Just Banking Presentation
Apr21
on April 21, 2012
at 8:52 am
I’m just unwinding back at my hotel after this 23 day, 4 country, 7 city trip; an exhausting but worthwhile experience (made all the more challenging by either Heathrow or Qantas losing my bag for 8 days on my arrival!).
The Just Banking conference organised by the Friends of the Earth Scotland was a fitting finale. I won’t write too much about it here–I’m too tired–but I’m sure Beth and friends will do a good write-up. For now, here is a screen recording of my presentation and the Powerpoint slides; later we’ll add the video as well.
Title: Echoing Lyonwiss
From Lyonwiss:
The distinction between cash and credit (and bank deposits) is very real and critically important.
Truly, and I am sure depositors of Northern Rock would agree too.
We are living in Extremistan. After World War II, we assume we are living in Mediocristan.
Title: 300 (a.k.a. The Battle of Thermopylae)
From Lyonwiss:
But I would add that out of three things that regulators or central banks “should, could or would” control credit creation, they certainly could. So in principle, even “endogenous credit creation” is not an inevitability or a foregone conclusion.
I suppose that will require a Congress or a Parliament who behaves like Spartans (someone with guts), wouldn’t you say so?
Steve,
The Bank of England has essentially responded directly to your style of economic anlaysis.
Martin Wolf links to it here:
http://www.ft.com/cms/s/0/8d71907c-88b5-11e1-a526-00144feab49a.html
There is some pushback to Steve’s ideas. The usual ‘private debt:GDP rose but so did private assets:GDP’ nonsense, but it then admits that this argument doesn’t hold water. But there is also an argument that UK private non-financial debt:GDP is not so high that it must come down.
It’s great to see the Bank of England taking your approach, which it essentially endorses, with caveats. I’d be interested to hear your response.
The Banks cannot be trusted to operate in a responsible way in a system whose PRIMARY purpose is profit. They become dominating and destructive economic forces.
Creating work and “work” in order to distribute goods and services is increasingly an absurd purpose given the inexorable and actually ecologically necessary force of technological innovation, and is just another way to be dominated by an elite this time by politicians.
If you made distribution (consumption) of goods and services TRULY the PRIMARY purpose of the economic system you could incorporate both profit and work within that system and yet the policies of that system would be concerned with the INDIVIDUAL, FIRST, NOT SOME ABSTRACTION…..like profit or work.
Taking away, for the most part, the consumer market from the Banking system by transforming the consumer financial paradigm from loan to dividend downsizes the Banking system’s power while simultaneously increasing financial stability by placing money in everyone’s hands perpetually on a regular basis. It also enables work to become a self determined activity instead of a drudgery or an enforcement. It enables technology to become our economic ally instead of an economic antagonist. Finally, it eliminates any semblance of an excuse for personal financial hardship while raising the awareness of everyone as to their personal responsibilities for keeping such an individually empowering system functioning as it was intended. In other words it makes both the system and the individual grow up.
In his review of the speech by the BoE’s Broadbent, Martin Wolf takes him to task for suggesting that the link between private sector debt:GDP ratios prior to a crisis and the subsequent slowdown of GDP growth is weak.
Wolf cites the IMF world economic outlook, which suggests that there is good evidence for such a link.
In Broadbent’s defence, he does admit that there is a link between the rate of change of private sector debt:GDP and the likelyhood of a financial crisis.
But it does sound like only a solid cross-country comparison will convince the BoE. I think Dirk Bezemer is trying to do this, based on his talk at INET. But perhaps you could also try to do a cross-country analysis, Steve?
@ Koonyeow April 23, 2012 at 12:38 am
No, Spartans are not required; only less corruption is required. Between the last depression and current one (in the making), the data show that credit creation in the last one hundred years was mostly well-contained. The last two decades were characterised by a financialization scam, when lesser men (and women) were in charge. Uncontrolled credit creation is not an incurable human disease and does not require any radically new ideas and measures we don’t already know.
“Uncontrolled credit creation is not an incurable human disease and does not require any radically new ideas and measures we don’t already know.”
ever since methusela was a young boy
greed and dishonesty are two pathologies we havent quite overcome though,
not sure how we regulate this away lyonwiss
“I agree with most of you say. But I would add that out of three things that regulators or central banks “should, could or would” control credit creation, they certainly could. So in principle, even “endogenous credit creation” is not an inevitability or a foregone conclusion.”
well they set the price of credit and let the quantity find its own level, because any attempt to control quantity directly has demonstrably failed in the past.
the problem is their pricing strategies are based on what the tea leaves are saying about the future, and as we know , the only certainty about the future , is that we and central bankers are going to get blindsided
endogeneaty creates uncertainty and central bankers are always scratching their heads and reacting defensively to market forces
I respectfully disagree with Keen. I think you do need constant expanding debt to maintain the money base in the economic system because of the interest repayments under the current monetary system. I understand that money circulates many times through the economy. But the problem is that it circulates through the banking system many times also. Deposits rates pay less money into the system than what Interest on loans remove from the system. If Deposits paid the same interest as what was realised on loans then no problem.
