on 31 October 2013
As other reviews, i really advice this book. Is a must read if you really want to understand how the system works, and what is money now days. Worths every penny, and i would say that is the best book in Amazon describing perfectly this subject. It outdates all books written before.
The book describes how the models used by institutions as IMF, World Bank or economists researchers, are totally outdated. They still study the 'machine' (macroeconomics) describing banks as neutral models agents in money supply. They still think that central banks can manipulate money supply thanks to the multiplier effect. And that are one of the big holes. First at all, banks are not neutral, because they are very important allocating resources. And more than that, they allocate more credit ('money') for operations with collateral (real state), than for business (they do not have collateral/asset at all if business fail). In regard to the second point, central banks can't control credit creation anymore. Banks do not need new deposits to create new credit anymore, because now days the procedure is in reverse: banks ask for reserves on demand.
The book is superb, and i would give 5 or 10 stars. The reason i give 4 in stead of 5, is that it leaves some important points that are a must if you want to understand the 'machine'.
1. the book do not cover in depth how banks dont need bank deposits anymore to create credit, but use collateral chains (shadow banking). Collateral chains are securities, debt, bonds, REPOs... pledged from one party (Banks, Hedge Funds etc...) to another for credit. If now days QEs and LTROs are not injecting inflation into the economy is because all this liquidity is being used to fill the banks hole in the shadow economy (used as reserves).
2. How central banks manipulate artificially interest rates providing reserves to interbank market. They don't let the market decide if high or low interest rates are needed or not, it means, if society needs more savings & productivity investment, or more consumption.
3. How central banks refinance indefinitely commercial banks short debts in case they can not refinance its own liabilities. It provides the wrong incentives to continue getting short debt (for instance, deposits), and invest in the long term (for instance, 30 year real state credit), creating an incredible unsustainable iliquidity banking system.
4. The authors also doesn't study how the system is designed with the wrong incentives. Because CBs back up commercial banks in case of liquidity issues, they can continue extending the risk even when interbank market is not financing this procedures.
5. from my point of view, the book provide the image that this system is a deregulation of banking system, when its obvious that is a monopoly privileged concede by governments. All this pile of debt started at the end of 70's, when the world finished gold standard, that at least, was constraining the credit creation (there is a limited amount of gold reserves in the system). I am not advocating for gold, but just saying that you can not argue that this is a deregulation of the system, when you permit a commercial bank leverage 25:1 to its own reserves thanks to central banks providing reserves on demand and refinancing indefinitely their short debt.
6. there is a point in the book that is not very clear at all, and is one of the conclusions core. Banks tend to allocate more investment in assets backed up by collateral that do not influence directly in GDP creation as real state, than allocating resources for business, that normally doesn't provide collateral. What i do not understand (or its not clear in the book) is the reason they catalog real state investment as a non GDP booster, when the industry behind real state is one of the biggest in the world. Economies that experience real state bubbles, experience also an important growth in their GDP.
7. At the end of the book, it focus in fiat nation money as one possible solution for money creation, since 97% of 'money' (electronic money) is created by commercial banks, and sometimes wrong allocated. They claim that governments know better how to allocate resources than private investors, so they should be, through governments treasury, the agents in charge of issuing money into the society through public investment, and not through commercial banks. But on this area, you really miss other kind of possible systems and solutions than the actual fiat economic system, as one based on a pattern, that could be gold, silver, oil barrels or commodities basket (Keynes solution). It means, a system where the interbank market balances the risk by itself thanks to the reserves scarcity. A system that really lets banks bankrupt, so provides banks the incentives to manage the system in a sustainable way. If a bank extend more than normal its risk, it will have to return to a sustainable position since the interbank do not refinance (or increases the interest rate for a particular bank). Now days, if a bank is not refinance by interbank, central bank will do indefinitely, creating really big monsters that are really 'big to fail'. This is a huge black hole in or actual fiat system, and is not covered in the book.
8. Finally, the books doesn't really take into consideration other alternatives to the issue of money creation as a government, private monopoly (CBs), or commodity standard (gold, silver). Why societies can't decide what is money? Why not a free monetary system? citizens creating as much currencies as they need, letting the society decide which ones are better than others. The issue in here is the word 'legal tender', and how governments impose societies how we have to pay taxes. For people really interested on this subject, i really advice Bernard Lietaer bibliography.
except this subjects, that are complementary core issues that are not cover in the book, the authors have created an amazing tool for understanding the 'system' like never before.