Sovereign Money in Iceland?

Iceland is considering fundamental monetary reform. A report (PDF) by Frosti Sigurjónsson, Member of Parliament, discusses problems under the current fractional reserve system as well as possible alternatives. The report was commissioned by the prime minister (website of the Prime Minister’s office).

The report argues that the Central Bank of Iceland lost control over the money supply. Commercial banks lent pro-cyclically; they effectively forced the Central Bank to provide base money when needed; the Central Bank’s interest rate policy didn’t suffice to keep the growth of broad monetary aggregates in check; money creation by commercial banks shifted seignorage revenue from the Central Bank to commercial banks; and the deposit insurance accompanying the fractional reserve system encouraged risky lending, distorted competition and gave way to taxpayer funded bailouts when systemic banks collapsed.

The report discusses the Sovereign Money proposal (Fischer 1930s; Huber and Robertson 2000; Dyson and Jackson 2013) according to which all physical and electronic money is created by the Central Bank; commercial banks administer transaction payments and serve as intermediaries; new money is brought into circulation by way of transfers from the Central Bank to the Treasury; and the Central Bank may also lend funds to commercial banks which in turn lend these funds to businesses.

The report recommends that either the Central Bank proactively enforces credit controls or, preferably, that money power is secured with the state owned Central Bank (p. 17). The report recommends to commission a feasibility study of the implementation of the Sovereign Money proposal in Iceland.

The report also discusses narrow banking proposals (see my earlier posts here, here or here) and Laurence Kotlikoff’s Limited Purpose Banking model (see my earlier post here).

Concerning the Sovereign Money proposal, I remain favorable as far as the analysis of the problem is concerned but rather skeptical regarding the proposed solution. In particular, I remain very skeptical as to whether a Sovereign Money regime could be enforced at all. I have previously described and evaluated the Swiss version of the Sovereign Money proposal—the “Vollgeldinitiative.” And I have made an alternative proposal for monetary reform (see also here).

Universities

The Economist featured a special report on universities. Some elements:

On the value added of university education (see this article):

Employers are not much interested in the education universities provide either. Lauren Rivera of Northwestern University’s Kellogg School of Management interviewed 120 recruiters from American law firms, management consultancies and investment banks. Their principal filter was the applicant’s university. Unless he had attended one of the top institutions, he was not even considered. “Evaluators relied so intensely on ‘school’ as a criterion of evaluation not because they believed that the content of elite curricula better prepared students for life in their firms…but because of the perceived rigour of the admissions process,” Ms Rivera wrote. After the status of the institution, recruiters looked not at students’ grades but at their extracurricular activities, preferring the team sports—lacrosse, field-hockey and rowing—favoured by well-off white men.

On rankings (see this article): More than 50 of the top 100 universities (according to the Shanghai ranking) are located in the US. Switzerland has the highest density of these institutions per capita (6.2 top universities per 10m people, next is Sweden before the Netherlands).

On public and private funding (see this article):

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Pupils Loose Handwriting Abilities

In the FAZ, Heike Schmoll reports that more and more German pupils (even those attending Gymnasium) lack the ability to write by hand, legibly and for an extended period. Culprits include digitalization; lack of practicing; and receding fine motor skills.

Teachers criticize a broader trend in the curriculum to de-emphasize language related skills.

Der Präsident des Deutschen Lehrerverbandes, Josef Kraus, forderte die Kultusminister der Länder auf, das Schreiben mit der Hand verstärkt in den Blick zu nehmen. „Die zunehmenden Probleme vieler Schüler mit der Schreibschrift muss sich auch eine Schulpolitik ankreiden lassen, die dem Schreiben und insgesamt der sprachlichen Bildung immer weniger Bedeutung beimisst“, sagte Kraus in Berlin. Er verwies auf den immer weiter reduzierten Grundwortschatz von 700 Wörtern, die Schüler am Ende der ersten vier Klassen aktiv beherrschen müssen, auf den Einsatz von Lückentexten und vorformulierten Antworten sowie vielen Fotokopien, die Schüler täglich erhalten.

