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Jenée Tibshraeny questions whether the 'power to make changes' rests with the banks, as the RBNZ and FMA say, or the lawmakers

Jenée Tibshraeny questions whether the 'power to make changes' rests with the banks, as the RBNZ and FMA say, or the lawmakers
FMA CEO Rob Everett & RBNZ Governor Adrian Orr.

By Jenée Tibshraeny

Can we and should we expect banks to be good corporate citizens if they aren’t made to by law?

This is the question that keeps coming to mind as I ponder the findings of the conduct and culture review the Reserve Bank (RBNZ) and Financial Markets Authority (FMA) did on retail banks in New Zealand.

The regulators have basically found no evidence of widespread misconduct and bad culture within banks, but see “significant weaknesses in the governance and management of conduct risks”.

They say neither of them has a direct legislative mandate for regulating the conduct of providers of core retail banking services such as lending, credit, and bank accounts.

They have also identified weaknesses in the legislative framework for products sold without advice, and a lack of requirement to consider customer outcomes throughout a product lifecycle.

In other words, the RBNZ and FMA are concerned there’s nothing in the law that requires banks to have special controls to manage conduct risk.

Nothing that requires them to report on misconduct or handle and attend to customer complaints in a certain way.

Nothing that compels them to meet conduct standards when selling simpler products that don’t require advice.

Nothing that requires them to consider how a customer might fare when they first sign up to a KiwiSaver scheme for example, compared to when they retire. Or how they may fare when the fees waiver on their new credit card wears off.

The regulators recognise these gaps limit the FMA’s regulatory remit and therefore the strength of the regulatory system.

They suggest ways the Government can plug these gaps. Commerce and Consumer Affairs Minister Kris Faafoi says he’ll take these recommendations on board, but has steered clear from committing to making any regulatory changes.

The banking sector is (for good reason) among the most regulated in the world. I get that it might not want another set of ineffective box-ticking exercises to further weight it down.

But can we really point the finger at banks for thinking more about their bottom lines than the wellbeing of their customers when we legally allow them to?

The RBNZ, FMA, Commerce Minister, Finance Minister and Prime Minister all talk about banks needing some sort of social licence to operate.

This sounds nice and I believe that the vast majority of bank employees genuinely want to do good by their customers. But is this enough?

Do banks not need concrete rules around the structures they need to have in place to ensure their organisations are well positioned to serve their customers’ best interests while making sustainable profits?

Does there not need to be a stick, as well as a carrot? Fines, sanctions, and so on.

Can the RBNZ and FMA really sit back and say the ball’s in banks’ court to up their games on the conduct front when there might be huge financial gains from being average versus being amazing?

Furthermore, what exactly does average versus amazing conduct constitute? How is this measured?

In theory I like the idea of the RBNZ and FMA saying: “The power to make changes rests with the banks, and their desire to change should come from a genuine focus on improving customer outcomes – not the need to comply with the law.”

No one likes red tape. It’s much better if everyone just gets on and does the right thing.

The reality is, sometimes having rules to follow is easier for everyone. You know what’s expected of you, you have something solid to work towards and you can see your progress.

Sure, if you fail, you pay a price, but this is better than ambiguity, better than the court of public opinion deciding you’ve failed at something you didn’t know how to measure.

These regulatory gaps when it comes to conduct have been known for some time. I’ve written about them a fair bit when it comes to the insurance sector; the insurance contracts law review underway is considering how to address these.

The resourcing pressures the RBNZ and FMA are under are also well known.

However when I asked Finance Minister Grant Robertson whether he’d consider beefing up funding in the next Budget, he wasn't going to make a commitment off the cuff.

A substantial amount of work to improve the regulation of New Zealand’s financial system is already underway.

This includes the Financial Services Legislation Amendment Bill to strengthen regulation of financial advice, changes to the Credit Contracts and Consumer Finance Act to target irresponsible lending, and a review of insurance contract law mentioned above.

But if the Government is serious about improving conduct and culture in banks in New Zealand, it would get the regulatory framework up to scratch, and resource the regulators so they can properly do their jobs.

It sounds simple, but you need fair rules and a good ref to have a fair game.

And because bad enough conduct can destabilise the financial system, this is a game worth playing well.

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Before the Lange/Douglas government the banks were reasonably tightly regulated. So was most of NZ & NZr’s for that matter. The RBNZ imposed what was termed loosely, if you excuse the awkward pun, a lending corset. Lending prioritised agriculture, primary production & industry. Scarcely any personal lending and home mortgages were all but impossible except for savings banks, building societies and solicitors. In the late sixties the five major trading banks were allowed to create “savings banks” within their operation so as to venture into home lending. Muldoon was expected to open thing up, but he didn’t. You need to ask those of us who were around then whether or not things have improved or worsened. Personally in my own circumstances there is not much difference to the basic personal banking except of course to be able to go on line rather than visit a branch is fantastic. But I would say the level of service and depth of frontline staff knowledge has slipped, and so has service generally, despite all the high speed technical toys and systems available. In other words, unless the answer is on their computer screen, you won’t get it. Now that is nothing to do with regulations, just customer service training or lack of it.

More regulation comes with, well, more regulation!
As written above, by Foxglove, it wasn't this way until the 80's, when the financial system here was de-regulated and the currency floated etc.
To impose more regulation on local banks without excluding 'foreign' regulation is pointless. Unless we return to complete regulation (pre-80's) then there is a way around anything the RBNZ/FMA might want to regulate.
That's what 'good' banker do; find a legal way around the regulations....

Banking is not unique in this regard. Why does Google operate in Ireland, for instance? Because its a way of getting around local regulations. It doesn't stop them operating here, there and everywhere. And that's what will happen to 'our' banks.


