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Meeting of minds

May 07 2014 07:00
*Edward Ingram
I JUST found this:

IMF Working Paper
Research Department
The Chicago Plan Revisited
Prepared by Jaromir Benes and Michael Kumhof
Authorized for distribution by Douglas Laxton
August 2012

It has just come to my attention that the International Monetary Fund and others, including Martin Wolf of the Financial Times, are discussing the same issues that I have been pointing to these past few weeks.

Here is what the IMF has to say in the abstract of their working paper WP/12/2012 which they say is not their official view – just thinking, like I am.

“At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan:

(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs.
(3) Dramatic reduction of the (net) public debt.
(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.
We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims.

"Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without losing problems for the conduct of monetary policy.”

The list of implied benefits looks to be the same as for my Economic Model Mark II (Mark I is about wealth bonds and safe borrowing as explained in my early essays for Fin24), except for two main things:

1. With my Mark II MSA Model the transition is smooth and well balanced. It can be immediate, as explained in this essay. There is no need to create bank reserves at a level comparable in scale to GDP or a fraction thereof in order to have enough funds for lending.

The MSA simply creates the amount of deposits that will currently or later be needed for lending as credit is repaid and the MSA takes ownership and custody of any deposits that are at any time thereafter, not lent.

The total deposits available for lending (including savings) are kept under control. The banks are simply agents of the MSA finding the borrowers and the savers whose accounts become deposits held by the MSA on behalf of the bank; but those deposits are still immediately accessible through the bank.

2. With my model the method of dealing with bank failures is different, but the outcome is the same. There is no reason for any run on the banks. Deposit money will be safe. The MSA simply creates any money that is lost by a bank failure – caused by an excess of non-performing loans.

Accordingly, I am contacting various people to see if we can collaborate on how to resolve the loose ends I am struggling with. Maybe there are no loose ends. But we need to find out.

The IMF paper can be read here.

 - Fin24

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.” 

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investments  |  money

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