Home > Uncategorized > Thomas Mayer on the ideal European Central Bank

Thomas Mayer on the ideal European Central Bank

We’re publishing some expert ideas about the future of the ECB (and hence Euro money). Two days ago some ideas of Willem Buiter were published, yesterday we published some ideas from Richard Werner. Today some ideas by Thomas Mayer. Beware the last sentence.

EMU is incomplete and dysfunctional The European Monetary Union (EMU) is incomplete and dysfunctional. First, it is incomplete, because the quality of book money created by banks through credit extension differs from country to country (depending on the quality of the banks’ credit portfolios and the financial capacity of the governments to support weak banks in their jurisdiction). We have a paper currency union (as euro notes are the same in all member countries), but no monetary union (as deposits differ). Second, EMU is dysfunctional, because the monetary policy of inflation targeting pursued by the ECB has broken down. Since the Phillips curve no longer works, the central banks has lost control over inflation. The ECB-“Insiders” (policy makers and their loyal “watchers”) of course deny that the emperor has no clothes and hope that the Philipps curve would come back at some point. This amounts to a denial of reality. Against this background, I propose first to complete EMU by introducing a safe bank deposit, i.e., a deposit fully backed by reserve money deposits at the central bank. The safe deposit would turn deposits (like bank notes) into complete substitutes across countries (anyone wanting to read more on this can find it here. Second, I propose that the ECB abandon the policy of inflation targeting and adopt a rule for the expansion of reserve money (which would of course translate into the expansion of the safe deposit). The rate of expansion should reflect the expected nominal growth rate of the economy. This rate could only be altered with a two thirds majority in the Governing Council on the basis of an assessment of any structural changes that are expected to change the long-term growth rate of the economy. I am aware that there would be no room for pro-active monetary policy in this regime. In my view, this is its biggest advantage.

Mit freundlichen Grüßen Dr. Thomas Mayer.

  1. December 9, 2017 at 7:49 pm
  2. December 10, 2017 at 11:50 am

    My five cents worth. A presentation for colleagues at my uni department. We do control engineering. http://folk.ntnu.no/tronda/econ/keynes-bancor-euro.pdf

  3. December 10, 2017 at 4:37 pm

    It’s always encouraging to see bright minds apply themselves to the challenge of improving an existing institution that is recognized to be foundationally flawed in many respects. Even small improvements would have to be considered helpful.

    I wonder, though, if any of the members of the ECB shadow council would find it useful to consider certain alternatives to the current institutional banking structure that would probably be considered somewhat “radical.”

    It was at the crest of the 2008 Financial Crisis that I recommended a complete “bypass” of the privately-owned banking and financial services sector of the economy.

    Erected by the federal government, the bypass would—quite easily, actually—have maintained the Main Street economy in a prosperity mode while the entire financial services sector of the economy was allowed to crash and burn in a “moral hazard” nightmare of their own making.

    My point was that “plain vanilla” banking services could be provided to the Main Street economy by the central government at the same time that all the private banks were going bankrupt. It could provide checking accounts, loans for houses and big-ticket purchases, loans to companies that actually make stuff (non-financial firms).

    All of these financial services could have been provided “on the fly” by the government if Congress had authorized the Treasury Department to buy up the assets of failed banks for pennies on the dollar, fully capitalize them with taxpayer funds. With new management/motivation, this “Taxpayers’ Bank” would then have been able to begin lending almost immediately. Such an entity could even have honored the obligations of insurance companies that were going bankrupt.

    If socialism was embraced with respect to the provision of plain vanilla banking services to the Main Street economy, it would eliminate for all time the risk of systemic failure brought on by the greed of the titans of the financial services industry.

    If this approach had been followed, the private sector survivors of the cataclysm would have been free to either compete with the government for plain vanilla depositors—which would be unlikely—or they could continue to do the one thing they’ve always wanted to do more than anything else…

    …chase after the speculative dollars/pounds/euros of rich people, promising them higher returns for higher risks taken; only this time there would be no bailouts from the government when their speculative gambles go bad.