Our banks are nothing like Google or any of the other FAANGs. They operate globally,indulge in transfer pricing and other 'legal' dodges.
It is perfectly possible for our legislators to tighten up the regulatory system under which our banks operate. They would find it much tougher to circumvent them,if adequately policed.

Really?! Good luck with that. As someone whose job it was to shift profitability ( and loses!) about for an international bank, I'll suggest to you that it's easier than you may think....

Good and informed comment by you and Foxglove. Some people think because you regulate it will fix every problem.

Philosophically I feel there is a flaw in this discussion; Jenee uses the term "Corporate Citizen", which i feel encapsulates the problem. This is that the banks, and many other private businesses, act as though they feel that they are not a part of society, but somehow above it, including being above the law. They use all kinds of tactics to manipulate the law makers to create rules and legislation in their favour (depositors funds belong to the bank, not the depositor, who is an unsecured creditor), they hide shoddy practices behind closed doors, and essentially act as parasites on society. Does anyone else feel it is odd that the Commerce Commission is concerned that Auckland Airport made $53 million in profit, but they made not a squeak about $2 billion for just one bank?

And now we are faced with lawmakers and watchdogs again failing to recommend robust regulation of private companies that is designed to protect the ordinary citizens of this country. Just what will it take for this country's leaders to figure out who they work for?

Philosophically, you have hit the nail fair and square. Yes the Corporate rules the waves. What were once government departments and city councils are now corporates alongside their private industry contemporaries. Well we all know how big corporates treat minority shareholders, think eg Enron, well that too is how tax payers and rate payers are measured out these days.

It's not a case of how much profit a company makes, it's where those profits come from and where they go.

If a company makes a $2 billion profit from export earnings, pays taxes and wages and suppliers here in New Zealand then that's a win, even if the $2 billion profit leaves the country. There is a nett benefit to New Zealand.

When an Australian owned bank makes a $2 billion profit from charging fees and interest on lending, what benefit does this have to New Zealand? They claim to have paid taxes and wages, but that's just a little kickback from gouging everyone of their money.

Or its their return on the capital invested in NZ. We all benefit from their infrastructure and when we borrow money from them they do hold capital against this risk. If they aren't going to be allowed to make some money do you think they will bother with NZ?

Seriously, the Australian Banks are withdrawing from Asia and resizing their operations in the US and Europe... be careful what you wish for.. they may decide they don't need to be in NZ either if they are not allowed to make a return on their investment.

Oh well that’s okay then.

Once you grasp the fact that when you take a loan it’s money created from nothing for which you use the proceeds of your labour to pay off at interest their contribution to NZ doesn’t seem so wonderful. Worse still, if you default they take your house which was paid for with money that cost them nothing.
What service are they providing by creating money out of thin air rather than acting like an intermediary between savers and borrowers? Mostly upside and very little downside for the banks.

Good grief. I funded a bank treasury book in the ‘80s. I missed the part where we just created the money. Look at a bank balance sheet and you’ll see this is a load of rubbish.

Hi Ex Expat

Here's what's been going on since, even the Bank of England were a little slow to catch on. This was published in 2014 after the last crash. Information obviously didn't make it to the Southern Hemisphere though!

Hi Ex Expat

This might help explain the bubble. Looks like the banks decided to change the rules since your involvement in the 1980's

Thanks Nic, great link. Explains it about as simply as possible.

My pleasure Withay.

Hi Ex expat. I suggest you look for the term “ex nihilo.” This is how the banks describe the creation of credit. For obvious reasons they wanted to use Latin not plain English.

“Ex nihilo is a Latin phrase meaning "out of nothing". ... In banking, the term ex nihilo refers to the fact that banks create money they apparently loan from nothing, by merely using the borrower to hand over a promise to pay, which the bank in turn monetizes.”

It all hinges on the borrower taking the bait, and the effect is so widespread and looks so benign.... Until the next recession and it's time to settle up. The hand of death (mortgage) extends through time. We see others take the bait and prosper. It's a bit like taking the King's shilling, or the signing bonus in current terms, you get paid right up until you get shot.

Their infrastructure? So you are saying the banks own the roads, networks etc? Utter bollocks. At best what they have done is overcharged interest on money borrowed to fund it. what other ways have they invested in NZ that has provided a return for the country that is greater than their profit? The majority of their employees are at the low end of the wage spectrum, the law places them at an advantageous position over their clients, the bank client relationship is not a balanced one - they have all the power... and the list goes on.

You're asking the right question Jenee.

Always expect any actor to work to the incentives and play the cards as they lie. This is simple game theory. If there's a problem with behaviours in the system, then it's the rules of the system that have failed. It's very easy to solve all this stuff. Bring back our Georgist tax system.

When the RBNZ said that they would like to have Debt to Income limits added as a macro-prudential tool to calm the housing market, what happened? They didn't get the tool added to the tool kit!

It's not healthy for NZ's economy to be so exposed to 4 large Australian based institutions. That they are so profitable (lowest cost/income and highest ROA globally) should be of no surprise to anyone, that's their price to be in NZ and they will only ever act in their own interest. NZ desperately needs a listed bank with the scale to provide real competition. Who knows what agreements are done behind closed doors though.

Kiwibank? It's a NZ owned bank so any profits stay in NZ. The only way they'll grow to the same scale as the Aussie four is if kiwis move their banking to be with them. So are you with Kiwibank? If not would you switch your mortgage, transactional accounts, deposits to Kiwibank? See so many kiwis moan about the big four having such a big share and making exorbitant profits off kiwis yet they fail to see that they're the ones making the big 4 so profitable. You ask them who they bank with and most will say a big 4 bank.