They argue that the trend is worrying, not least because handwriting quality and ability to learn go together.

In der Tat gibt es einen in anderen Studien nachgewiesenen Zusammenhang zwischen dem motorischen und dem visuellen Gedächtnis. Wer mit der Hand schreibt, entwickelt eine visuelle und motorische Darstellung und steigert durch das Zusammenwirken zweier Gedächtnisbereiche den Lerneffekt. Kraus kritisierte eine „angestrengte Erleichterungspädagogik“, die für ständig sinkende Anforderungen sorge.

See also this blog entry on longhand note taking.

MIT Economics

In MIT’s Rise to Prominence: Outline of a Collective Biography, Andrej Svorenčík summarizes facts about the MIT economics department. A part of the abstract:

By reconstructing the network of MIT economics PhDs and their advisers, this article furnishes evidence of how MIT rose to prominence as documented by the numerous ties of Nobel laureates, Clark medalists, elected officials of the American Economic Association or the Council of Economic Advisers to the MIT network. It also reveals the MIT economics department as a community of self-replicating economists who are largely trained by a few key advisers who were mostly trained at MIT as well. MIT has a disproportionate share of graduates who remain in American academe, which may be an important factor in MIT’s rise to prominence. On a methodological level this article introduces collective biography, or prosopography, a well-established historiographical method, to the field of the history of economics.

Deflation and Growth

In a BIS working paper (abstract page) Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann analyze the link between growth and deflation from a historical perspective. They conclude:

First, before accounting for the behaviour of asset prices, we find only a weak association between goods and services price deflations and growth; the Great Depression is the main exception. In some respects, this confirms previous work. Second, the link with asset price deflations is stronger and, once these are taken into account, it further weakens the association between goods and services price deflations and growth. Finally, we find some evidence that high private debt levels have amplified the impact of property price deflations but we detect no similar link with goods and services price deflations.

Terrorism in the Middle East

The Economist and Tom Segev in the New York Times reviewed “Anonymous Soldiers,” Bruce Hoffmann’s book on Israel’s origins.

The Economist largely accepts the notion that Irgun terrorism and America’s support for Zionism pushed Britain out of Palestine. It concludes:

On the Haganah’s broader influence, Mr Hoffman notes that al-Qaeda’s Afghan library had a copy of Begin’s “The Revolt”, but does not ask why so many Palestinian prisoners take Israeli university courses on how Jews established their state. Much of what they do, including building terror tunnels, bombing transport nodes, lobbing mortars at residential neighbourhoods and burying arms dumps in places of worship, has antecedents in Jewish militancy. Israel knows Palestinian methods and it has an array of anti-terror legislation which, had Britain responded similarly, might have aborted the future state.

According to Segev, in contrast, Hoffmann over estimates the impact of terrorist acts against colonial Britain committed by Menachem Begin’s Irgun. Statehood for Israel would have come anyway.

Philippa Perry’s “How To Stay Sane”

Philippa Perry’s short book provides a succinct perspective on mental health. Perry argues that mental disorders fall into two groups: one associated with behavior that displays a tendency to stray into chaos; the other with behavior that manifests itself in excessive rigidity. She discusses the structure of the brain and the role of nature vs. nurture in integrating emotions and reasoning. The former rules.

Perry points to several areas that are central to successfully navigating between chaos and rigidity:

  • Self-observation: Wisdom and sanity build on a non-judgemental, self-observing attitude that fosters self-awareness and avoids self-justification. Self-observation amounts to re-parenting oneself. It helps develop compassion (internal and external) and it grows the brain. It requires to use feelings rather than be used by them. Keeping a diary helps, as do prayers or meditation. “Toxic chatter” doesn’t.
  • Relating to others: Brains need brains; nurturing relationships are key to staying sane. True dialogue requires honesty and thus, vulnerability. “Adhering to strict guidelines about how to behave around others is a form of rigidity. Not being mindful of your impact upon others is a form of chaos.” The “daily temperature reading” fosters emotional honesty.
  • Stress: Positive stimulation is fruitful; it fosters learning, creativity and brain plasticity and it strengthens the immune system. But it must not become overwhelming as to trigger panic and brain dissociating. Physical activity generates good stress.

