Here is a box of old speeches by Mr Lowe for Central Bank “twitchers” to peruse between now and September 2016 when Mr Lowe’s appointment as RBA Governor commences.
The Glass Pyramid doesn’t expect any deviation from the current approach of the RBA as most of it is baked into the current regulatory and supervisory model for monetary creation in Australia where:
1. Money creation by the government – is frowned upon.
Despite what most people think, most money is not created by the government.
Instead it is created by authorized deposit “making” institutions (banks) when they create deposits which are treated by law as equivalent to money created by the government.
Yes! – when a bank extends you a loan it is effectively creating money.
Even though the idea of giving private profit driven organisations the power to create money is simply a barbaric accident of 19th century history, people have been brainwashed to believe that this makes more sense than to have their elected representatives do so.
Even though almost all booms and busts are the product of private banks creating too much “money” and then panicking and creating too little.
To ensure that government provides as little competition to the banks as possible (inflation is the limit to how much money is created in total by the banks and government) their army of media friendly employees (aka bank economists) and ideological warrior buddies (neoliberals) – rave on endlessly that government should not run deficits and instead must act like a household.
What they really mean is that they don’t want government money creation to cramp the money creation by the private banks. If the government is politically blocked from creating money for education, health, tax cuts for low income earners etc – that means more room for banks to create money by lending for speculation.
You end up in the situation we are now in where we have huge banks making mega profits and a government struggling to rub sticks together. The private banks have won an effectively monopoly over money creation.
2. When government does create money it is required to do so via the charade of AOFM interest bearing bond sales.
Even worse than outsourcing most money creation to private banks is that when government does create money it is forced to do so with an interest charge attached.
The charade is that government spending by bond sales, where it appears the government is borrowing the money it spends, is a charade because the RBA effectively gives most of the money required to buy the bonds to the private banks so that the purchase of the “govt bonds” does not undermine the RBA target rate. It does this by “buying” older govt bonds from the banks so that when they buy the new government bonds their ES accounts at the RBA are not drained too much – which would put upward pressure on the target rate.
Where does the RBA get the money to buy those older government bonds? It just creates a few accounting entries – as effective as if it actually printed the notes.
So generally bonds sales by the government actually involves ‘money printing’ by the RBA rather than borrowing existing ‘money’ but most do not understand that.
The important point is that the government has been forced to borrow at interest what the RBA could have given it without interest. The banks hate that idea because it would demonstrate that there is no need for the money supply to be created with a trailing commission attached.
Chances are if the public knew that they would say
“Why don’t we just have the RBA create all the money without a trailing commission attached”
Bloody good question too.
3. The majority of money creation is therefore outsourced to the banks.
If the government is too scared to run deficits and if they do, they are forced to use the AOFM/RBA charade, that leaves the door open for the private banks to have lots of profit making fun by creating loans with an interest rate trailing commission attached.
What is more if anyone suggests that bank profiteering from money creation (making loans) is a bad idea the banks know that all they (and their neo-liberal buddies) need to do is run a campaign against public money creation (deficits) as that will cut off the only real alternative.
4. Money creation by the banks is in the form of lending.
Private banks are technically described as Authorised Deposit “Taking” institutions even though what effectively makes them a ‘bank’ is that they are authorised to make or create deposits which is what happens when they give you a bank loan and they mis-describe their IOU to you for the loan funds as a ‘deposit’ in their accounts.
That re-labelling of their obligation to extend you the amount of the loan – the account payable – as a deposit is how a bank is able to expand its balance sheet simply by lending you money.
That is really what makes a bank – a bank.
A simple way of stopping this money creation magic by banks is to require that they acquire a deposit on term BEFORE they make a loan consistent with the term of the deposit.
Basically force them do what most people think they already are doing.
5. Even if Mr Lowe was inclined to switch lending more to productive purposes he cannot because the prices of unproductive assets bloated on past lending decisions “debt creation”by the private banks might fall unless there is sufficient lending for productive purposes to keep the economy moving.
The RBA and APRA have driven a massive bubble in asset prices on existing housing by driving down the target rate and allowing the banks lending activity to become heavily concentrated on lending for speculation on the prices of existing housing assets.
Even if Mr Lowe (and Mr Byers) are now having second thought about the sanity of doing this and decided that it would be much better if banks concentrated new lending activity on productive purposes such as new housing construction or building new factories, infrastructure, etc it would be very difficult for him to do anything about it because cutting the supply of credit for the purpose of speculating on house prices would mean that the price of those assets would stop rising and would start falling.
