Talk at Turkish Central Bank regarding the Iceland Plan for Monetary Reform. Defects of Current Fractional Reserve Banking system and advantages of proposed 100% reserve banking plan

1. Dr. Asad Zaman
Presentation at TCMB on 25 April 2015

2. Harvard, Bogazici, Bilkent BoE, Keynes, Iceland
 Erdem Başçı  Ersin Özince
 Muharrem Karslı
 Suzan Sabancı Dinçer
Muharrem Karslı (

3.  In GD ‘29 Irving Fisher, Keynes, others:
“It is evident that there is no limit to the
amount of bank money which the banks can
safely create provided they move forward in
step.
 Iceland Monetary Reform (IMR) say NO
 QE – massive liquidity injections did not affect
money supply in USA post GFC 2007

6.  Multiple Equilibria in Money models
 Co-ordination is KEY
 Self-fulfilling expectations are common.
 Money Supply growth must harmonize with
expectations
 Interest rate DOES NOT work well, and has
multiple and complex channels.
 Open Market Operations NOT EFFECTIVE
 Iceland Plan provides details.

8.  Dangers of Private Money Creation
 Created Chicago Plan
 Discussed Debt-Deflation
 Failure of Equilibrium Theories
 No anchoring of investments & prices
 Crucial role of expectations
 Non-predictability of past – Black Swans
WE DID NOT LEARN any of this in grad school.
EVIDENCE of suppression of dangerous
knowledge

9.  Owners of 100 million TL can print money
 Rich will get richer
 Huge Amount of Money will be created
 Highly UNJUST system
 Lords of Finance will be able to buy
politicians, universities, journalists, real
assets

10.  Manufactured Monetary Crises to create FED
 FED ensures against bank failures.
 Banks can create money without risks
 Creation REQUIRES borrowing
 Creation of Culture of Borrowing:Roaring 20’s
 Installment Sales, Land Boom, Stock Boom
 Big Bust of 1929
 Creation of FED led to biggest bank failures.

11.  GD ‘29, S&L 80’s, GFC 2007-8
 More than 250 Crises in 1980-2010
 Pro-cyclical money creation by private banks
 Minsky financial fragility.
 Implicit/Explicit Guarantee by Government
creates WRONG incentives. (TBTF)
 Socialize losses, privatize gains.
 Mian & Sufi: HoD – bailout to bankers instead
of mortgagors – WHY?

12. • GFC 2007-8 Stocks TRIPLED.
• No Lessons Learned ! No Regulatory Changes.
• MORE bubbles after the crisis
• Stocks and bonds at high levels in USA, others!
• Property Valuations Shooting Very High.
• Secular Stagnation: No/Lo Growth
• IMF (& BIS) warning: overheated housing
markets in Asia, Europe, Latin America, and in
Australia, Canada, and Israel.

14. Inf(t) = 0.78 Inf(t-1)
+ 0.05 DM3(t-1)
10% increas in M3
SR  0.5%  CPI
LR  2.3%  CPI
7.7% of increase in
M3 DOES NOT pass
through to prices !!
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13 Dec-14
M3 & CPI
CPI M3

15.  In Turkey, from 2006
to 2013 Money Supply
increased by 318% but
prices increased by
171%. -- where did the
money go?
 The best measure of
excess credit is the
difference between the
growth rate in bank
credit and nominal
GDP
Credit is outpacing GDP
by an alarming margin in
Argentina, Brazil, Hong
Kong and Turkey.
Lending to the private
sector has increased by
around 20% or more
than nominal GDP over
the past year in both
Turkey and Hong Kong –
The Economist

16.  Central Banks Lack Control: Pro-cyclical
money creation leads to repeated crises
 Injustice: Wealthy get license to print money
 Increasing Inequality
 Interest: Earnings without service – farmers
 Creation of money tied to debt creation
 Investment in non-productive financial sector
 Fiscal Constraints: Lost Seigniorage revenue
 Distortionary Taxation
 Reduction in Social Welfare Spending.

17.  Excessive Credit Creation by Private SectorPro-Cyclical Money Creation
Minsky – Financial Fragility Hypothesis

18. GD ‘29:Strict Financial Regulation
Reagan-Thatcher: De-Regulation

19. Increasing Inequality

20. Poor Countries
Bottom 3 Billion
Rich Countries
TOP 85
INDIVIDUALS

21.  Japan: Lost Decade – highest debt burden:
◦ Lo interest + Hi Money  land & stock bubble
 Pakistan: 1.4 T debt, 0.7 army, 0.5 dvlpment
 Third World: Huge Debt Burden
 The Neo-Colonial Model
 The East Asian Crisis