    With this kind of two-tier banking system, the Central Bank would certainly have to be removed from the hands of the for-profit banking elite and placed in the hands of public servants dedicated to the prosperity of The People instead of the viability of money lenders seeking to optimize their profits through guile and clever machinations.

    So in your deliberations over the future of the ECB, would there be any time when you’d consider a rather dramatic replacement of existing institutions with a socialism-based answer to the problem of systemic risk?

  4. December 11, 2017 at 11:31 am

    Thomas Mayer’s analysis of the problem looks sound enough, but I’m unhappy with his proposed remedy. The only safe remedy is real national or economic community self-sufficiency, which had it not been for banker-inspired monetary union is more or less what the EEC had. What Mayer proposed leaves shareholder values and debts much as they are now. Cf. Luke 16:1-13.

    Bravo for Trond Andresen’s unrepentant Keynesianism! As he’s into control engineering, let me remind him of cybernetics (e.g. what is involved in navigating) and my having seen Keynes as moving from merely steering by balancing market forces to adding course correction, i.e. intimating the I as well as the P of steering in intuitively anticipating the theory of PID control. Cf. my comments on Robert Delorme’s Philosophy of Economics paper.

    Regarding James Kroeger’s suggestions, my concern is that the existing centralised banking is keeper of everyone’s personal and business accounts, and is doing its best to close down all their local banking outlets as unnecessary given internet banking, thereby eliminating local record backup, locally-informed advice and complaints about banking errors.

    The word Socialist has become so conflated with anti-Capitalism and State Socialism as to muddy any discussion of radically communal as against self-centred motivations. Perhaps a better label would be Subsidiarist, meaning localisation of administrative functions and decision-making to the lowest level feasible. This reduces central Governments to deciding which legal conventions, forms of organisation and production sharing arrangements self-evidently work and dealing with flagrant breaches of them; likewise with direction of local community and infrastructure maintenance and industrial organisation and work sharing.

    Kroeger’s “what if’s” need to be realised by governments accepting the honest conventions that money is credit and the goal now has to be not the generation of unnecessary wealth but ecological maintenance, indebting those who spend money not to the banks but to all the people using currency of the monetary union involved. This leaves room for community and regional banking as well as national and international. The responsibilities of central banking would likewise reduce to providing something like ‘cloud’ back-up for local banking records, freely accessible via free services like google.

    • December 12, 2017 at 12:49 am

      Understanding that banks currently create money in the form of credit without being limited by deposited reserves, there would seem to be a need to impose limits on their lending behavior once the economy has started to employ most of its human resources, or else face the problem of ‘uncontrolled’ inflation. This would seem to be one important purpose for having a CB: to exert control over the lending habits of bankers who otherwise have no incentive to limit their own lending activity, otherwise.

      Now if we re-engineered the banking system in a way that would place an absolute limit on banks lending activity—up to the amount of community ‘surplus’ that had been deposited in the (local) bank—it would indeed impose a limit that would tend to moderate any ‘acceleration’ of inflation, but I’m dubious as to how popular this kind of change would be among the banking elite.

      I do acknowledge that the word Socialism has been demonized over time, but even in the ultra-capitalist United States, there is a general recognition that some Socialism in a “mixed-economy” is a good thing—not an alternative that should completely displace private enterprise and markets—but something self-interested individuals will sometimes wish to embrace, collectively, to enhance their collective well-being.

      • December 12, 2017 at 8:39 am

        James, you seem to be completely missing the point of my comment, being that the banking institutions do not lend anything, and the real bank is world we live in: the surplus wealth nature and our predecessors have provided, inso far we do not merely live off it but work to maintain it.

      • December 14, 2017 at 1:44 am

        …the real bank is world we live in: the surplus wealth nature and our predecessors have provided…</em

        One of my foundational understandings of the money based economy, Dave, is that money is ultimately a claim on the productive efforts of others (that everyone recognizes as such).

        Generally speaking, these productive efforts have mostly occurred in the past, prior to the moment when money is accepted by a supplier in exchange for something that was produced and brought to market.

