Man has only one tool to fight error: reason.
— Ludwig von Mises
1. Edward Harrison, “Endogenous Money and Fully Reserved Banking.” The idea of “endogenous banking” is circulating the blogosphere with more presence than ever, especially after the Krugman–Keen debate (where the end result is that few heterodox economists realized that “orthodox” banking theory acknowledges that the money supply is partially decided endogenously). I have a few quibbles on Harrison’s post.
First, all production requires savings, whether funded by fiduciary media (credit) or fully backed money substitute. The availability of inputs — real goods — requires that these be saved, not consumed. Credit only complicates the distribution of real goods (the Mises–Hayek cycle theory is built on this insight). If credit leads to higher productivity it’s not because it allows for production without as much saving, it’s because it makes financial intermediation more efficient (less savings left unused). That credit allows for loans without savings isn’t a good thing, and in a free banking system the ability for banks to extend credit would be severely constrained.
Second, Harrison writes that bank reserves are irrelevant, because credit demand is endogenously determined; this is true, but generally since demand for credit is practically limitless, reserves provide banks with the capital to lend. I don’t find it convincing to interpret the causality from loan origination to reserve provision (that is, banks lend and then the central banks provides the necessary reserves). Rather, individual banks will borrow from the Fed (at the overnight rate) as long as they can charge some kind of premium over that rate (that is, as long as they’re making a profit). But, clearly, the availability of cheap-enough reserves is determinant. That in our current world, of depressed demand for credit and underwater balance sheets (especially amongst banks), the Fed’s capital injections haven’t led to more credit expansion is not evidence that reserves are irrelevant in a world of “healthy” borrowing and lending activity.
As much as I sympathize with the notion of “endogenous money,” I don’t think the post Keynesian theory of banking accurately captures the actual process of credit expansion.
2. Raghuram Rajan, “Is Finance Too Competitive?” As you read through it, you might find ancillary points disagreeable. But, the main message is spot on: banking should be competitive, and those which do poorly should face the full brunt of their losses. Finance is a crucial sector for any economy, and the freer and more competitive it is, the better. Unfortunately, Rajan doesn’t explicitly extend his thoughts on financial competition to money itself; a competitive market in money issuance would reduce the likelihood of debilitating financial crises caused by monetary distortions.
3. Susan Corke and David J. Kramer, “Russians Are Afraid — and for Good Reason.” This is an interesting piece on the status of civil rights in Russia. According to the authors, Putin’s government seeks to impose a repressive legal system which, in ways, mirrors that of the early Soviet Union, but in a more subtle way — some Russians, however, haven’t been fooled.
4. Robert Wenzel, “Immigration Patterns in the Eurozone.” Southern Europe’s struggling economies have pushed workers to migrate south to north,
5. Liz Alderman, “Privatizing Greece, Slowly but Not Surely.” As the Greek government sells off assets to raise revenue, it finds that some of the land it owns has been, essentially, occupied. The whole process reveals multiple dimensions of the inefficiency of Greece’s government.