Iceland Plan for Monetary Reform:

Part 1: Defects of Current System

Dr. Asad ZamanPresentation at TCMB on 25 April 2015

Who Controls Money Supply?

Harvard, Bogazici, Bilkent BoE, Keynes, Iceland

Erdem Başçı Ersin Özince

Muharrem Karslı 

Suzan Sabancı Dinçer 

Muharrem Karslı (

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

Can Erdem target M2 or M3?

Effects of QE: House of Debt

England: Excess Private Money

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.

How did Erdem control inflation?

Re-discovery:QTM veil over Money

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 SwansWE DID NOT LEARN any of this in grad school.EVIDENCE of suppression of dangerous knowledge

Post GD 29, Economists Learned

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

Consequences of Private Money

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.

Creation of FRB 1913

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?

Problems of Current System

Shiller: Irrational Exuberance 2015• 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. 

Price Earnings Ratio: US Stocks

Inf(t) = 0.78 Inf(t-1) + 0.05 DM3(t-1)10% increas in M3SR 0.5% CPILR 2.3% CPI7.7% of increase in M3 DOES NOT pass through to prices !!

Turkey HAS asset price bubble

May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13 Dec-140.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

M3 & CPI

CPI M3

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

Manage Bubble: Soft Landing

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.

Problems of Private Money

Excessive Credit Creation by Private Sector

Minsky’s Financial FragilityPro-Cyclical Money Creation

Minsky – Financial Fragility Hypothesis

Injustice & Inequality

GD ‘29:Strict Financial Regulation

Reagan-Thatcher: De-Regulation

Increasing Inequality

Interest: Earning without Service

Poor Countries

Bottom 3 Billion

Rich Countries

TOP 85 INDIVIDUALS

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

Debt grows with money

Buying Future Laborers

Student Debt: Quadrupled in 10 years

Bottom Quintile has highest debt burden

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

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

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

Sovereign Money

Iceland Plan for Monetary Reform:

Part 2: Solution: Sovereign Money

Dr. Asad ZamanPresentation at TCMB on 19 April 2015

Control Creation of Money: ZERO inflation Spending of Money: Real Investments Earning of Money: Service – not WealthCurrently maximum earnings from financial sector, buying & selling (no service) Rich make more than

◦ ENTIRE countries, ◦ 50,000 people with median pay in London.

Keys to Sovereign Money

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, PLSREPAYMENT of loans used to clear conversion liabilityDELETED Money: re-issued as Sovereign MoneyGovt Creates additional money as per economic need.

Transition to 100% Reserve

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.

Separate: Creation & Use

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

Adv 1: No More Banking Crises

Generate & Spend Surplus Wisely

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.

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

Government Revenues

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.

Advantages:

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.

Elimination of Debt Slavery

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

Euthanasia of the Rentier

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 InsuranceRentier Economy Productive EconomyNO BUSINESS CYCLES – Controlled Money

No Inflation, No Speculation

Spending Wisely

Conventional Islamic

Consumption: Bad

Investment: Good

Consumption on Essentials: Health, Education, Welfare

Luxuries (Israf)

Investment: Real, Productive

Speculative, Financial

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.

Serious Problem: Govt is NOT good at investment

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.

Building & Financing Communities

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.

Local Community Based Banks

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

Provision of Credit & Growth