Engaging in a fan-war with the banks and their fans is of no use. They are to powerful to lose. Imagine the dominance of Allblacks, FC Barcelona or Roger Federer and it was very painful to follow that particular sport being supporter of their rivals. Banks have additional advantage that they set the rules too :-)

End credit/debt creation and the poor practises and speculation from the bad operators will be weeded out very quickly.

Withay you might be interested in this critique of 100% reserve banking

Hi cs. Thanks for the link. The authors bias is palpable throughout with all the derisive language used to demean and degrade any idea they don’t agree with.

In their conclusion, this really stuck out - “The (GFC) debt explosion that has brought the World economy to its knees was not the fault of endogenous money creation.”
I had to laugh a little. If it wasn’t due to money creation (it was in my opinion), it was systematically aided and abetted. It wouldn’t have happened without money creation. Nobody would have been making NINJA loans with real money.

I’m trying to narrow down exactly where we disagree and I think it might be:
- Deflation, you believe the best way to avoid deflation is to continually inflate (ironically making deflation more likely)
- Control, you believe that money should be controlled by government/banks whereas I believe it should be controlled by the people who work for it and earn it.

I’ve put words in your mouth with the above so if I’m wrong in anyway please let me know. If we get to the genesis of our differences we could make some head way :)

Withay, what's a link to your best laid plan for "sounder money" - I'll read it and give my thoughts.

Mitchell is not very nice to the Austrians - mainly because he's an anti-libertarian. Fair call. We all need to be civil ;-). Mitchell maintains that ultimately the GFC was caused by real incomes failing to keep up with the level of private debt taken on. To maintain lifestyles the plebs (me included) were made to "eat credit" whilst labour income share went down. At the end of the day, if NINJAs had had secure, better paid work they wouldn't have defaulted. That is not to say that deregulation and poor behaviour did not play its part.

I too think that house pricing has run amok. And private debt. But endogenous money is important for economic growth in the real economy. Regulate lending for housing and have properly regulated housing markets (no nimbyism, lots of state housing, training builders to avoid bottlenecks) to deal with the housing bubble but keep endogenous money for what it's good for - investment, keeping businesses in credit and consumption smoothing over the lifespan. Nationalise the banks by all means. Why should they profit and gouge us from an implicit government guarantee?
I can't see how a fixed money supply and permanent deflation will work - constantly falling wages, falling prices. Money isn't a veil. I am not going to borrow to invest if prices are going down and real interest rates are rising. The real value of the loan will increase. But send me your plan. Perhaps you envisage the principal of loans being linked to inflation so that if the economy deflates so does the value of your loan (in which case depositors need to accept deflation of their deposits too).... But in a permanent state of deflation why would savers lend to borrowers without a positive interest rate? They can get richer by holding cash. But the positive rates will punish borrowers in a deflationary realm and real interest rates surge. Money is like blood in circulation. If you don't have enough the body dies. I think a fixed money supply would starve the economy of blood.

But send me your best plan and I'd be very interested to read it.

Thanks so much for the reply and openess to discuss cs. As somebody who disagrees, your opinion is in many ways much more pertinent than others.
I don't have something I can copy and paste handily so I will take some time and type out my thoughts as succinctly and articulately as possible a solid outline of what I deem best with an explination as to why.
Check back tonight and I should have something for you (hopefully it's not too long for interest's comment section). Cheers

Hi cs. I'm going for the record of the longest comment ever on I've never collated my thoughts on how I think money should be in this format but I should have the key points and comments below. Let me know what you think and apologies if it's a hot mess.

With A Y – Initial plan for sound money.

Firstly I would highlight first a few principles or characteristics which I believe should be the founding pillars of a sound money system.

The first characteristic of a sound money system – Simplicity
Money and our monetary system needs to be simple. It needs to be easily understood by everyone. Money represents our time and labour which are supremely important and valuable to each individual. Currently, I would say the majority of our population don’t understand how money works and how it affects them. Accordingly they suffer the consequences unfairly in my opinion. Monetary theory and understanding should not be the preserve of an intellectual elite but all of our society. The more complex a system is, the more opportunities for “gaming” the system there are. The more simple however, the harder it is to game the system. It is also easier to be, and demand transparency for monetary interactions with a simple system.

The second characteristic of a sound money system – A store of value
Money needs to be a store of value. Again, this is a reflection of the fact that money is our time and labour. The money we earn should not be diluted or have it’s purchasing power inflated away due to our monetary system. The money supply needs to be more or less static, accordingly it can not be fiat money.

The third characteristic of a sound money system – A medium of exchange
Money needs to be widely and willingly accepted at home and abroad. It needs to be durable, portable, divisible, scarce and uniform. Our current level of technology has greatly assisted with facilitating this.

The above being the stated characteristics, the most effective way of achieving them I can find is for money to be backed by or pegged to the value of a tangible asset. Historically and currently, the obvious candidate would be Gold as it has all of the characteristics stated above. A gold standard is simple, it is one of the best stores of value we have and it is still used as a medium of exchange to this day.

