Re: [OPE-L] Robert Brenner, "That hissing? It's the sound of bubblenomics deflating"

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Tue Oct 02 2007 - 17:06:01 EDT

I agree that my arguments are counter intuitive from the standpoint
Of either classical or neo-classical theory, because you would expect
An increase of savings to reduce interest according to these theories, but I argue in my paper that in a credit based system actually the reverse happens. The argument is certainly non-obvious, but I think I demonstrate it in the paper. The paper is I am afraid, relatively formal and a rather hard read.

I agree that there are now, to various extents, legal reserve ratios, but, with recent financial liberalisation these are not as constraining as they once were. But from the standpoint of pure theory, one first has to look at how the banking system would operate in the absence of such state regulation and with a gold money base. One has to ask what the mechanism was of the classical commercial crises of the 19th century for example.

-----Original Message-----
From: OPE-L [mailto:OPE-L@SUS.CSUCHICO.EDU] On Behalf Of ajit sinha
Sent: 02 October 2007 20:30
Subject: Re: [OPE-L] Robert Brenner, "That hissing? It's the sound of bubblenomics deflating"

--- Paul Cockshott <wpc@DCS.GLA.AC.UK> wrote:

> 1. What are people with a high rate of interest
> doing with it?
>    This amounts to asking what does the rentier
> class do with its income?
>    I would go along with Keynes and assume that they
> save a relatively high proportion of it.
Shouldn't this itself put a downward pressure on rate
of interest?
 Since the total of net new saving must equal the
total net new borrowing, this saving by the rentier
class imposes an external constraint on the rate of
growth of net enterprise debt, unlesss that is, the
rentier class choses to save primarily in equities.
Suppose that the rate of issue of new equities does
not rise, and this is realistic at times when interest
> rates are high, since this depresses equity prices,
> then the effect of rising interest rates is to
> increase the rate of growth of the gearing ratio.
I don't understand this, Paul. I think there is a
problem of causation here. An crease in savings should
lead to fall in the rate of interest, which causes the
borrowings to rise and match with the increased in
savings. I do not see how culd you go from increased
savings to increased borrowings and a higher interest
> This rise in the gearing ratio is, from the
> standpoint of the banking system, a rise in the mass
> of loans and by the recirculation of funds, a rise
> in the mass of deposits. But what this means is that
> the ratio between bank liabilities ( deposits )
> and first class assets ( state money ) changes. The
> first class assets fall as a share of total
> reserves, whilst second class assets ( commercial
> debt ) rises.
Again, I don't understand this. Banks need to keep
minimum reserve requirements by law. Why should
increase in savings and borrowings lead to fall in the
minimum reserve requirements. Increased deposits
simply gives banks the new base to create new credits,
that's all.
> 2. What is my theory of the rate of interest?
>    Well I have now reached the point in the
> explanation to bring this in. I believe that the
> rate of
>    interest will be a rising function of the ratio
> of second class to first class assets held by the
>    banking system.
Check your statement just before this. It appears that
you are arguing as follows: rise in interest rate
leads to increase in savings this somehow leads to
increase in the rate of interest, which leads to rise
in the ratio of loans (second class assets) to minimum
cash reserve (first class assets). Now you are saying
that the rate of interest is a function of the ratio
of second class to first class assets, which appears
to be going in a circle. Where am I going wrong?
A bank with a low reserve ratio
> faces an increased probability of facing a run on
>    its deposits, or even, of not being able to meet
> normal random fluctuations in the withdrawal to
>    deposit rate. If that happens the capital of the
> bank is at risk. Thus as a bank's reserve ratio
>    falls, the potential cost of making a loan rises,
> and the bank will demand a higher interest rate for
any loans that it makes.
If my undergraduate knowledge of banking is not wrong,
then I think minimum reserve requirement is generally
a legal requirement for banks--they don't have much
manuvering space here. But in any case, the question
is why the ratio of second class assets to the first
class assets must rise?
>    During the gold standard, the first class
> reserves were exogenously determined by the gold
> mining industry,
>    and the commericial crises of the period came
> whenever the tendency for the gearing ratio to rise
>    hit the buffers set by the gold reserves.
> Nowadays, the first class reserves are denominated
> in
>    state money, which is a very variable standard of
> value indeed, and one which can be expanded at will
>    by the central bank.
>    We saw this process in operation very clearly in
> the run on the Northern Rock bank in the UK last
> month.
>    The banking system as a whole had an excessive
> ratio of second and third class assets to
> liabilities,
>    and Northern Rock had a position that was
> aggravated by the fact that its liabilities were, to
> an
>    unusually large extent in the form of term loans
> from other banks, whereas its assets were in the
> form
>    of relatively illiquid mortgages. The rate at
> which it could borrow on the interbank market became
>    prohibitive so it was forced to go to the central
> bank. In order to control the interest rate, and
>    keep the Northern Rock liquid, the central bank
> was forced to extend an extra 10 billion in loans.
>    The central bank now controls the interest rate,
> but in doing so, it must adjust the level of
>    Primary assets held by the banking system to the
> level which, in the absence of state intervention,
>    would induce the desired rate of interest.
Banks can get in crisis by giving bad loans. Nobody
denies that. For this minimum reserve requirement must
fall is not necessary. Cheers, ajit sinha

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