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Bank Capital Punishment and Other Nostrums

December 22, 2014 in Economics

By Steve H. Hanke

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Steve H. Hanke

Bankers — facing a barrage of new capital requirements, regulations and investigations — must feel as if they are targets of a witch hunt. Well, if the truth be told, they are. Indeed, it’s gotten so bad that the Dutch authorities, who were clueless before the crisis, have put the sinners (read: bankers) on public display and forced them to repeat the following: “I swear that I will endeavor to maintain and promote confidence in the financial sector…. so help me God.” So, there you have it, so help me God.

The world’s politicians and central bankers — the ones who enabled the excesses that led to the financial crisis of 2009 — have to blame someone else for their misdeeds. And what is a more inviting target than hapless bankers?

Beating up on bankers (and banks) — the ones who produce most of the world’s money — creates a problem: it constrains the growth of money broadly defined. In consequence, Europe is in a slump, and so is Japan. As for the U.S., it’s stuck in a growth recession with nominal aggregate demand growing much more slowly than the trend rate since 1987. Even China is sagging a bit. This is all because of relatively slow money growth. Let’s review the terrain and my themes of the past few years—themes that continue to be supported by the unfolding evidence.  

First, take a look at the United States. The Center for Financial Stability, under the direction of Prof. William A. Barnett, publishes Divisia monetary data. These are now available via Bloomberg and provide the most accurate picture of the U.S. money supply that is available.

 Even though the Fed has been pumping out State Money at a super-high rate since the crisis of 2009, it hasn’t been enough to offset the anemic supply of money produced by banks — Bank Money. Even after six years of pumping, State Money still only accounts for 21 percent of the total money supply broadly measured. In consequence, the Divisia M4 money supply measure is growing on a year-over-year basis at a very low rate of only 1.7 percent. And that’s why nominal U.S. aggregate demand measured by final sales to domestic purchasers is still growing at below its trend rate of 5% (see the accompanying chart).

Moving across the pond to Europe, the picture starts to turn even uglier–thanks to Bank Money austerity, not fiscal …read more

Source: OP-EDS

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