When things go wrong Perry recommends to aim at re-writing one’s narrative:

  • Personal narrative: Grasping one’s guiding beliefs helps developing new perspectives. Narratives are co-constructed and form minds. They pass down “identity, wisdom and experience” from generation to generation. Telling one’s own story helps gain distance and independence, and it creates “a place of freedom” (Perry refers to Victor Frankl’s Man’s Search for Meaning). Narratives are self-reinforcing; a genogram can help uncover and trace their roots. But stories are flexible, they can be changed, and so can lives that build on them. “Creating a consistent self-narrative that makes sense and feels true to ourselves is a challenge at any stage in life.” Optimism is productive and self enforcing; but hearing good news must be learned. Fear of losing love comes with penny-pinching. Certainty is a trap.

“On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective”

Markus Hertrich and Heinz Zimmermann argue in a working paper that after August 2014, financial markets priced in a significant probability that the Swiss National Bank would abolish the exchange rate floor vis-a-vis the Euro. Hertrich and Zimmermann write in the abstract:

We observe a drastic increase in the break-probabilities after August 2014, reaching a level of nearly 50%, which was the level before the announcement of the details of the “Draghi put” in September 2012. The credibility of the SNB in maintaining the floor, as seen from the option market, was thus substantially lower than publicly claimed.

IMF Recommendations for Switzerland

The concluding statement of the IMF mission to Switzerland (consultations under Article IV) includes the following top 5 recommendations:

  • Ease monetary policy further to help limit an expected slowdown in growth and reduce risks related to very low inflation.
  • To further support growth, allow fiscal automatic stabilizers to operate freely. If the downturn is more severe than expected, consider discretionary fiscal easing.
  • Adopt pension reform to ensure the sustainability of the safety net for future generations.
  • Raise banks’ minimum leverage ratio requirements to more ambitious levels to ensure banks have adequate capital to weather future shocks without recourse to public support.
  • Pay bank auditors from a FINMA-managed, bank-financed fund rather than by the bank that is being audited to avoid conflicts of interest.

The IMF also calls for an overhaul of the deposit insurance scheme. It sees three risks to its central scenario:

  • Risks related to low inflation.
  • Uncertainty about EU relations and immigration.
  • Global economic environment.

German Reparations

Reinhard Müller discusses legal aspects of recent Greek demands for German reparations in the FAZ. In the past, both German and international courts have ruled against similar demands.

In the NZZ, Elena Panagiotidis reports about the atrocities committed by German occupying forces during World War II and reviews the history of unsuccessful Greek demands for reparation (by government) and compensation (by individuals).

Addendum (March 25):

An article in The Economist provides still another perspective.

Postscript on Belgrade

The (once?) famous b92 station and Christen Farmer‘s b92 blog “Grumpy in Belgrade” (also published as a book). Nicola Tesla museum and airport. Corruption measures compiled by Transparency International. Euro Money country risk assessment. Saint Sava’s Temple, “Belgrade’s Sagrada Família.” Property market and country assessment by Global Property Guide.

National Bank of Serbia

The NBS occupies a beautiful 19th century residence with a visitors’ center in Belgrade’s city center as well as a large modern complex nearby.

In 1875, the first Dinar was minted. After Serbia’s independence in 1878, the country joined the Latin Monetary Union and Dinar and Franc could be exchanged at parity. In 1884, the Privileged National Bank of the Kingdom of Serbia was established. A businessman contributed to the capital of the Bank and served as governor. The National Bank continued to operate as the Kingdom of Serbia turned into the Kingdom of Serbs, Croats and Slovenes (1918); the union of South Slav states; Yugoslavia; and the Republic of Serbia (Videos).