I have taken the liberty to pre-empt criticisms of a tangible asset backed system as no doubt they will come and it will also give insight as to why I support it.
The first issue always raised is deflation. I would agree with anyone that this is a massive danger in the transition period from fiat to sound money as the money base has been artificially inflated so much. I’m sure there are ways to achieve this transition smoothly but I will not go into them here as my purpose is to talk about a system not a transition.
Once in a sound money system, why wouldn’t a reduction in prices turn into a deflationary death spiral? My answer to that would be for the following factors.
1) It would only be deflation of prices not of the money supply as sound money is neither created or destroyed.
2) Knowing prices will be cheaper does not stop (all of) us from purchasing right away. Use technology as an example, many people buy a new iPhone as soon as it’s released even though they know in a years time it will come down in price dramatically due to a new iPhone being released. The higher price is something we currently pay for the use or consumption of something now as opposed to waiting until it is cheaper. Extrapolate that out from technology, we will always need shelter, food, clothes etc. which again we will purchase and pay for when needed.
3) For the goods and services that would reduce in price over time, it will be at a much slower pace. The reason we fear deflation now is that fiat money can disappear very, very quickly. Our global economies are all linked, pumped full of credit and at risk of a global contagion. A death spiral requires a certain velocity of decrease in the money supply to encourage a critical mass of people to hoard money. Prices decreasing at the rate of technological advancement wouldn’t achieve this velocity and again, sound money isn’t destroyed so it is only the price of a good or service that changes not the supply of money as well.
4) Decreasing prices is increased demand. The reason the Luddites were wrong about mechanised looms putting workers out of work was due to the textiles they produced becoming cheaper and demand increasing. They saw a dramatic increase in jobs due to the much larger demand and sales.
5) Profit is the difference between input cost and price sold. With a reduction in the cost of goods and services, input costs will be lower as well enabling a sale at a lower price without a dramatic reduction in profit.
6) I would also contend that sound money would actually protect us from a large and damaging deflationary event. Knowing that deflation is (but not limited to) the contraction of the money supply, our credit creation system creates the exact conditions needed to experience such an event. If loans are paid back or defaulted on faster than they are taken out then the money supply will contract. As we have backed ourselves into a position where we are dependant on others taking on loans for our income, if defaults are happen then it can cause it’s own feedback loop. For this reason, QE was implemented to staunch the defaulting and soak up the bad loans during the GFC. Unfortunately however, this has backed ourselves again into a worse position than before, destroyed wealth of savings held, increased inequality and burdened the US taxpayers with the bill.
7) It’s important to remember that for the majority of human monetary history, we have used an asset backed money systems. To quote an excerpt from a study by Atkeson, Andrew and Kehoe, Patrick. Federal Reserve Bank of Minneapolis. Deflation and Depression: Is There an Empirical Link? January 2004:
“... the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. ... What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”
8) Most importantly there will still be inflation as well as deflation under a sound money structure. As with any free market, supply and demand will determine the price. If there is more demand or less supply prises will rise. The assumption that there would be perpetual deflation is a view achieved only by looking through a fiat mindset.

Another critique of an asset backed money system is that, as you say “Money is like blood in circulation. If you don’t have enough the body dies. I think a fixed money supply would starve the economy of blood.” This is the “we need an increase of money for growth argument.”
To answer succinctly. The supply of money doesn’t matter. Any supply will do as well as any other. The free market will simply adjust by changing the purchasing power accordingly.
Increasing the money supply doesn’t supply more capital, production or economic growth. It just shifts capital from one area to another by diluting and devaluing existing savings and increasing inequality through asset inflation. This is the opposite the sound money value of “A store of value.”
Investment will still happen as people will still want to invest. The majority of savers would want to make money with their money and investment would be facilitated by banks who would be intermediaries or through peer to peer lending. We would still experience economic growth which is “an increase in the amount of goods and services produced per head of the population over a period of time.” – Nothing to do with an increase of money, more to do with advancements in technology and improvements in production capability.

The Benefits of sound money.
1) No degradation of savings through inflation. As above, money is representative of our time and labour, we do not deserve to have that value once earned eroded by private banks and our government.
2) Less inequality. Currently due to asset inflation under our current system those who hold assets are unfairly advantaged as their asset increase in value while the poorer in society loose purchasing power
3) Less speculation. The consequences of speculative loans would be much greater as banks customers would be the direct source of the money that would be lost and bad banks would be weeded out much faster as they would be allowed to fail without need for a bail out to protect the entire banking system.
4) Money would stay more local. Currently, the big four banks in NZ transfer billions per year out of NZ. As we know, they create money from nothing for loans for which we pay back with interest. Aside from being repugnant, it’s also holding our economy back and transferring wealth out of NZ for no benefit to NZers. With sound money, most of the money lent out would be from local savers who would in return receive the majority of the interest with the bank taking a small cut keeping money local and benefitting locals through higher term deposits.
5) Less asset bubbles. Housing is the obvious bubble here. For money to be created from nothing it needs to be for a loan for which the banks favourite vehicle is housing. The more money is available to purchase houses, the more the prices will be to reflect this. This creates a self-reinforcing cycle as house values climb, the more banks will create through loans for housing.
6) Individual power. Stopping money creation gives more power to the individual as their savings will hold their value. Also, government won’t be able to “tax through inflation.” This will force more political transparency as any spending the government wants to do will need to be raised through taxes and we will see the cost more upfront.
7) Economic freedom. Currently money creation is also used to compel people to use their money in certain ways typically to “stimulate” the economy as the prevailing party sees fit. The mechanism for this is centrally controlled interest rates. If loans are dependant on sound money deposits then interest rates would be set by supply and demand on not a political party.
8) Increased purchasing power. As we advance, goods and services will in general be cheaper allowing us to save money, consume more or consume higher quality items. We will also have increased purchasing power abroad.

In summary money is such an important part of our lives, it has to be fair, non compulsive and understood by everyone. I feel the outline I have laid out mostly achieves that whereas our current system is the exact opposite.
Any comments are welcome and as always I appreciate your time.

All that an interest isn't mentioned once. Until you understand interest you don't understand money. But hey I commend your efforts to try and understand.

Try getting your head around this, my rework of the quantity theory of money that explores the nature of interest. (M.V)+i=P.Q, where i is interest.