22. Student Debt: Quadrupled in 10
years
Bottom Quintile has highest debt
burden

23. Leveraged Losses: Poorest hit hardest by
collapse of housing values.(Mian & Sufi)
Injustice of Interest Based Mortgages.
Debt-Deflation Cycle: Collapse of
Aggregate Demand & Great Recession

24. Strong Bias towards Non-Productive
Investment – Keynes: Casino Investment

27.  No Banking Crises
 Central Bank: Complete control money supply
 Keynes: Euthanasia of the Rentier
 Increasing Equality and Justice
 Govt Budget: No Interest Payments,
Seignorage from Money Creation
 Eliminate Distortionary Taxation
 Social Dvlpment Inc investing in humans
 Use Window Guidance for Productive
Investment

28. Dr. Asad Zaman
Presentation at TCMB on 19 April 2015

29. Control
 Creation of Money: ZERO inflation
 Spending of Money: Real Investments
 Earning of Money: Service – not Wealth
Currently maximum earnings from financial
sector, buying & selling (no service)
 Rich make more than
◦ ENTIRE countries,
◦ 50,000 people with median pay in London.

30.  All DD A/c  Transactions A/c at TCMB
 Banks owe Coversion Liability to TCMB
 To be paid back over years.
 Savings Account  Investment Accounts
◦ No checks, Delayed Withdrawals, PLS
REPAYMENT of loans used to clear conversion liability
DELETED Money: re-issued as Sovereign Money
Govt Creates additional money as per economic need.

31.  Money Creation, under control of Central
Bank, Technical Committee decides optimal
needed for economy (Zero Inflation goal)
 How to Spend Money: Decided by Standard
Budgetary Operations – Parliament
Consensus.

32.  Laeven & Valencia: Systemic Banking Crises: A
New Database, IMF WP 08/224
 START of systemic banking crises: 70’s
 124 banking crises from 1970-2007
 208 currency crises from 1970-2007
 63 sovereign debt crises 1970-2007
 ROOT cause: excess un-restrained private
money creation.
 100% reserves + Controlled Sovereign Money
+Controlled Investment in Financial Sector

33. Revenue: Expenditure
 Taxes?
◦ On Rentier Class
◦ NOT on production
 Zakat/Sadaqat for
Social Services
 Inflation Free Revenue
from Money Creation
 Consumption
◦ SPEND on essentials
◦ Tax or Prohibit Luxuries
 Investment
◦ Spend on Real Sector
◦ Prevent Speculation, Land
Stocks.

34.  Money Creation
 Liability Conversions during transition phase
 Taxation: Gently tax bubble economy
 Tax Rentiers, NOT producers
 Current system is REVERSE: Rentiers in POWER
 Zakat/Sadaqat – Natural Human Generosity

35.  Low/Zero Debt Burden on Government.
 Vastly Increased Fiscal Space
 Re-Align Taxes  Increased Productivity
 Justice: tax unearned income
 Government Public parternship in provision of
social service  genuine democracy
 Community building instead of breaking.

36.  Banks MARKET Debt
 Fraud is common
 Debt Enslavement is common
 Personal: US Students
 Nigeria: $5 Billion Debt  44 Bill Repayment
 International:Trillion/Yr tax on Poor Countries
.

37.  Rentier Economy: Secular Stagnation
 Lost Decades
 Profit-Sharing: Good Investments Preferred

38.  Stable prices ONLY possible with 0 interest
 Prevent Gambling
 No High Frequency trading.
 Tie Prices to fundamentals.
 Govt: Stabilize & Insure Risks
 Prevent Speculation
 Use Takaful instead of Insurance
Rentier Economy  Productive Economy
NO BUSINESS CYCLES – Controlled Money

39. Conventional Islamic
 Consumption: Bad
 Investment: Good
 Consumption on
Essentials: Health,
Education, Welfare
 Luxuries (Israf)
 Investment: Real,
Productive
 Speculative, Financial

40.  Islamic Public Finance Laws
 Delineate what govt can and cannot do.
 Prohibit Government from many kinds of
wasteful spending.
 KEY functions: Provision of JUSTICE
 ENABLER – Legal Framework for operation of
institutions
 COMMUNITY BUILDER
 Spreading Right and Prohibiting Wrong.

41.  Creating thousands of agents of change
 Citizen Engagement: Game Changer
 Cohesive Communities: Drivers of
Development
 BUT need support & finance
 Postal Banks
 Local Community Banks
 Local Public Banks
 German Model: Sparkassen Banks.

42.  Have intimate local knowledge
 Why Grameen microfinance works
 SME sector vital for employment and growth
 Outsiders CANNOT separate good/bad
investments
 Example of Orangi Pilot Project in Karachi
 Provision of Credit to Real Sector is VERY
CLOSELY linked to Growth of GDP.

43.  The chart shows the CLOSE relation between
provision of credit to private sector and
growth in Japan: