Saturday, May 12, 2012

The New Arthurian - Andrew Haldane: Financial arms races

The Federal Reserve seems to think that a dollar of credit-in-use is just as good as a dollar of money in circulation. It isn't just as good. It's better (for the lender) and worse (for the borrower) because of the cost of interest that applies to credit but not to money.
Better for the lender and worse for the borrower. Doesn't that explain the growth of finance? Doesn't it explain the laggard performance of the economy?
We need to take income out of the non-productive sector and put income into the productive sector again, where it was when our economy was good.
Read it at The New Arthurian
Andrew Haldane: Financial arms races
By The Arthurian

If you haven’t Haldane yet, you should read some his work immediately. He is the Executive Director of Financial Stability at the Bank of England and a brilliant writer, especially on matters of banking. Attempting to solve this problem, The Arthurian also provides policy recommendations and addresses those suggested by Andrew Haldane.  


  1. Sweet! Thanks for the link, Woj.

    Haldane is obviously a knowledgeable guy. That lets him get into all kinds of details. But that puts a guy like me "in the weeds" where it is hard to see my way out.

    Keep an eye on the big picture. We have too much debt? Okay, we have too much debt. Every solution must move us toward a solution to that problem.

    Haldane recommends constraints on bank leverage. I think that means: Put limits on how much banks can borrow. I don't know if that would help, but let's say it would.

    Okay. To paraphrase a Star Trek title: Who limits the limiters?

    Policymakers are thoughtless: Oh, the banks have too much debt? We'll pass a law against that! But the trouble is that 9 out of 10 existing policies are designed to get people and business and banks to borrow *MORE* ... If we didn't have those nine, maybe we wouldn't need the one that hopes to contradict them.

    Rather than creating obstacles to the creation of debt, maybe we should start by removing a few of the incentives for the creation of debt. And maybe we should create some incentives that help people pay down debt faster.

    1. Your point about the number of policies dedicated to encouraging private borrowing is extremely important. The banks can only lend as much as individuals are willing to borrow, so the relationship requires both parties. As I see it, the current efforts to stimulate growth are focusing on reducing mortgage, auto and student loan rates...basically the opposite of what is needed.

      The road may be long but I remain hopeful yourself, Haldane and the cadre of others that share these views will eventually garner enough support to push policymakers in the right direction.