Interest is mentioned? Interest would be determined between the supply and demand of savers/investors and borrowers. Not a centralised authority.

Reading this - yes, Withay, this needs more explanation.
Scarfie - please explain why you would modify MV = PQ to be (MV)+i = PQ?

Velocity of money reflects demand, so surely is a function of i already. Instead you are saying V = f(...,i) + i.
Plus money supply is exogenous to interest rates, so you are now saying that it isn't?
Also, how do you define the identity i - that isn't apparent given the natures of M and V.

After a cursory glance at your equation, the only reason the same equation wouldn’t work here is if the added interest component was effected in such away that it inferred money creation.
The original MV = PQ is still relevant.

Dead right that a money supply won't work. The point is that the outcome of any money supply will be the same if there is interest attached. It is interest that debases it more than being fiat or fractionally reserved. A commodity currency will not work.

The equation results in predictive value about what will happen to a money supply. My prediction since 2013 is that interest rates must trend down. If they go up (outside of the trend) there will be defaults. So with the current interest rate rises I am sitting back with popcorn waiting for the cracks to appear, for they will appear.

Velocity will also drop, and money will be printed/created. Until it can't.

One other for you to consider. Central banks don't control the trend, they only have the ability to set rates within it.

"Dead right that a money supply won't work. The point is that the outcome of any money supply will be the same if there is interest attached. It is interest that debases it more than being fiat or fractionally reserved. A commodity currency will not work."

How will it be the same outcome if in one system money is created from nothing and interest is charged on it, and in the other money is borrowed from exisitng savings (no money created) and has interest charged on it?
The first example is a changing (increase) of the money supply, the second has no change of money supply. It has to have different outcomes.

I think this might be a case of looking at my proposed system through a modern monetary lense and trying to apply our current systems outcomes onto something from a different system hence the confusion?

Because interest sets up an exponential claim on the future. If you have a money supply of $100 and charge 10% interest, where does the new $10 for interest payments come from? You have to create new money no matter what your base money supply.

Perhaps take a step back and look at the nature of unearned income, which is no different to theft. ie: you steal the efforts of another mans labour, no different to stealing the money out of his wallet. Interest always results in a redistribution of wealth. Take a read of the founding father of democracy, Aristotle called interest immoral.

Interest is not an exponential claim on the future for the money supply! You do not need to create $10 to pay the interest on a loan of $100. You work for it. Interest is a claim on your future earnings.

Your example would only be valid if someone borrowed all the money in circulation which of course wouldn't and practically couldn't happen.

Interest is a claim on future productivity. If priced fairly, the money supply is of no consequence.
In the case of the $10 on the $100 - Money supply has increased, but real value is unchanged.

Thanks Nymad. To argue the point (as this is about system where the money supply is fixed) I would still say the money supply hasn't increased. The borrower now has $100 extra and the lender now has $100 less so no change there. For the repayment of the loan, the lender eventually would recieve $110 back but the extra $10 would have come from elsewhere in the economy, i.e. a customer of the borrower (through their future productivity as you say). In summary, at no point has the supply of money increased or decreased in this example and as the lender can't monetise their asset (the borrowers debt) as this is a fixed money system and to monetise an asset is fraud.
Hope that makes sense.

I had hope for you Withay but it is looking like you are just determined to confirm your beliefs rather than truly understand. Don't look to Nymad for any help as he just likes the sound of his own voice and nitpicks at the sides while overlooking the underlying issues. Perhaps Aristotle was just doing the same thing? Or perhaps he is one of the founding fathers of democracy because he actually knew a thing or two.

There used to be a guy called Cowboy posting here and he used to like to bring in these mythical things to support his argument, this elsewhere in the economy, or future production made from thin air.

Scarfie, if I’m wrong I want to know hence why I put myself out there. Could you at least highlight the flaws rather than just “lose hope” for me.
I’m still sure what I said is 100% but please, explain why money needs to be created to pay interest?

I've heard an argument aagainst interest requiring new money - basically you need to remember velocity of money. - a $10 note can be used to pay off many debts many times over.... thoguh sometimes I'm not interested to see a simple model of how interest requires new money creation... excuse my ignorance

Hi cs. For an individual to repay a loan without the necessity to create money, It could be as simple as forgoing certain consumption to save money and use the savings to repay the interest or to use the loan to increase productivity which will increase their income and pay the interest back that way. Neither example requires created money.

The funny thing is, I set up this example with my nieces and nephews and their friends and tried it (around 5 to 7 years) They easily grasped how it worked and one even individually came to the conclusion when asked of reducing consumption to afford the interest. I think they got it as they weren’t encumbered with any preconceived notions of how our current money system worked.

If the above explanation doesn’t answer it for you, do you want me to lay out an example with figures?

I had an argument with Don Brash about the nature of interest, he lost. We left money out of it, it was his proposal to demonstate his eminent wisdom to me by using bushells of wheat. I turned the proposal around on the fool to demonstrate how his lending scheme resulted in one party going hungry the next year. A redistribution of wealth. It was something along the lines of one farmer has a bad crop and needs to borrow his neighbours surplus, at interest, to sew next years. Economicsts don't have a bloody clue, their training blinkers them. Use real goods, real resources, in your mental gymnastics. Imagine having to grow 10% more wheat each year from your field, compounding year after year.

“Imagine having to grow 10% more wheat each year from your field.” Easy if you’ve borrowed for fertiliser to increase yield. Also, growing more is not the only way, you can reduce your consumption to pay the interest. If the interest is paid then there is no compounding. Or if you can’t pay your debt you default. Those three scenarios no money is created or destroyed, it has only moved through the economy.

Surely Don Brash wasn’t done by that arguement? And you still haven’t explained why money needs to be created to pay interest?

