Hi Brian. Thanks for the Torrens Q&A. I have a question about sovereign green bonds. If a monetarily sovereign country wanted to begin issuing green bonds that ostensibly are issued to exactly match the government's spending on certified environmental initiatives, what would you see as the benefits of this approach? Would this be an attractive product for bond purchasers?
As a cynical bond analyst, I would say that it is a marketing gimmick. Putting on my political analyst hat, marketing gimmicks can be useful.
The only economic change is that such bonds might attract ESG funds (ESG = environmental, social, governance), and they might lower the yield on the bonds. Since a currency sovereign is not going to run out of money, that theoretically does not matter. However, conventional economists would be happier. That said, I doubt that it could lower the borrowing costs by much for a central government - their "regular" debt is already the benchmark. Where this is more interesting is in the Euro area, and possibly sub-sovereigns.
Conventional economists might feel that by tapping into ESG funds, there will be greater capacity to "fund" environmental spending. That's the wrong analysis from a MMT perspective, but it makes it easier to politically sell the spending.
"These are distinct because the government can issue bonds/bills in a permanent zero interest rate environment (although having a small positive yield of 0.25% or so would grease the wheels of the system)."
Why would paying anybody free money from the state grease the wheels? What public benefit is there to that?
The bonds/bills with a permanent zero interest is surely just the currency.
" They would need to borrow from private sector entities to finance their “money” holdings"
Not sure I follow.
Banks are agents of the central bank. The structure put forward by Warren is systemically equivalent to everybody banking at the central bank (which is ultimately all a CBDC is), but run on the balance sheets of the licensed banks. The central bank implicitly provides the necessary duration backing all bank assets. Since bank assets are regulated, that makes sense. Any bank asset the central bank isn't prepared to back shouldn't be a bank asset.
Banks hold deposits and capital matching their assets in a denomination, with the central bank being that depositor if everybody has gone elsewhere.
I don't see any need for a separate negotiable instrument from the actual denomination. If the central bank makes all deposits money, one of the central theses of MMT, then there is no need for a separate 'savings currency' (which is what bonds are) directly with the fiscal authority.
What structural issues do you see with the proposals Warren has put forward?
I have not seen this proposal, but you are describing a de facto nationalisation of the banking system. Nationalising the banks is well beyond a technical change to the operation of the bond market, which is the context of my article.
There's no nationalisation of the banks, just a disintermediation. That's always been the MMT proposal. Deposits in banks become money. From Warren's mandatory readings:
• Normalize bank liquidity by allowing Fed member banks to borrow unsecured from the Fed in unlimited quantities.
• Have the Fed set term lending rates out to 3 months in addition to the Fed funds rate.
• Extend FDIC insurance to Fed deposits at member banks to keep any insolvency losses at the FDIC.
• Remove the cap on FDIC insurance to eliminate the need for money market funds.
My point remains that taking over the credit risk of the entire banking system banks (in exchange for what?) cannot be considered a technical modification to the *government bond market*.
It's in return for eliminating the government bond market - which is an expensive and unnecessary money changing exercise that adds no value.
It's much like when the mints and bank note issues were centralised - to better serve the public good.
It fits with the direction of travel. We no longer have OMOs but interest on reserves - because OMOs didn't track closely enough. The next step is to stop messing around trying to indirectly manage money quantities and let it float to the limits of creditworthiness at a zero base rate. The central bank will tightly control that 'creditworthiness' requirement once it has to put its money where its regulatory mouth is.
We should all get together and thrash it out sometime. Your input would be very valuable since you've been at the sharp end.
Abolishing the government bond market is not something that banks care about. They have subsidiaries acting as market makers, but the earnings there are chicken feed.
Giving banks an unconditional guarantee eliminates the main club government holds over idiotic bank management. Even if banks are “too big too fail,” bailouts are unpopular across the political spectrum. Governments that are not stuffed to the gills with neoliberals (unlike 2008) might make the bankers pay. Saying that you will “regulate better” in exchange for the guarantee runs into the reality that (a) regulators are already trying to avoid bank defaults and (b) sooner or later, someone like Donald Trump will get elected and appoint the regulators. No fancy regulatory scheme can do anything about (b).
"Giving banks an unconditional guarantee eliminates the main club government holds over idiotic bank management"
That club turned out to be made of paper. When the push comes to the shove the government bailed out the depositor when there are runs. So there is little point to it. It has no control value at all. Instead it leads to unneeded instability.
The regulator currently has no skin in the game. However if the rules said that the central bank *had* to bail out any bank in trouble, and that would be a sacking offence, then maybe the regulators might do their job.
It's all a game of who watches the watchers. Banks are agents of the state lending state money to people who expect that money to be as good as state money. It's time to stop pretending that deposits are anything else.
Hi Brian. Thanks for the Torrens Q&A. I have a question about sovereign green bonds. If a monetarily sovereign country wanted to begin issuing green bonds that ostensibly are issued to exactly match the government's spending on certified environmental initiatives, what would you see as the benefits of this approach? Would this be an attractive product for bond purchasers?