There is no problem with private bank lending btw, the problem is that private banks create money. If the central bank is the only entity that creates money and private banks simply act as intermediaries sourcing funds from investors, lenders or retained earnings then this is good.
@ Mahaish April 23, 2012 at 12:42 pm
You said, “greed and dishonesty are two pathologies we havent quite overcome though” and never will, I would add and also all other human failings. But does it matter? The idea is to design a robust system where those failings do not matter much.
“there are two kinds of luggage: carry-on and lost.” – onebag.com
Sorry to hear about your “mishandled” luggage. I’d love to read about your reaction to Luci Ellis’s last speech on why US had a housing crash / Australia didn’t, if you had any time.
“Uncontrolled credit creation is not an incurable human disease and does not require any radically new ideas and measures we don’t already know.”
Yes you can always re-regulate etc., and regulartion will need to be legislated an enforced no matter what. But lets also admit that re-regulation is merely a palliative.
The real problem with the economic and monetary systems is the ideas upon which they are based, and even beneath that the primary intentions and purposes of those systems. Those are the things we desparately need to re-regulate, re-regulate that is, as in change.
I’ve been over on Mish Shedlock’s blog for years saying the same thing. 99% of the people over there think capitalism was hijacked on April 23 1992 at 2:30 AM or something. That is just an excuse. The real problem is the intentions and purposes of capitalism haven’t changed/evolved for 3 centuries. Its run on the same track too long. Economic circumstances change. Technological innovation occurs. Ecological circumstances change. Last but not least people’s awareness raises about the occurence of these things, and combined with present circumstances, a sense of history, indignation at a system that is obviously out of synch with 95% of the world’s interests….they demand change. I’m here to speaking up for REAL change.
The libertarian constituency of Mish Shedlock’s blog are always clammering for REAL capitalism. I always reply that the REAL capitalism is indeed Distributism. Call it what you want, I could care less about the labels actually, but its prescriptions are the right one’s for the times. Why? Because they address the on the ground realities mentioned above and deal terminatedly with the excesses of the current primary power, i.e. finance. Human systems are always maleable. Make the right prescriptions work. Its doable. Its merely a matter of consciousness, intention and socially expressed will.
@ Steve Hummel April 23, 2012 at 2:01 pm
You are getting much closer to the answer. The “evils” of capitalism or socialism are rarely those of individuals, but mostly those of institutions, which act inappropriately in the name of the collective.
Examples include: corporate unethical behaviour for the sake of shareholders, banks speculating instead of facilitating for economic activities through finance, governments transferring public wealth to private hands to “save” the financial system, trade unions impeding economic change to protect jobs etc.
All institutions serve some useful purposes (for why they are created originally), but are also perverted for other corrupt purposes. Economic theories do not cope with these realities. But as you say: “Human systems are always maleable” to intention and will, a basis for optimism.
@Neil W
“That’s ‘lightning strike if you break the rules’ thinking. Banks cheat and cajole – it’s in their interest to do so.”
with all due respect that is pretty weak in the context of what I posted. Sure cheating and cajole removes constraints but none of us are constrained to do anything if we choose to ignore laws and test what we can get away with.
If there were no actual constraints on lending — i.e. the regulatory constraints were being ignored — why would Australian banks borrowing hundreds of billions offshore to on-lend here rather than just issue loans and create deposits? My answer is that they are capital constrained — they have tapped out the limits to what credit they can create under the APRA guidelines. What is your answer?
Mikeh1980
“why would Australian banks borrowing hundreds of billions offshore to on-lend here rather than just issue loans and create deposits?”
The banks might also be collateral constrained for reserve borowing because of the small Aussie bond market.
Lyonwiss,
Yes, the corporate contract will have to re-written to align with the ideas, values and policies of Distributism. I have always thought the trickiest part of C. H. Douglas’s vision was his statement that Social Credit envisages an “aristocracy of producers, serving and accredited by a democracy of consumers.” The financial problems are an obvious target and yet a difficult enough obstacle to overcome, but corporatism has coalesced right along with financialism. They will undoubtedly collaborate. The focus will have to be maintained on the will to freedom for the individual and the emphasis on the concept of subsidiarity. Bigness is definitely a part of the problem.
the problem lyonwiss,
is that we are the designers and builders of the system, and we change our minds to take advantage of commercial opportunities.
what marxists and schumpeter refer to as creative destruction.
business innovation makes the regulatory framework redundent sometimes.
do our laws and regulations control capitalists , or do capitalists control our laws and regulations.
there are three fundamental laws of beauracracy,
firstly, politicians like legislating, and usually legislating leads to more beauraucrats,
and secondly and more importantly, the political process is reacting to the economic circumstances that business innovation forces on it, so the law is an ass most of the time when it comes to regulating business, in particular financial engineering.
and thirdly, the regulators are held financially and idealogically captive by the very people they are trying to regulate
so its not so easy
Dannyb2b wrote:
I understand that money circulates many times through the economy. But the problem is that it circulates through the banking system many times also. Deposits rates pay less money into the system than what Interest on loans remove from the system. If Deposits paid the same interest as what was realised on loans then no problem.