They question I asked is how long can you keep increasing yield at a compound rate of 10% per annum? Really how long? When you get the answer to that I think you will get close to comprehension of the money problem. When you set up a system where borrowing at interest is the norm then that is what people will do. Then you have the problem of the field needs to produce 10% more each year, year after year. The 100 bushells you grow needs to become 200 after 7 years, then after another 7 it will be 400 bushells. Follow through on the math, that is what exponential growth mean. Talking about money is not much use when the narrative is "growth". You need to change the narrative not the money.

Can you clarify why you need to keep increasing yield at a compounding rate? There is a preconception there which I don’t think is valid. If you can clear that up, then we will be way closer to an answer.

Because you keep borrowing at interest.

And why do you keep borrowing at interest? Why do you assume that borrowing is a perpetual thing?

Because that is what people have always done. Once you enable a system of money for nothing, don't mince words as that is what it is(moral foundation remember!), then you have let the genie out of the bottle and won't get it back in. Just like I can give you an assurance your proseltysing over honest money won't get you it, it is too late for that and you will have to wait for this one to break first. Look at Linklaters comments as a good example. He or she sort of gets it but can't separate their own behaviour from it. I see that a lot, my little bit of unearned income is small so it is okay. You have to realise it is the behaviour in aggregate that does the damage. Oh one more thing in your thinking, velocity has been mentioned to you. Follow that line of thought through also. They other problem you face with interest is when it finds its way into asset prices. You might retire the debt but the asset price stays inflated.

This comment has gotten very narrow in format.

Scarfie! I agree!!! I totally agree with what you have said! What I have been arguing over however is MY PLAN FOR SOUND MONEY NOT OUR CURRENT SYSTEM. You have been commenting on my plan through the the quirks of our current system. TWO DIFFERENT THINGS. We have been having two different conversations. Before you comment, please read carefully.

Edit: it is literally because of some of the reasons you have pointed out that I want a sound money system!

That has to be his supposition, otherwise his whole argument falters. It's the same with PDK.
They look at the antiderivative of some linear growth function and assume that because that is exponential, our standard of living is doomed on this basis that we have known finite resources.

Their conflation of physical growth with economic growth is the issue.
The irony being that Scarfie is an inventor, but can't disentangle these two things. (In simple terms) Himself and PDK think 1 unit of GDP is worth 1 unit of energy/physical resource and this cannot change. In the case that you believe this, you will never believe that interest is repaid because you are claiming on the finite resource unit.

Obviously, economic growth theory of human capital highlights why this is preposterous. However, they take the elementary approach to explaining the world.

Again, thanks nymad. I think that’s nailed it. I’ll what for scarfie to reply but it’s interesting what you find when you peel back the layers.

Our comment line is getting skinny!

This might interest people

Interest is spent back into the economy - otherwise why bother lending? Velocity of money means that 100 loan can be paid back at 110 with only 100 in the economy if the interest is spent back into circulation.

A lends B $100 at 10% to make widgets. In process she buys materials and then sells widgets making back the $100.
B pays back $10 in interest to A. B has$90.
A spends $10 buying widgets off B. B now has $100 to pay off principle.

Simple but conclusive? THoughts?

Misses the point on the redistribution of wealth from Alice to Bob. Highlights perfectly what happens when you try to disconnect the theory from real goods.

ha ha true - no extra money creation needed - but A is up 10 widgets!

That is usuary alas.

Scarfie. It doesn’t miss the point. We were discussing why you need to perpetually borrow which you didn’t answer? Any system where people buy and sell you will have redistribution. There is no issue.

Hi cs. Perfect. How do you think this stacks up with my sound money idea now?

I don't have a problem with interest. Or believe that money creation is necessarily caused by interest charges. What I have a problem with is a fixed money supply requiring continuous deflation and the constraint on growth that an absence of credit money creation would entail.

I think credit creation is basically a good thing. More blood to feed a bigger organism. It's just you have to make sure the credit is given in a highly regulated way to productive, sensible investments. That is how economies have grown since the earliest civilizations - and indeed even in the most "primitive" societies (Yap for example with its massive stones with holes in them). The commodity money/barter economy is theoretical - not how human societies actually work - which is kinda my beef with Austrian economics too - it is based on theory not empirical reality.

So deflation is still an issue, I provided 7 or so reasons in my plan as to why I think it’s not the issue it’s made out to be. What did you think of that?

Also, creating money doesn’t create growth nor wealth. Money quantity doesn’t matter, the market simply will adjust the purchasing power based on supply and demand. Creating money is tax by inflation which allows certain powers to redistribute “money” elsewhere. Does that make sense that it is redistributive?

I read your defence of deflation - and while theoretically what you say is potentially true - I don't think deflation and economic growth are easy bedfellows. Mainly because of debt being denominated in nominal terms.

You see, theoretically price controls like a minimum wage increases reduce employment by increasing costs (as Austrians would argue). But theoretically they could also increase demand through higher incomes and consumption and the higher marginal propensity to consume of workers (as Keynesians would argue). The question then becomes empirical. Are minimum wage increases associated with increases in unemployment??

Creating money doesn't necessarily create inflation you know. Spending in excess of capacity in terms of real resources creates inflation. If inflation does inflate away nominal debt it tends to help the poorest who are the most indebted. Savers tend to be the wealthy. I'd like a bit more wage inflation right now to eat into my nominal mortgage debt.

Withay - you are a worthy opponent! I have enjoyed this discussion very much. Both Austrians and MMTers like me share in common the experience of being "outcasts" in a way.