As a cynical bond analyst, I would say that it is a marketing gimmick. Putting on my political analyst hat, marketing gimmicks can be useful.
The only economic change is that such bonds might attract ESG funds (ESG = environmental, social, governance), and they might lower the yield on the bonds. Since a currency sovereign is not going to run out of money, that theoretically does not matter. However, conventional economists would be happier. That said, I doubt that it could lower the borrowing costs by much for a central government - their "regular" debt is already the benchmark. Where this is more interesting is in the Euro area, and possibly sub-sovereigns.
Conventional economists might feel that by tapping into ESG funds, there will be greater capacity to "fund" environmental spending. That's the wrong analysis from a MMT perspective, but it makes it easier to politically sell the spending.
"These are distinct because the government can issue bonds/bills in a permanent zero interest rate environment (although having a small positive yield of 0.25% or so would grease the wheels of the system)."
Why would paying anybody free money from the state grease the wheels? What public benefit is there to that?
The bonds/bills with a permanent zero interest is surely just the currency.
" They would need to borrow from private sector entities to finance their “money” holdings"
Not sure I follow.
Banks are agents of the central bank. The structure put forward by Warren is systemically equivalent to everybody banking at the central bank (which is ultimately all a CBDC is), but run on the balance sheets of the licensed banks. The central bank implicitly provides the necessary duration backing all bank assets. Since bank assets are regulated, that makes sense. Any bank asset the central bank isn't prepared to back shouldn't be a bank asset.
Banks hold deposits and capital matching their assets in a denomination, with the central bank being that depositor if everybody has gone elsewhere.
I don't see any need for a separate negotiable instrument from the actual denomination. If the central bank makes all deposits money, one of the central theses of MMT, then there is no need for a separate 'savings currency' (which is what bonds are) directly with the fiscal authority.
What structural issues do you see with the proposals Warren has put forward?
I have not seen this proposal, but you are describing a de facto nationalisation of the banking system. Nationalising the banks is well beyond a technical change to the operation of the bond market, which is the context of my article.
And there is, of course, Warren's proposals for Quebec's independent currency.
https://moslereconomics.com/wp-content/uploads/2018/04/A-Plan-for-Quebec-Monetary-Independence.pdf
Who knows what could have happened :-)
There's no nationalisation of the banks, just a disintermediation. That's always been the MMT proposal. Deposits in banks become money. From Warren's mandatory readings:
• Normalize bank liquidity by allowing Fed member banks to borrow unsecured from the Fed in unlimited quantities.
• Have the Fed set term lending rates out to 3 months in addition to the Fed funds rate.
• Extend FDIC insurance to Fed deposits at member banks to keep any insolvency losses at the FDIC.
• Remove the cap on FDIC insurance to eliminate the need for money market funds.
https://moslereconomics.com/wp-content/pdfs/The%20Financial%20Crisis%20-%20Views%20and%20Remedies%20-%20Oct%202008.pdf
A fuller version is here: https://www.huffpost.com/entry/proposals-for-the-banking_b_432105
My point remains that taking over the credit risk of the entire banking system banks (in exchange for what?) cannot be considered a technical modification to the *government bond market*.
It's in return for eliminating the government bond market - which is an expensive and unnecessary money changing exercise that adds no value.
It's much like when the mints and bank note issues were centralised - to better serve the public good.
It fits with the direction of travel. We no longer have OMOs but interest on reserves - because OMOs didn't track closely enough. The next step is to stop messing around trying to indirectly manage money quantities and let it float to the limits of creditworthiness at a zero base rate. The central bank will tightly control that 'creditworthiness' requirement once it has to put its money where its regulatory mouth is.
We should all get together and thrash it out sometime. Your input would be very valuable since you've been at the sharp end.
Abolishing the government bond market is not something that banks care about. They have subsidiaries acting as market makers, but the earnings there are chicken feed.
Giving banks an unconditional guarantee eliminates the main club government holds over idiotic bank management. Even if banks are “too big too fail,” bailouts are unpopular across the political spectrum. Governments that are not stuffed to the gills with neoliberals (unlike 2008) might make the bankers pay. Saying that you will “regulate better” in exchange for the guarantee runs into the reality that (a) regulators are already trying to avoid bank defaults and (b) sooner or later, someone like Donald Trump will get elected and appoint the regulators. No fancy regulatory scheme can do anything about (b).
"Giving banks an unconditional guarantee eliminates the main club government holds over idiotic bank management"
That club turned out to be made of paper. When the push comes to the shove the government bailed out the depositor when there are runs. So there is little point to it. It has no control value at all. Instead it leads to unneeded instability.
The regulator currently has no skin in the game. However if the rules said that the central bank *had* to bail out any bank in trouble, and that would be a sacking offence, then maybe the regulators might do their job.
It's all a game of who watches the watchers. Banks are agents of the state lending state money to people who expect that money to be as good as state money. It's time to stop pretending that deposits are anything else.