narrow and wide banks (credit or investment banks), see also M. King, op. Cit., P. 263 and corresponding footnote 18 on p. 389.
- 11 Cf. on this M. Wolf: The Shifts and the Shocks, op. Cit., P. 211; and M. King, supra, pp. 261-263.
- 12 Quoted from F. A. Hayek: Monetar Nationalism and International Stability (1937), reprinted in: Denationalization of Money, Tübingen 2011, pp. 108-109.
- 13 Ibid, p. 109.
- 14 H. Minsky, op. Cit., Pp. 255-256.
- 15 A. Turner, supra, p. 189; and O. Schlotmann, S. Siddiqui, op. cit., p. 293.
- 16 B. Dyson, G. Hodgson, F. van Lerven: A response to critiques of "full reserve banking", in: Cambridge Journal of Economics, Volume 40 (2016), No. 5, pp. 1351-1361.
- 17 See also O. Schlotmann: The German Time Structure of Interest Rates ..., loc. Cit., Pp. 27-32; and G. Braunberger: Joseph A. Schumpeter, Ein Pionier der Macrofinanz, Schumpeter Discussion Papers, Wuppertal 2016.
- 18 JM Keynes: The ex ante Theory of the Rate of Interest, in: D. Moggridge (Ed.): The collected Writings of John Maynard Keynes, Volume XIV, The General Theory and After, Part II, Defense and Development, London 1973 , P. 218 f.
- 19 Cf. Keynes: "Some people find it a paradox that, up to the point of full employment, no amount of actual investment, however great, can exhaust and exceed the supply of savings, which will exactly keep pace." JM Keynes : Alternative Theories of the Rate of Interest, in: D. Moggridge (Ed.), Loc. Cit., P. 210.
- 20 Cf. for a comparison of the two traditions of analysis: O. Schlotmann: Die deutsche Zeitstruktur der Zinssätze ..., loc. Cit., Pp. 26-32.
- 21 J. A. Schumpeter: The golden brake on the credit machine, in: E. Schneider, A. Spiethoff (Ed.): Essays on economic theory, Tübingen 1952, p. 164.
- 22 In Schumpeter's theory of economic development, the additional productive credit demand when the production potential is fully utilized leads to temporary credit inflation before the implementation of new combinations sufficiently increases the economic flow of goods and prices fall again. J. A. Schumpeter: Theory of Economic Development, loc. Cit., Pp. 158-159.
- 23 Cf. on this D. W. Diamond: Financial Intermediation and Delegated Monitoring, in: Review of Economic Studies, 51st vol. (1984), no. 3, pp. 393-414; and Deutsche Bundesbank: The Role of Banks, Non-Banks and Central Banks in the Money Creation Process, in: Monthly Reports, Vol. 69 (2017), No. 4, p. 35.
- 24 O. Schlotmann: KMU Financing, USA 1, Scale 0, 3.5.2017, http://www.finance-magazin.de/money/fuer-eine-handvoll-euro/kmu-finanzierung-usa-1-scale- 0-1401241 / (October 1, 2017).
- 25 SG Cecchetti, KL Schoenholtz: Narrow Banks Won't Stop Bank Runs, April 28, 2014, http://www.moneyandbanking.com/commentary/2014/4/28/narrow-banks-wont-stop-bank-runs ( October 1, 2017); and O. Schlotmann: KMU Financing, a.a.O.
- 26 R. G. Rajan, L. Zingales: Financial Dependence and Growth, NBER Working Paper, No. 5758, Cambridge MA 1996; and T. Beck: Financial Development and International Trade, Is there a Link ?, Policy Research Working Paper, No. 2608, Washington 2001.
- 27 See the concept of the depositor protection balance sheet by W. Stützel: Is the “golden banking rule” a suitable guideline for the business policy of credit institutions ?, in: Lectures for Sparkassenprüfer, Deutscher Sparkassenverlag, Stuttgart 1960.
- 28 A. Turner, supra, pp. 61-64; and see O. Jorda, M. Schularick, A. Taylor: The Great Mortgaging: Housing Finance, Crises and Business Cycles, HKIMR Working Paper, No. 25, Hong Kong 2014. These authors conclude that the financing business of Real estate accounts for around 60% of the total lending business of banks in the G7 countries.
- 29 Cf. also M. Hellwig: Deutschland und die Finanzkrise (n), in: Wirtschaftsdienst, 97th Jg. (2017), no. 9, pp. 606-607, https://archiv.wirtschaftsdienst.eu/jahr / 2017/9 / germany-and-the-financial-crises / (28.11.2017).
- 30 A. Turner, loc. Cit., P. 183.
- 31 D. Pimlott: Mervyn King at Odds with ECB on eurozone crisis, in: Financial Times, June 24, 2011.
- 32 Cf. C. Buch, J. Reich, B. Weigert: Makroprudenzielle Politik, in: Wirtschaftsdienst, 96th year (2016), no. 8, p. 561, https://archiv.wirtschaftsdienst.eu/jahr/ 2016/8 / macroprudential policy / (28.11.2017).
- 33 See J. Pickford: Wealthy borrowers use home loans to bet on stock market, in: Financial Times, August 7, 2017.
- 34 ECB: Guidance on leveraged transactions, in: Banking Supervision, Frankfurt 2017.
- 35 Cf. e.g. J. Weidmann: Stop encouraging banks to buy government debt, in: Financial Times of September 30, 2013.
- 36 See A. Turner, op. Cit., P. 183.
- 37 See, however, the criticism of Admati and Hellwig, who are of the opinion that banks need a lot more equity than the current regulation in Basel III provides. Your guideline is 20% to 30% equity backing on the assets side. See A. Admati, M. Hellwig: Des Banker's new clothes, 3rd edition, Munich 2014.
Title: Abolish Fractional Reserve Money: Sustainable Prosperity Without Future Financial Crisis or Panglossian Economics?
Abstract: One drawback of our current credit economy is that commercial banks could potentially make too many loans. The supporters of full reserve banking and positive money therefore claim that the abolition of commercial bank money creation would lead to fewer financial crises. This paper argues that the market would bypass any lending regulations by creating its own money substitutes. Such a reform does not take into account the relationship between saving and investing in a growing monetary economy, abandons the benefits that commercial banks have in financing corporate investments, and is harmful for economic growth. As an alternative approach, further macroprudential instruments are suggested.
JEL Classification: E5, E44, E50
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