Thanks cs. Really appreciate the chat and if you ever wanted to catch up in real life to debate let me know.
You’ve explained before how you come to the conclusion that printing money doesn’t necessarily cause inflation but I’m yet to agree so that might be for another day. Economic growth though is still detached from inflation or deflation as economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.” It’s about production which from memory is actually counter correlated to interest rates.

There you have it. You can deal in a real world with real resources, or you can just make up some babble in your head and make a profession out of it. The evidence is actually already there for a peak in energy, or peak EROI. That even was more than 50 years ago. There is a field of thought called deconstructivism, apply that what Nymad has just said and you won't find much underneath it. A few fancy mathematical principles out of context to make him appear like he knows what he is talking about. Yes i have a calculus paper.....As usual he snipes at the sides and misses the core.

We can make this skinnier.

How is the integral of a linear growth function out of context?
Like. Literally, that is what you and PDK refer to when you say exponential growth in 'drawdown'.
Judging by withay's comments, I think he can make the distinction as to whether that is out of context.

I also addressed the absolute core of what you must believe in order to take your perspective. At the core you ignore that 'interest' is future productivity. It's only a claim on future resource in the situation that you completely ignore technology in your growth model.

Scarfie. The monetary value of resources increases or decreases as the become more plentiful or scarce. It is only linked to money in the sense that we use money as in intermediary. No babble, no complex maths needed, just supply and demand.


I thought you were one of the more intelligent contributors,until I read your second paragraph. Unearned income is theft. Really? So all my dividends represent not an investment in NZ companies like F&P H'Care,Mainfreight,POT etc,but simple theft? From whom? Whose money am I stealing?

Other than Sparta,money was,according to Aristotle,embraced with enthusiasm He saw it as a particular characteristic of democratic city states I recommend that you read Felix Martin's .Money,The Unauthorised Biography,p181-184.

Think it through LL, strip it back to basics. Only once you lay the moral foundation can you discuss the exceptions. For instance a teacher or a nurse are recipients of unearned income, that you have your earnings stripped to pay for this is not in question. What is in question is how badly do we need them? Can we afford them is part of that question.

Your extraction of wealth from those companies increases their operating costs, that means less money for employees or they charge more for their services. The discussion is about what price is everyone willing to bring forward tomorrows consumption to today. As always interest, or derivatives of it such as dividends, are a claim on the future resources of the planet.

A civilisation without interest is possible, hard to get your head around I know as you have to throw out everything you know. There are different ways of managing the affairs of men, just think of the change we have seen in living memory from a capital based system to a credit based one.

You got kids LL? How do you feel about using resources that are a one off and your descends will never have the use of because you participated in a world that mandated they were used to pay the interest on the loan taken out yesterday?

I also recommend Felix Martin's book. Fantastic read.

Marx would view all profit as unearned income in the sense that workers produce more value than their wages that the capitalist sells and profits from. Surplus value.

Fundamentally libertarians have a hard time dealing with surplus value. If the product of our labour is our rightful property (therefore taxation is theft), why don't the workers deserve the surplus value they create? Cause they freely contract out of it? How free is that contract though? Any freer than the coercive power of the state to tax?

Sorry to digress.... Martin's book is great.

Not to start another skinny thread but the answer to your query - “if the product of our labour is our rightful property, why don’t they deserve the surplus value they create?” Is that without the infrastructure of an employer the employee couldn’t create that value. It is a partnership where both benefit.

Ah but the libertarian would say taxation is theft - why should the state take my property without consent- the fruits of my labour are my inalienable property. Taxation is a kind of slavery - forced work. But of course the libertarian benefits from the infrastructure and security the state provides and without which they couldn't operate their businesses and generate profits. You can't have it one way for workers (the coerced extraction of surplus value is fair compensation for the capital investment and risk) and not for the capitalist (coerced taxation is unfair because its my taking property by force).

"Partnership" implies a kind of equality. Both benefit. But one side benefits a lot more due to prior ownership of the means of production. Exploitation of people's lack of effective choice (coercion) would be what Marx called it. But here we shall never agree ;-)

But perhaps you are not as extreme as to say taxation is theft? Perhaps you support a minimal government based on voluntary contributions rather than taxation.

Sorry to go off on tangent - very interested in the Nozick/Rawls debates at the moment.

I agree with your theme but not your definitions. Anarchists = no government/no tax. Libertarians = small government/small tax.

So overall I agree :) I just feel the need to defend the misunderstood position of libertarians. (I am not fully libertarian but definately lean that way)

Withay - thank you for that well-written explanation of your view. To be honest, it seems in line with pretty much every lecture I've listened to from Contra Krugman, Mises Institute etc.

I am not convinced that 100% reserve banking would be particularly stable. Credit risk is still there. Runs on multiple banks in a panic stemming from one bad bank. People hold cash. Credit dries up. Recession. And if you are going to allow some kind or money growth to avoid the necessary deflation of a completely fixed supply, is the mining of gold or bitcoin really the best way to ensure an economy gets the money it needs to purchase the fruits of increased productivity and pay off the debt incurred in the investment to create that new productivity?

I think archaeology has sort of mislead us on the nature of money. Coins have lasted due to their metallic nature and fill the museums. So we think money was mostly precious metals in the past and that paper money based on debt is somehow a modern invention/abomination. But from reading authors like Dan Graeber and Felix Martin you understand that is only a very small part of the money story. The bigger part has always been about systems of credit/debt. The coins survived. The wooden tally sticks got burned. And so we're left with the idea that at its core money is naturally a commodity.

Very interesting though. I will read more especially about the Austrians and the Chicago Plan.

Appreciate your reply cs. To clarify one point, when you say "Credit risk is still there. Runs on multiple banks in a panic stemming from one bad bank." How would this happen under a 100% reserve system? How is credit risk still there?