Thing is that deposit interest is not the only way that the banks recirculate money back into the system. They also do so via dividend payments to bank shareholders, and wage payments to bank employees. And while deposit interest paid out is far less than loan interest received, deposit interest plus dividends plus wages (which include enormous bonuses for some employees) plus other operating costs roughly matches loan interest received.
Mahaish,
The political solution lies in a mass social movement that is able to appeal to the best and highest values of Humanity and their own TRUE economic self interest…..simultaneously. A mass social movement that is able to herd the entire political apparatus in the correct sane, humane direction. Traditional politics is divisive. Ghandi mobilized an entire nation in the name of self determinism. Martin Luther King brought change through moral force.
Wage slavery enforced by an outdated consumer financial paradigm currently controlled by oppressive Banking and monetary systems has to change. Its the REAL issue of the times. True paradigm changes are inclusive and transformative not reactionary and destructive.
Politics must be outflanked, herded and then made to act in everyone’s interest.
There has been some debate about Paul Krugman’s recent articles that QE is not particularly benefitting bank profits and therefore the Fed is not the tool of the banks.
If we are talking about distributional impacts of a policy it is helpful to think in terms of factor returns.If you are talking about distributional impacts why not employ the economics of factor returns?
If there is demand for money it will have a price and its production can attract a profit.
Think of the factor return on inside money creation as seigniorage and on bank money as interest ( the asset return from good loans – also known as bank profit). Though of course central banks can loan directly through a variety of open market operations.
More here http://andrewlainton.wordpress.com/2012/04/23/distributional-impacts-of-money-creationqe-a-factor-returns-approach/
Derek R
“Thing is that deposit interest is not the only way that the banks recirculate money back into the system. They also do so via dividend payments to bank shareholders, and wage payments to bank employees. And while deposit interest paid out is far less than loan interest received, deposit interest plus dividends plus wages (which include enormous bonuses for some employees) plus other operating costs roughly matches loan interest received.”
Im aware of the things you mentioned and they are definetely true. Also to add to your point loan defaults are another factor which offset the contractionary effect of loan interest repayments. But the net effect is still negative as these factor do not compensate completely for the contractionary effect of loan interest repayments.
Even if these mitigating factors are considered the reality is that the system still does need ever expanding debt levels to sustain a certain level of money within the system. The system is growing increasing indebted to sustain growth, and increasingly indebted to the financial sector. The financial sector is dominating other sectors due to its priviledge of money creation.
Danny2b,
The monopoly on credit is truly a big part of the problem. And as we see the Banks and Central Banks act really in tandem. Theirs is a duopoly. Again, the solution is a rival and other intentioned institution whose mandate is monetary freedom and economic sovereignty for the individual. Purpose and intention is everything.
Steve Hummel
“the solution is a rival and other intentioned institution whose mandate is monetary freedom and economic sovereignty for the individual”
The solution requires removing the power to create money from profit oriented banks and also modifying how the central bank operates. If the central bank can only create money into citizens accounts (not lend to banks) in a balanced manner while maintaining an inflation mandate then this seems a balanced approach.
if interested heres my proposal:
internationalmonetary.wordpress.com
@Danny2b Derek R
Just checked the annual report of a major bank
Barleys 2011 Total income £32.2 billion, profits before tax £5.9 bn. Despite writing off 77 bps (0.77%) of its loan books for bad debt and rebuilding its capital ratio. The profit to revenues ratio of banks is quite good when you consider the huge turnover. In this case it is 17%, for Apple by comparison it is 17.9%
Danny,
Interesting proposal. It reflects awareness of the elitist control of the monetary system which is a major problem that many overlook or deem necessary. To me the step that must be accomplished is the immanent economic freedom of the individual so that he is actually in control of economic policy via their sufficient purchasing power money-vote. Otherwise an elite organization will end up dominating. Power is best left in “the many hands” of individuals.
If the individual is able to be financially extorted in any way by any system, monetary or economic (corporate) it will devolve away from individual freedom.
Technology now enables us to produce more than sufficient goods to meet everyone’s basic needs, and computer science also can enable us to direct the flow of commerce to prudent areas and in appropriate ratios to make the monetary and economic systems function properly, stabily and ultimately in a wise way.
The process will include acculturating individuals to a new set of values and a psychology that are basically the opposite of the current systems. And no it doesn’t have to be some reactionary heavy handed Pol Pot idiocy especially if the economically freeing mechanisms are instituted first. And neither does it have to be a “Brave New world” scenario if that freedom is accompanied with a mature sense of responsibility. The question we need to ask ourselves is does responsibility have a better chance of being a general reality in a mass, anonymous, hierarchical society where scarcity is enforced or one where individuals are self determined economically, institutions are able to be decentralized and where there is much more time to visit with the neighbors and contemplate human wisdom than there is now because everyone spends most of their time “getting on” and then collapsing in front of the tube.