Re: Dollarization -- Moore's argument

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

 

If no bank had ever  to worry about deficits at the clearing house , then they would lend till the cows came home. (now that may be a good thing given orthodox systems tend to suffer from a lack of effective demand, but it is not how banking systems work.)

 

Comment:

 

Agree - but it need not be so provided the world's central bankers were to switch from ineffective aggregate credit control through the interest rate mechanism to effective control thereof by means of credit/capital ratios whereby (a) aggregate credit creation would remain within policy-determined ceilings in any given period, and (b) the maximum share of individual credit-creating institutions within the aggregate would be commensurate with their share of the credit system's aggregate capitalization.

 

Gunnar

 

----- Original Message -----

From: Paul Davidson

To: Basil Moore

Cc: pkt@xxxxxxxxxxxxxxxx

Sent: Tuesday, May 15, 2001 4:24 PM

Subject: Re: Dollarization -- Moore's argument

At 09:20 AM 5/15/01 -0400, you wrote:

Paul
Good point. But I thought that is what CD's were all about??? (Liability side liquidity)
The deficit bank issues CDs, and so borrows from the surplus bank. This can continue indefinitely?
Basil

Basil: Not quite. The Lender of last resort is not suppose to prevent each bank at a clearing house from running any deficit.  

If no bank had ever  to worry about deficits at the clearing house , then they would lend till the cows came home. (now that may be a good thing given orthodox systems tend to suffer from a lack of effective demand, but it is not how banking systems work.)

LOLR action is only suppose to take place when there is a systemic deficit problem, that threatens the collateral of surplus banks as well as the liquidity of deficit banks -- LOLR is not for  an episodic problem.

moreover in the case of a LDC "dollarizing, say, Ecuador. -- If Ecuador were to run a persistent and large deficit in its international dollar payments -- and therefore ran out of its dollar reserves, why would the Federal Reserve Bank lend money to the Central Bank of Ecuador? 

And since Ecuador is not in any of the Federal Reserve Districts, which of the 12 Federal Reserve Banks would you suggest make the loan to Ecuador? (I.e., on which of the district banks shoudld the loan to Ecuador be booked?)

Paul

At 05:05 PM 5/4/01 -0500, you wrote:

At 11:03 AM 5/3/01 -0400, you wrote:

Colin

Believe it or not, I am serious. But I am also ignorant, and open to persuasion and even dissuasion.


Think of a branch bank. Under dollarization we no longer have to ensure that each branch has no deficit or surplus, and depress the local economy if it should run a deficit.

But Basil there is a difference between a branch bank of a single bank not having to worry about a balance of payments between itself and the mother bank AND two separate banks at the same clearing house.  In the latter case, one bank can get into deficit problems at the clearing house while the other runs a surplus -- even though both banks keep their accounting records in the same unit of account, say the dollar.

You are apparently envisioning a single commercial bank spanning the globe -- which is a lot more than mere dollarization.

Paul
Paul Davidson
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS
Holly Chair of Excellence in Political Economy
Economics Department - University of Tennessee
523 SMC
Knoxville, Tennessee 37996-0550
work phone: (865) 974-4221
fax: (865) 974-4601/  (865) 974-1686
home fax: (865) 577-7748

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Holly Chair of Excellence in Political Economy

Economics Department - University of Tennessee

523 SMC

Knoxville, Tennessee 37996-0550

work phone: (865) 974-4221

fax: (865) 974-4601/  (865) 974-1686

home fax: (865) 577-7748