Home > Economic policy > A new payments and savings system?

A new payments and savings system?

August 3rd, 2008

With US banks, and even brokerage firms like Bear Stearns, being bailed out on a massive scale, and the rating agencies largely discredited, it’s unsurprising that the question of whether governments could do a better job of some of the tasks now assigned to financial markets is being raised again, after a long period when any such suggestion was taboo. Nicholas Gruen had an interesting piece in the Fin, reproduced at Club Troppo, on the possibility of governments mobilising bonds as a liquid asset and using them as a basis for a payments and saving system to compete with private banks. I haven’t had time to think through the details, but the proposal is certainly worth a hard look. Certainly, the kind of knee-jerk anti-government reaction that used to come from the finance sector and its supporters is no longer tenable since their sudden conversion to soci@lism (at least when it comes to rescuing banks).

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  1. August 3rd, 2008 at 14:21 | #1

    The size of the financial sector as a portion of the world economy does seem quite large. This strikes me as being somewhat inefficient.

  2. tin tin
    August 3rd, 2008 at 15:32 | #2

    John,

    Two points:

    (1) the financial market is hardly a free market; and
    (2) the simplest solution to Gruen’s problem is to remove the banks monopoly access to central bank ‘liquidity’ and open it up to all and sundry.

    On the first point, you could hardly call the financial sector a free market. It is riddled with regulation and the price of money/credit is largely determined by government institutions (RBA,Fed,ECB,BOE) through cash rate targeting. In this case banks have merely responded to the perverse incentives offered to them by the regulatory framework they operate in – they get the upside if everything turns out ok and they get extra ‘liquidity’ from the central bank if it all goes pear shaped. If central banks are offering to lend money against dodgy capital when things get tough, why wouldn’t banks take more risk? They’d hardly be rational economic agents if they did not. I know I’d be a little less careful in life if I had the guarantee of a benevolent regulator to bail me out every time I got into a bit of a pickle. Poorly designed regulation deserves its fair share of the blame for the current crises.

    On the second point, if we opened up the ‘liquidity’ facility that the RBA now offers to banks to all members of the community we would to a large degree have a banking system similar to that proposed by Gruen. Instead of having a bank balance you would have a portfolio of liquid assets as suggested by Gruen. The same sort of assets the RBA now accepts as collateral from banking institutions. When you undertake a transaction (via EFTPOS for example) the RBA would lend you cash against your capital to complete your transaction. The interest rate you are charged on this daily cash credit balance would be determined by the market on a daily basis. It would be a rate that changes daily depending on the market demand for cash balances. To settle up your ‘cash credit’ account with the RBA you could either sell some of your liquid assets at a later date or pay the balance back in cash from your future income. In operation it sounds very much like a credit card with the important difference that any lending is backed by liquid assets. So why do we limit the use of the RBA lending facility to banks anyway? At a bare minimum, corporations other than banks should also be granted the same borrowing privilege. I know I’d love to be able to borrow from the RBA on the same terms as the banks but you and I are currently unable to do so.

  3. Ikonoclast
    August 3rd, 2008 at 19:17 | #3

    I wonder what was wrong with the Keynesian system with an Aussie “Common-Wealth” flavour circa 1945 to 1970? We had very low unemeployment (a frictional 2%) low inflation, a national bank (the Commonwealth), free tertiary education, better funded hospitals (relative to population), a national air carrier (Qantas) with an unparalled saftey record etc etc.

    Now what do we have now? An economy that can’t walk (low inflation) and chew gum (low unemployment) at the same time. An economy that apparently can’t afford free tertiary education. Qantas in a lack of maintainence and compromised safety free-fall.

    Instead of going for a national program to switch to solar in a massive way we are building more coal ports and subsiding “clean coal”, a total bulldust initiative that simply will never work. And weekend TV is full of car races and SUV ads when peak oil was probably in 2005.

    Talk about a stupid country and a stupid race. We don’t deserve to survive… and we probably won’t.

  4. August 3rd, 2008 at 21:11 | #4

    “Certainly, the kind of knee-jerk anti-government reaction that used to come from the finance sector and its supporters is no longer tenable since their sudden conversion to soci@lism (at least when it comes to rescuing banks)”.

    Such a reaction from those people would no longer be tenable by them, because of the hypocrisy involved. However, their screw up does not mean that a government approach would be a good one either, and it does not affect other people’s standing for a knee jerk reaction, let alone a prudent caution reaction to the same effect.

  5. SJ
    August 3rd, 2008 at 21:16 | #5

    Good to see that your knee-jerk reflex is unaffected by events, PML. :)

  6. August 3rd, 2008 at 21:17 | #6

    Tin Tin,

    No-one borrows from the government in what I’ve proposed. That raises a bunch of other issues. It’s not really motivated by any ‘left’ or ‘right’ view of things. Not even any idea that the financial system has failed us. It’s just motivated by what seems like an obvious opportunity to do things better in the age of the internet. As the article makes clear, it’s basic motivation is to allow a demarcation of the interface between government and the non-government sector which is maximally convenient for all concerned – as we are doing with other government institutions.

