7/28/2019 Can This 12-Year Old Solve Our Monetary Policy Problems

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May 30, 2012

Can This 12-Year Old Solve our Monetary Policy Problems?

By Willy Staley

In an era when even our so-called best and brightest are apparently entirely incapable of, or unwilling to, tackle our most pressing problems, we have collectively become more interested in simple and elegant solutions. Herman Cains 9-9-9 plan, for instance, could have been created by a child. And children have actuallybecome a popular source of fiscal policy fixes recently. Its a common trope in films: that children can see the world more clearly than their adult counterpartsbecause their minds are so uncluttered by the day-to-day banal concerns that define our lives. Just a few months ago a Dutch boy submitted an entry to the Wolfson economics prize by detailing how Greece might peacefully exit the Eurozone.The solution involved a Euro-to-Drachma exchange machine and pizza. It went, asthey say, viral.

More recently, on our side of the Atlantic, Victoria Grant, a 12 year-old Canadian girl, has recently gotten a bit of press in Canada for statements she made ata Public Banking Institute conference in Philadelphia. Speaking to the conference, she explained that Canadas national debt is the inevitable outcome of a banking system and monetary policy wherein all money is essentially debt. The logic w

orks like this: a government issues debt to raise funds, which are then bought by banks, and banks, through fractional reserve banking, are creating money out ofthin air when they issue loans. Therefore, all money is debt, and our governments are subordinated to bankers callous whims by allowing them to control the monetary supply. As a result of this arrangement, governments pay interest on their debt, mostly to banks, and were all worse off for it, while bankers get rich off of our misery. Of course Grant is a bit more civil in her description of it. Video below:

Were not sure at what age we learned how monetary policy works, or how fractional-reserve banking works, but were certain it was later than 12. Grant made an interesting case, and she did so to a more-than-willing audience: the Public BankingInstitute exists for the sole purpose of advancing the cause for publicly-owned

banks. North Dakotas state-run bank is one of the PBIs favorite examples to harpon, and rightfully so it has been quite successful, but maybe because of all thenatural resources in, or rather, under, the state.

Grants line of reasoning is interesting, but most economists would counter that it could lead to inflation, or even hyperinflation. A government that prints itsown money when there is not corresponding economic growth, and therefore a needfor expanding the amount of money in the economy, runs the risk of devaluing thecurrency. A currency is a product that responds to supply and demand like any other, after all.

That said, Grants concern speaks to the very real problem that many Americans have picked up on in this crisis: banks and other corporations profits are not neces

sarily tied to our economic growth as a nation. With the help of our federal government, banks have shown that they can do well rain or shine. Increasing abstraction in the financial instruments banks use to turn a profit has led to the real concern that, if banks profits arent tied to our economic development, then whoor what exactly do they answer to? In theory, by answering to the credit and depository needs of Americans, their shareholders will see good returns, but many get the feeling these days that banks answer only to shareholders, and make theirmoney by charging fees, or making bets using complex financial products.

Real money, real problems

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But where Grant faults banks is not for their disconnect with their original purpose. Instead, Grant takes issue with the banking enterprise as a whole. The notion that banks are creating money out of thin air when they issue loans is moreor less true, but its not a necessarily bad thing. (It also likely isnt somethingGrant came up with on her own. This idea is quite popular with conspiracy-mindedtypes on the Internet, like the people behind the Zeitgeist film.) Technicallyspeaking, fractional reserve banking does create money that didnt exist, but thatswhats so good about fractional-reserve banking: its ability to help our economygrow when it needs to by giving people access to money that might not exist, inthe traditional sense. If we didnt have access to credit through banking in thisfashion, we wouldnt be living as well as we do now. Banks, through this system, are able to profitably allocate capital towards its most productive uses while also paying depositors to hold onto their money. This is what makes banking so good and so necessary to a functioning economy. Where Grant sees only debt, there is also credit needed to start profitable businesses, or buy cars and homes.

Follow the trail of people who think fractional-reserve banking is bad, and youllsoon find 9/11 truthers, Ron Paul supporters, gold bugs, New World Order theorists, thinly-veiled anti-Semitism and not-veiled-at-all anti-Semitism. Those forwhom the diffuse and constant ugliness of the world coalesces into vast and intricate conspiracies have a tendency to see something nefarious in banks ability tocreate money where there was none before of course this isnt what Grant was sayinat all, but its the company her line of reasoning keeps. In truth, fractional-re

serve banking is an integral part of any economy that wants to grow. And by actually lending the money directly with proper underwriting practices, banks can easily have a sense of their downside risk and the disasters that might come to pass if they make risky bets with depositors money. The problem with banking nowadays is that, some argue, banks dont need to worry so much about economic development in order to turn a profit.

Interest rates, after all, arent what has led to our deficits. Our federal government, to use Paul Krugmans words, is an insurance company with an army two land was in Asia and an aging population havent helped this situation at all. And besides, interest rates are at record lows.A little child shall lead them

All this aside, Grant points to the very real problem that the banking industry,to most observers, appears to be the only private industry that the federal government colludes directly with, and its an industry that has interests that do not necessarily align with the American publics. Thats the problem she has honed inon, and its good to see someone so young being so outspoken about such a complexissue. It vexes even our most talented policy professionals, and other talentedpeople got us into this mess in the first place. A little clarity always helps.

Many young people will likely grow up feeling similarly about banks. What we must do, however, is focus this frustration into something useful. We mustnt throw the fractional-reserve baby out with the corrupt and greedy bathwater.

http://www.mybanktracker.com/bank-news/2012/05/30/victoria-grant-fractional-reserve-banking/