        But in the financial world, the productive efforts that are traded for money are commonly expected to occur in the future. A future “income stream” is what buyers of financial assets usually expect to get from many/most of their financial investments.

        In this context, money is a claim on the productive efforts of others that we expect will occur in the future.

        People do in fact trade a commitment of their time in the future to productive efforts in exchange for a claim in the present on the productive efforts of others which occurred in the past.

        So from this perspective, I would ask you if your conceptualization of the “surplus” that banks would manage in a real world banking system includes the conceptual surplus that does not currently exist in the world, but which is simply anticipated—with a great of rational justification—to be generated in the future?

        Yes, it is all ultimately based on “guesswork”, but we often find in this existence that our guesses are good enough to produce desirable results.

        Have you worked this feature of our experience into your conceptualization of the surplus that future banks would be involved in? Your answer could help me to reconcile your ideas on this topic with my own understanding of things…

  5. December 14, 2017 at 6:48 pm

    “One of my foundational understandings of the money based economy, Dave, is that money is ultimately a claim on the productive efforts of others (that everyone recognizes as such).”

    James, I entirely understand what you mean. Do you understand that I am disagreeing with the usual understanding – which is yours – on effectively the same grounds as Copernicus disagreed with Ptolemy? The order of events is ambiguous and the conventional interpretation is mistaken insofar as it both obscures the truth and makes practice unnecessarily complicated.

    Put another way, the fact that “financial assets” including money are sold as a “claim” on the productive efforts of others doesn’t mean the claim represents a moral right even if (perforce) it is a legal one: it could be a hope, or wishful thinking, or a scam. The “assets” could on the other hand represent credit worthiness – a rolling indicator of what people or cooperatives may need to use to contribute in the future, given the reliability of their contributions in the past. An unearned right to goods is by no means the same as giving credit where it is due or needed.

    Indicators that the conventions based on direct observation of how money is used are back to front include it going to the rich who don’t need it but not to poorer people who do need it – both to survive or to thrive. Again, those who think they have earned money are tempted to spend it for show rather than necessity, whereas those used to relying on credit learn not to push their luck too far, minimising their demands on Nature’s bounty. Indications that monetary claims are a scam include the way bank money is created, whether you think of this in terms of the principle of Reserve Banking or the detail of Professor Werner’s careful observations of actual banking practice: the money banks lend has not been earned but is simply credited to accounts; nor is any debt incurred until the money has been spent. People have in any case been saying this since c.1823. Read “What is Money?” by A Mitchell Innes (1913) or watch “The Money Makers”. Indications that work contracts are a scam are that employees are expected to credit employers with work but accept payment in bankers’ IOUs, which could equally well have been supplied at the beginning of the week. Employees would the owe work rather than employers payment. In short, if our monetary system is described honestly it amounts to rationing credit limits (and perversely so), not redistributing wealth.

    A typo probably hasn’t helped you grasp my argument that “the real bank is THE world we live in”. Hence your question: “I would ask you if your conceptualization of the “surplus” that banks would manage in a real world banking system includes the conceptual surplus that does not currently exist in the world, but which is simply anticipated—with a great of rational justification—to be generated in the future?”

    In my real world banking system, what we now call the banks (and I would reduce to credit management advisers) would NOT manage the surplus. The real economic system would do that in much the way it does now: with distributors keeping shelves stocked and producers doing what is necessary for them to be able to do so, subject to prudential constraints on the availability of resources to help Nature regenerate its surpluses. But they, and others like carers and scientists and educators and organisers and advisors (and even those fully employed just by trying to look after themselves) would be given generous credit allowances first which, insofar as they were used appropriately, would be renewed second. Filling our world with weapons and dangerous technology (as against prototyping these to see if they were dangerous), or making, selling, buying and throwing away rubbish, would not be using it appropriately. Nor can good work be anticipated to justify high wages and profits; it (be it design or realisation) deserves to be rewarded only after it has been done well. Certainly bankers do not deserve to be rewarded for the educational achievements and hard-won communal infrastructure and natural resources which are the surplus we shall be living on as we try to maintain and reproduce it; nor for the obscene degradation of ecological processes which used to do most of our work for us with negligible pollution.