  7. swio
    August 3rd, 2008 at 21:44 | #7

    “it’s unsurprising that the question of whether governments could do a better job of some of the tasks”

    On that note its a good thing Bush’s attempt to privatise social security was defeated.

    American retirement benefits provided by the government through the taxation system continue to be delivered just as smoothly as ever. Private methods of providing retirement benefits, however, are not looking so good at the moment. I wonder how many people’s retirement plans have been ruined over the last six months, or will be over the next year or so.

    I really wish Australians at least had the choice of entrusting their retirement plans to a safe taxation based system. The current system requires every working man and women in the country to learn about high finance to minimise the risk of having their retirement ruined, and even then its still a gamble on high finance and the hope of a competent super fund manager.

  8. Bingo Bango Boingo
    August 4th, 2008 at 01:11 | #8

    swio, how is ordinary superannuation (e.g. a balanced growth fund which generally has a mix of cash, Australian bonds, international bonds, Australian shares and international shares) relying on high finance? It’s anything but. This is why, contrary to your claim, working Australian haven’t bothered to learn the intricacies of so-called high finance. I know there are some who’d like to say that the labor movement, and PJK specifically, turned us into a nation of financial gamblers, but it’s not really true.

    As for people’s superannuation plans being ruined, I’m not sure about the US, but in Australia the numbers must be very small. Anyone retiring these days is very likely to have been working for the last 15 years. My understanding is that recent falls in equity prices have basically taken us back to 2007. So hardly a disaster.

    BBB

  9. TerjeP (say tay-a)
    August 4th, 2008 at 07:26 | #9

    For a private payment system without lending or borrowing there is always e-gold.

    http://e-gold.com/unsecure/qanda.html

  10. TerjeP
    August 4th, 2008 at 13:43 | #10

    The recent stuff ups kind of suggest that it’s time for governments to stop their interference. Why assume the opposite?

  11. James Haughton
    August 4th, 2008 at 16:09 | #11

    e-gold! Wonderful! To the uselessness of a gold standard we can add the unreliability of a dot.com!

  12. TerjeP (say tay-a)
    August 4th, 2008 at 17:40 | #12

    Better than a dot.gov!!

  13. August 4th, 2008 at 18:41 | #13

    Sounds like an interesting idea. How about a “no interest, no fees” Government bank that provides only for internet banking?

  14. swio
    August 4th, 2008 at 19:32 | #14

    BBB,

    We haven’t got to the point where superannuation dominates retirement benefits. Its only been in place for 15 years.

  15. Bingo Bango Boingo
    August 4th, 2008 at 19:53 | #15

    Well then your claim is even more baffling:

    “The current system requires every working man and women in the country to learn about high finance to minimise the risk of having their retirement ruined, and even then its still a gamble on high finance and the hope of a competent super fund manager.”

    I’m afraid you’ll need to be a little more clear about why ordinary Australian workers need to know about so-called high finance. Is it to manage all these non-super, non-pension retirement benefits allegedly out there (you’ll recall the tax option you are calling for, presumably the old-age pension, and so pension benefits cannot possibly be included here)? What form do these arrangements take? I am not aware of them.

    BBB

  16. August 4th, 2008 at 20:59 | #16

    SJ, your prejudices are showing. I didn’t describe my own preferences at all, I merely pointed out that the hypocrisy of some removes their standing without in any way providing an argument for what they oppose.

    As it happens, I favour a hybrid system, at least transitionally, with age related tax breaks allowing people to save in their own right over a manageable short term to provide for a manageable brief period until the state system cut in. That is, government provision should come in at later ages and be funded from earlier ages, with the gap slowly widening until the government system was all gone – but equally, I would want the widening to occur carefully, with a moratorium as, when and if private arrangements didn’t come in well enough. I’m certainly not fool enough to think that simply abolishing the government system would work properly; I analysed some of the difficulties with that here.

  17. August 4th, 2008 at 23:05 | #17

    “The recent stuff ups kind of suggest that it’s time for governments to stop their interference. Why assume the opposite?”

    Take off those blinkers, sonny boy. The Govt isn’t in the least bit responsible for these stuff ups.

  18. TerjeP
    August 5th, 2008 at 04:40 | #18

    Melaleuca – surely you jest.

  19. August 5th, 2008 at 11:07 | #19

    melaleuca,
    I wish I had your absolute faith in both the integrity and ability of government. Unfortunately, the lobotomy has not yet been performed.
    Incidentally, can you explain how they managed to get around the informational problem identified by Hayek? If they have not stuffed up, then they must have got around it. I would be fascinated to see how. There is a Nobel in it for you.

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