Without a bootful of debt, buyers cannot force up the price of existing housing stock. Existing house prices that don’t rise don’t attract new speculators and that means prices may soon stagnate and then fall.
6. The RBA and APRA have shown little interest in shifting the focus of credit creation away from unproductive lending for asset price speculation.
The bigger obstacle is that neither Mr Lowe nor any of his brethren in the RBA and APRA – including the current Governor Glen Stevens have shown any real interest in trying to shift the focus from unproductive lending for asset price speculation to more productive lending. If they did they would have given the banks directions to favour credit creation for productive purposes over credit creation for speculation on existing house prices.
For them the bottom line is simple.
If the government is politically prevented by neoliberal fanatics from running a sufficient deficit to supply the economy with a sufficient money supply to avoid deflation they have no choice but to take whatever they can when it comes to money creation in the form of private bank lending.
If speculation on existing house price assets is the only show in town that is what they are going to buy a season ticket to support – even if they are the ones who staged the production in the first place.
RBA and APRA have shown quite clearly that they are even willing to drive up a mountain of foreign liabilities in our banking sector (all guaranteed by the taxpayer) if it means that they can supply households with lower “bait rates” that they know will encourage them to borrow too much and speculate on the price of existing housing stock.
While the government policies regarding taxation of capital gains and negative gearing are significant they really only amount to a problem when the RBA and APRA drive massive amounts of credit creation towards the stock of existing housing.
7. The RBA charter requires the RBA to drive the Australian economy using the single tool of driving credit creation / bank money creation with interest rates.
It is not as though Mr Lowe can simply decide that he wants to have no part of this diabolical system.
The RBA charter requires him to try to drive the economy using this broken and demented model.
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia.
So the bottom line is that Mr Lowe is required to try to drive full employment and the grand goal of the economic prosperity and welfare of the people of Australia by trying to manipulate the demand for debt (aka Bank created money with an interest trailing commission attached) using the target rate for overnight inter-bank loans.
Talk about mission impossible – even with APRA trying to help along the way.
If the RBA and APRA carefully controlled access to credit (bank lending) so that it was primarily directed to productive investment instead of speculation they may have a chance but in practical terms that would not be enough due to the deflationary effect of issuing money with an interest trailing commission attached.
The interest on past debts requires a supply of new money creation to allow that interest to be paid without deflation arising, but that new money also requires more money to be issued because it is also issued with an interest obligation. And so it goes ….. more debt money is created to cover the interest payable on older debt money created by banks.
Lending for speculation is almost unavoidable in circumstances where the public sector (the only viable alternative to Bank Money) has been forced to create as little new money as possible and when it does it is forced to create it with an interest trailing commission attached.
In short, lending for speculation rather than productive investment that benefits the people of Australia is almost guaranteed under the RBA charter.
8. The RBA and APRA show no interest in openly discussing any of the above.
If someone can find a series of speeches by RBA staff (or APRA for that matter) where they explain in clear terms – that the general public can understand – any of the above points please provide the links as the Glass Pyramid would be happy to promote them.
The only real hope that any of the above will change and that Mr Lowe will be any different to Mr Glen Stevens is if he starts educating the public as to all of the above RIGHT NOW.
While it is understandable that the Governor of the RBA feels obliged to prosecute the mission he has been given by the government – as expressed in the RBA charter – none of that is barrier to him explaining over and over again how the system currently works and the issues/problems with it.
That would allow a proper public debate in Canberra and across Australia and an informed Banking Royal Commission.
Who knows, maybe then Mr Lowe would find himself the Governor of a Reserve Bank of Australia that has a coherent and productive mission that is in the interests of all Australians and not just those who happen to own assets that the RBA and APRA have chosen should be the target of speculation with bank created money, created with a trailing commission attached and subsidised by a mountain of foreign debt.
What might his job entail with a coherent charter?
- Stop all “money creation” by the private banks. In other words stop treating their accounts payable accounts created making a loan as equivalent to public money. Limit them to deposit taking not deposit making.
- Restrict the banks to being a mere financial intermediary – i.e putting savers together with credit worthy borrowers as efficiently as possible. APRA would be merged with the RBA as separating their functions serves no real purpose.
- Provide Exchange Settlement accounts as they currently do
- Advise the government as to the size of the deficit / surplus each year that is estimated to be required to maintain the stability of the Australian currency. As to how that deficit / surplus is acheived will be a matter for the government.
No need to try to save the world by yanking on the interest rate lever.