    • December 15, 2017 at 2:26 am

      This may be a bit of a parenthetical aside, but I thought I’d comment on one of the points you made early on:

      …the fact that “financial assets” including money are sold as a “claim” on the productive efforts of others doesn’t mean the claim represents a moral right even if (perforce) it is a legal one: it could be a hope, or wishful thinking, or a scam.

      This is an interesting statement to me because I have a developed position with respect to the meaning of the word moral as well as the term moral right.

      I say that any action—or decision to not act—is “moral” (in our common understanding of the use of the word) if everyone would be better off if everyone were to act—or choose not to act—in the same way.

      If everyone would be worse off, then an action or failure to act is commonly perceived as being “immoral.” If we would be neither better off nor worse off, then the action or failure to act cannot rationally be considered to be either moral or immoral.

      (Yes, this is indeed related to Kant’s categorical imperative, but is different in a crucially important way.)

      From an article I wrote some time ago on human cruelty:

      Killing a person who angers you is immoral because we would not all be better off if we were all to kill the people who anger us. Stealing is also immoral in most situations for the same reason. Lying is immoral in some circumstances because we would not all be better off if everyone also lied when facing the same circumstances. But lying would be moral in other circumstances because everyone would be better off if everyone were to lie for the same reasons.

      Re: the concept of a moral “right”…

      As a matter of fact, no individual is blessed with “rights” as a natural consequence of merely existing. Any right you might “have” is not something that you actually have possession of; it is something that can only be granted to you by the will of others. To say that an individual or group has a right is actually just another way of saying that everyone else is obligated to behave (or not behave) in a certain way with respect to that individual/group.

      Why might everyone feel motivated to grant you any kind of right at all (to their obligated behavior)? Answer: they would do such a thing only if they recognized that they would benefit if they all agreed to behave (or not behave) in the same way. In other words, they would only agree to grant you a right if they believed it would be the moral thing to do.

      So from this perspective, is the “claim” that people commonly believe the possession of money gives them to the productive output of others a moral claim?

      My answer: in a general sense, yes. The claim is by (my) definition moral if everyone would be better off if everyone were to “respect the claim” that money supposedly grants to those who possess it.

      For the same reason, it is therefore immoral to counterfeit money, since it provides a benefit to the counterfeiter that would not be experienced by everyone if everyone were to counterfeit the money they wanted to spend.

      Limited time today…

    • December 15, 2017 at 10:24 am

      “I say that any action—or decision to not act—is “moral” (in our common understanding of the use of the word) if everyone would be better off if everyone were to act—or choose not to act—in the same way.”

      This leaves you with Hume’s epistemological problem: how do you know that everyone would be better off? His answer was democratic agreement on the customs or mores of a society: in practice, as seen and expressed in legislation by governments. Kant’s categorical imperative was a reaction to that, and sounds like a crib of Christ answering the question “What shall I do?” with “Love your neighbour”. But the term ‘imperative’ makes of this an obligation rather than a free ethical decision, focussing it on actions rather than choosing to adopt an attitude which will motivate good outcomes. The Christian position as I understand it is specific to the relationships between one person and one (or many) others. It is possible to judge that an action which encouraged the timid would be counter-productive with bullies or even the already self-satisfied. You can see that in the Gospel stories of Christ helping the needy and berating those who treat their own good luck and others’ misfortune as deserved, or even avoid trouble thinking “There but for the grace of God go I”.

      It is interesting to compare the Anglo-Saxon concept of ‘right’ with the [European] Continental one, which is almost synonymous with ‘just’. Short of obliging anyone, “it is right, indeed, and just, always and everywhere to give [God our Father] praise”. But to bring this back to economics: God died that we might live, and imitation is the sincerest form of flattery.

      My apologies for these comments being even more inadequate than cryptic clues to a Christian cross-word!

      • December 16, 2017 at 6:48 am

        This leaves you with Hume’s epistemological problem: how do you know that everyone would be better off?

