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Accounting, Economics and Law: A Convivium

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banking, financial instability, financial regulation, money creation


Banking and Finance Law | Law


Let me begin by thanking Yuri Biondi and Accounting, Economics and Law: A Convivium for hosting this book review symposium. It is a privilege to have my book reviewed by this distinguished roster of experts. Since the book's publication I have had some time to reflect on its strengths and weaknesses. Unsurprisingly, the reviewers in this issue have identified a number of the book's more glaring shortcomings. But it relieves me to say that I don't think the book's key arguments have (yet) sustained any mortal wounds, even if solid blows have been landed.

The basic thesis of The Money Problem is that financial instability is, and always has been, mostly a problem of private sector money creation. This is an old-fashioned view. I think it's pretty clear that most experts today don't subscribe to it. I continue to think it essential that financial instability be understood explicitly in terms of money creation. This means treating financial stability policy as an aspect of monetary system design-an institutional design project that implicates not just stability but also questions of monetary control and seigniorage, or fiscal revenue from money creation. I see these topics as components of a single, integrated institutional design challenge.

The book lays out a blueprint for monetary and banking reform. The proposed reform would follow through on the logic of U.S. banking regulation as it has existed since the New Deal era. While in this sense the blueprint is (conceptually) conservative, it would require some very big alterations to existing arrangements. Rather than summarizing the blueprint in any detail, let me just touch on a few of its salient features. The proposal would restrict entry into "money" creation. Money creation, for this purpose, means issuing large quantities of short- term or demandable debt (denominated in the standard unit of account) that is continuously rolled over. Money creation is thus associated with a specific funding model. This funding model would be limited to licensed banks; the banking system and the government itself would be the exclusive issuers of money. In effect, banks would be engaged in a public-private partnership-a joint venture with the state for the issuance and circulation of money. The monetary authority would control the quantity of money issued by the banking system. All money would be fully sovereign and nondefaultable, backed by the government. Banks would pay risk- based fees to the state, which would flow to fiscal revenue (seigniorage). I argue that this basic structure would greatly enhance financial stability while also improving macroeconomic management and enabling the public to recapture economic rents currently captured by elements of the financial sector.



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