Martin Wolf has published this week an article that completes previous which dealt with the problems of the banks. In this article, he reflects on ways to solve these problems.. Once again, it provides us with an excellent text that stands out among all that has been published on the occasion of the crises of the regional banks of the United States, of Credit Suisse and of the doubts about other European banks.
It is possible to simplify further and group the proposals to solve bank problemss in three ways:
The FIRST Form appears as the let the market solve the problems of the banks without the intervention of the state. For example, proposals for Ken Griffin o Charles Calomiris. These proposals are very attractive since it would seem that they propose that the State not intervene in the activities of the banks, neither to protect them nor to reduce the risk of banking crises. But it's not true. The problem is that they are misleading proposals because none of these proponents are proposing to remove all protections from banks.
For example, do not propose to stop helping them when they have liquidity problems, aid that, as is known, is only provided by banks and not to citizens or non-banking companies. Nor do they propose to take away the privilege of accessing safe money, the money issued by central banks that citizens and non-bank companies still cannot access. These and other –many more- protections enjoyed exclusively by banks lead to banking activities, especially payment activities, being monopolized/oligopolized by banks. The effect of maintaining these protections is to suppress the free market., competition and innovation, with the detrimental effects that all this has for the efficient allocation of resources, productivity, growth, public resources, etc.
The SECOND way to fix the problems of the banks consists of further increasing bank protections and state interventions to reduce the risk assumed by deposit institutions. It is the one that has been systematically adopted after each banking crisis since the XNUMXth century. It is the way in which states have tried to reduce the frequency and severity of banking crises. In reality, this proposal is the same as the previous one with the only difference that, in addition to protecting banks, depositors are protected, but has the same devastating effects of removing free market rules in the provision of banking activities.
The THIRD way, as Martín Wolf points out, is that of use a means of payment that is not invested in risky activities. This solution consists of replacing a risky asset such as bank deposits today with a risk-free asset. It is based on using as a means of payment safe money, such as digital money issued by central banks. A digital money that is safe, without risk, as safe as physical money is now.
Indeed, today in all the countries of the world, physical money is issued by central banks compared to what happened in some countries in the XNUMXth century when banknotes were issued by private banks. And then the crises of that physical bank money were continuous. Today there is no longer a crisis of physical money. Crises only occur in digital money, in bank deposits because they are not money, they are promises to return money. They are assets with risk that can fail. And, for different reasons, they end up failing.
Martin Wolf exposes the two forms that have been invented to ensure that the means of payment are safe assets. One is the one of power access money issued by central banks that is now accessed only by banks. It is what is now called “retail CBDC”. but there is Another way of having secure means of payment and it is the one devised by the liberal economists of Chicago in the 30s of the last century and which consists of that depositors' money is 100% backed by CBDCs, that is, by the so-called "Reserves" in the Central Bank. This form has re-emerged in these years because the "Stablecoins" backed 100% by CBDCs could also be used as a means of payment without the problems that bank deposits have today.
The main advantage of these types of safe money is that they do not need to be insured by the State. Secure money payment service providers (CBDCs) do not need the State to help them with massive injections of liquidity because they do not have liquidity problems. They do not need taxpayers to save their companies with public money because they do not put payment flows at risk. And no prudential rules are needed to prevent them from investing the money in risky activities because CBDC payment service providers cannot use or invest their customers' money. It is the customers who decide what to do with their money.
These, and many more protections that are absolutely necessary so that bank deposits do not cause damage to the economy, they end up determining a framework of payment activities and other banking activities in which there is no competition, in which the free market does not work. For this, andThe most important benefit of using safe money as a means of payment is not only stability but, above all, the means of achieve the introduction of the free market in a sector in which, after all the liberalization of international trade, telecommunications, transport, etc. and the introduction of the market in China and other communist economies, is perhaps the only major sector of the economy that still operates outside the rules of the free market.