By Hema Senanayake –
I have sent this letter to the Governor of the CBSL. It might contain some technical description of economic concepts hence some readers might find it difficult to comprehend. Yet they may feel the rationale of what I have pointed out in the letter.
Covid-19 Economic Fallout – A Solution Through the Policy of Public Money Administration for Market Economies.
I would humbly recommend you explore the possibility of adopting public money administration policy until we get over with this severe global health crisis.
Our country is already in severe debt. If the government respond to the spread of Covid-19 via the existing monetary policy approaches our government and the country will be overwhelmed by debt, would limit our ability to face the calamity effectively and would delay recovery once the pandemic is contained. This dynamic will be changed for better, by adopting public money administration policy. This will enable the government to spend billions (or even trillions) of rupees without creating demand driven inflation.
The said policy will carefully and gradually switch to a policy known as Full Reserve Banking from the current Fractional Reserve Banking. Japanese macro-economist Prof. Kaoru Yamaguchi has carefully studied the conversion by applying DSGE (Dynamic Stochastic General Equilibrium) model and find out that the conversion can be done smoothly and the same has been found out by a Working Paper (No. W/12/202, August 2012) published by IMF.
However, both the author of IMF Working Paper and Prof. Yamaguchi are in favor of Full Reserve Banking and suggest to get rid of the Fractional Reserve Banking permanently. However, I do not hold that view because I strongly uphold that in order to function any market economy efficiently, the economy needs a flexible banking system that can create more credit out of a fairly small amount of incoming deposits and this requirement cannot be met by Full Reserve Banking even with the application of a monetary rule suggested by Milton Friedman. But, I observe that in a crisis like this, temporary transition to Full Reserve Banking system would be extremely beneficial, as the process provides enormous amount of debt free money for the government to face this crisis.
This is a crisis, I think, even larger economies cannot face just by reducing interest rates and resorting to another round of quantitative easing.
If you require a serious brain storming, on this idea, I would suggest you to invite Prof Kaoru Yamaguchi to participate it, through electronic media, as the situation does not permit him to visit in person.