"Runs' have happened in the past with 100% reserve banks and they have fulfilled their obligation to depositors as they had 100% reserves.

I would love to understand your thoughts as your premise of "People hold cash. Credit dries up." stems from the idea that a bank run can happen.

Credit risk is always there - the risk your borrowers won't pay you back. 100% reserve banking would have no liquidity risk in the sense that lenders could not demand their money back until the term they had agreed on expired. But what if the borrower has defaulted and you've chewed through your equity? Your bank fails and no one else lends you any more money. And people stop lending other loan-making banks money. They keep their money as cash. And investment stops. And the economy grinds to a halt.

I think the Austrian view that bankruptcies and bank failures caused by deflationary episodes are just part of a nice natural process and that solvent people will just come in and buy up the bankrupt companies is unrealistic. Yes people may still need food, clothing and shelter - but with no money how do they signal that demand and why would anyone produce the goods with no one holding cash to buy them? It is unleashing a crude form of social darwinism that does not properly heed the consequences to the vast majority people of such an extreme ruthless way of running an economy. The Great Depression is case in point. You risk losing capitalism under such extremes as the unemployed grow and the stagnation causes mass dissatisfaction with capitalism.

Sorry I am assuming you are envisaging a system with two kinds of banks - deposits are 100 % reserve. Yes no liquidity risk.
But then you have banks that loan money out matching maturities. I lend the bank 1000 for three years which you loan to someone wanting to buy a car. The second type of instutition is what has the credit risk.

You do intend there to be lending out of savings right? Otherwise there can be no investment or consumption smoothing at all.

Hi cs. Yes that is the case. 100% reserve for deposits and savings can be lent at the savers discretion. For one of your points above, whenever you invest there is always a risk, a borrower defaulting is that risk. I don’t think that would stop people lending and borrowing (it hasn’t throughout history), it would however change the price of money and what it was loaned on (a higher rate for the lender and borrower to account for the risk). A bank (saver) would never loan to a speculative venture and savers/lenders would receive a decent return.

The “safety” for term deposits provided by our current monetary system is why rates are so low. Minimal risk, minimal reward.

To summarise, “credit risk” is really lending risk (if there was no risk there would be no reward) and if a borrower defaulted, again no money has been created or destroyed. There is still the same money supply as before.

Yes the money supply is the same - but it will be held as cash if a bank defaults due to non performing loans and people panic en masse- not given as term deposits. Which stifles investment. When people choose to hold cash instead of invest and spend demand falls as consumption and investment fall. Velocity of money falls (the inverse of the marginal propensity to save). Prices fall. People can't repay their loans. Unemployment rises. Now where I think Austrians are coherent is that they don't have a problem with a good old recession. They think it cures malinvestment in a "if it doesn't kill you it makes you stronger' kind of way. Fair enough. It's coherent. But I think that the human cost of these depressions is too high and the outcome would be a rational choice to surround the capitalists with sharp pointy pitchforks.

Haha I agree with your Austrian recession comment, I feel the same. The contagion of a recession under a sound money system would be much less than under a fiat system so less suffering.

History shows (as humans were on a gold standard longer than not) that investment does and will happen. There is a lot more investment of profit as well. I’m honestly going to refer to history now as I’ve previously outlined my default and deflation situations in line with my sound money plan already.

These banks are all too big to fail and if they experienced a crisis would all need bailing out by the government. Which raises the question as to whether they really are 'private' businesses when their losses will always be socialised. Nationalise banking and only allow credit creation for consumption smoothing of creditworthy customers (mortgages) and productive investment only. Banking should be boring like it was in the post-war period prior to deregulation.
See Bill Mitchell on the case for nationalisation of the banks

A good set of rules for the new banks from Bill Mitchell:
"I start from the proposition that the only useful thing a bank should do is to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk. In that regard, the banks:

should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit.
should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.
should be prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.
should never be allowed to trade in credit default insurance. This is related to whom should price risk.
should be restricted to the facilitation of loans and not engage in any other commercial activity.
So this is not a full-reserve system. The government can always dampen demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.

The issue then is to examine what risk-taking behaviour is worth keeping as legal activity. I would ban all financial risk-taking behaviour that does not advance public purpose (which is most of it).

I would legislate against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy."

Hi cs. Under that plan why wouldn’t the same thing happen? Credit worthy customers would purchase house with money created out of nothing providing income to others who become credit worthy and purchase a house with money created out of nothing and around and around it goes. Again we would have banks that we’re too big to fail (a self creating/reinforcing Ponzi scheme), asset bubbles, speculation, increased inequality and devaluing of savings amongst other issues.

Money creation is the issue, if you can’t create it you will find that naturally money will be lent to productive ventures and credit worthy customers.
I think a change of game, not rules is needed.

Fiddling while Rome burns! (DFA Australia about the regulatory bodies)

The Aussies have this week re-appointed the head of APRA for another 5 years. Given how bad the quality of bank regulation has been over the last few years, some of which has been unearthed by the Royal Commission this seems a very strange decision if you ask me.

There is nothing to regulate. You cannot dictate morality by law. It is far too subjective, and as has been said - there are far too many loopholes. I think we are looking at this the wrong way. It was OUR choice to be ripped off by the big Ozzie Four. There are plenty of local banks to choose from, all we need to do is take our business to them. Instead of complaining, we need to be voting with our feet.

On the subject of sales targets - if we are going to pick on banks for a normal business practice to incentivise staff to achieve more, we should also be picking on retailers (Noel Leemings, Bond and Bond), building companies, insurance companies, car sales, in fact, any business that pays out on a sales performance basis.

Kiwis - stop complaining and vote with your feet. I get great service from my bank (and adviser). And I personally choose the products and services I use!

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