        For quite some time, now, my response to Hume’s demand for “absolute” certainty has been to take his method of skepticism one step further…

        I claim that—with very few exceptions:

        [Virtually] All Knowledge Is Guesswork

        The number of things we can be absolutely certain about can probably be counted on one hand…

        I know, for example, with absolute certainty that I am currently existing and that I am currently experiencing various sensations/inputs from my senses. I know with absolute certainty that I can remember experiencing various sensational events previously.

        What I don’t know is if, when I close my eyes to sleep, that I will awaken to a new day tomorrow morning. Nor do I know if I will continue to exist five minutes from now. I don’t know if tomorrow I will perceive as true anything that I perceived to be true yesterday.

        The important insight that Hume failed to recognize was that, even though this existence offers us very little in the way of absolute certainty, what we do still have available to us is our guesses, and experience has taught us that those guesses are not without value.

        What we learn is that a great many of our guesses—e.g., my belief that I will continue to exist tomorrow—that we assume to be true are repeatedly validated by our experience over time, and so we develop a high level of confidence in them.

        From experience, we have found that many of our guesses have “predictive value.” And yet, in spite of their reliability and our confidence in them, many of the scientific “laws” we teach our children are still ultimately only guesses.

        For philosophers, then, the “pursuit of Truth” is actually an effort to improve the accuracy of our guesses.

      • December 16, 2017 at 1:36 pm

        “I claim that—with very few exceptions: [Virtually] All Knowledge Is Guesswork”. ~ James.

        Any ‘knowledge’ about the future is either guesswork or inference, not knowledge. We have knowledge of what we can see happening now, and of the past from what has already been learned from a succession of ‘now’s – not necessarily our own, insofar as we are able to communicate with each other. One of the things we can see happening is ourselves discovering new physical arrangements or defining new terms, and by now a great deal of mankind’s vast collection of knowledge is of this definitional or organised form and of agreements on where it is applicable. Only then can we reasonably extropolate our knowledge of the past to form expectations about the future. The reasoning can be symbolic and therefore communicable; or intuitive and therefore iconic: imaginable and therefore comparable in terms of the behaviour of explorable physical models; or a label can stir emotions which ‘feel’ good so that we hone in on them to turn the label into a “guess”.

        So I don’t agree with your proposition, James; but if this is your “response to Hume’s demand for ‘absolute” certainty”, why did Hume seek to redefine “the pursuit of truth” as democratic agreement among those already running the show? At least he was honest enough to admit he was seeking his fortune.

        The reality is complex, so not really describable in a string of words, but I have recently elaborated this at more length in comments on Robert Delorme’s paper on Deep Complexity at the conference on Economic Philosophy, accessible via the Home button. [Editor: please note this has not yet appeared in the WEA Conferences panel]. http://economicphilosophy2017.weaconferences.net/papers/a-cognitive-behavioral-modelling-for-coping-with-intractable-complex-phenomena-in-economics-and-social-science-deep-complexity/

  6. December 15, 2017 at 1:22 pm

    So what is the money an ideal central bank would be dealing with?

    Toward a General Theory of Credit and Money
    [Mostafa Moini in ‘The Review of Austrian Economics’, 14:4, 267–317, 2001].

    “Practically and analytically, a credit theory of money is possibly preferable to a monetary theory of credit.” Joseph A. Schumpeter

    “Whether power to command the industry of others be not real wealth? And whether money be not in truth Tickets or Tokens, for recording and conveying such power? And whether it be of consequence what material the tokens are made of? … Whether all circulation be not alike circulation of credit, whatsoever medium—metal or paper—is employed: and whether gold be any more than credit for so much power?” Bishop Berkeley. ‘Querists’. [Before Hume].

    Abstract. “Money is not a thing but a species of credit, and hence a social relation involving rights and obligations. It emerged as the most abstract species in the course of the general process of evolution of credit. Formulation of a theory of credit is, therefore, logically prior to any theory of money. A framework proposed along this line by Macleod, during the second half of the 19th century, has been neglected until now. …”

    Not that I agree with Berkeley that wealth is power. I see it as the outcome of power [ultimately God-given energy] when this is is wisely directed.

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