Just Banking Presentation

flattr this!

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.

About Steve Keen

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

102 Responses to Just Banking Presentation

  1. alainton says:

    @lyonwyss
    Lets not get bogged down in ideas that only coins jan­gling in our pocket is money. Only about 3% of all money in the UK is cur­rency — notes and coins, but the other 97% can still be used to buy things if the money is liq­uid — e.g. in a deposit account acces­si­ble by a debit card.

    The cre­ation of debt cre­ates assets in a deposit account — that money is expanded and over time is destroyed as the debt is rapid, with inter­est on that debt remaining.

    Banks can cre­ate money out of think air but they can destroy it out of thin air too if they get their sums wrong. Its a myth of think­ing that banks are totally uncon­strained in lending.

    Now imag­ine a sit­u­a­tion where all trans­ac­tions were by debit cards and there was no cur­rency in oper­a­tion. A bank might cre­ate credit in excess of its assets(retained profits/interest) and equity, then it would be tech­ni­cally insol­vent. If it did this for any period how­ever no other bank would advance it credit and no-one would ratio­nally deposit money their. It would also be swiftly closed down by reg­u­la­tors. So banks can­not infi­nitely expand credit even in a cur­rency free world. The whole bank­ing sys­tem is based on a sys­tem of trust — that banks restrain their credit mak­ing capa­bil­i­ties by them­selves stay­ing credit worthy.

    This would be the case even in a world with­out cen­tral banks or taxes. These add an extra dimen­sion and allow the state to — to some extent– reg­u­late the money sup­ply — but doesn’t alter the fun­da­men­tal truth that banks can only make money out of think air so long as they are credit worthy.

    If banks have prob­lems with their credit wor­thi­ness, then, as Hawtry explained, they are forced to with­draw more money from cir­cu­la­tion through debt repay­ments than they cre­ate. They become net short term destroy­ers of money rather than net short term creators.

    The Stret­ton posi­tion if the view that though banks cre­ate money at point x and destroy it at point Y then the repay­ments come from other bank accounts — the cus­tomers of firms that took out an invest­ment loan for exam­ple. So over a period, and with over­lap­ping loans and repay­ments the bank­ing sys­tem as a whole is net, not cre­at­ing money. And of course if the loan­ing bank receives repay­ments on prin­ci­pals + inter­est it must have come from with­drawals else­where in the sys­tem. So that even though one bank can cre­ate money in the short term and destroy that money over the loan period, if all loans are repaid and loans and repay­ments are even and over­lap evenly, the sys­tem as a whole does not ‘cre­ate’ money net.

    It is good argu­ment, but a lim­ited one. For two rea­son. Firstly it assume credit and repay­ments occur evenly and we know from the the­o­ries of the credit cycle from Hawtry, Min­sky etc that they don’t we have major peri­ods of credit expan­sion, boom and defla­tion­ary credit con­trac­tion. Sec­ondly banks by var­i­ous meth­ods such as rehy­pot­i­ca­tion and finan­cial­i­sa­tion found ways to keep on lend­ing and lend­ing by squeez­ing their assets. Of course the fun­da­men­tal point is that all loans needed to be able to be paid back for this to work, as unless credit is used to fund pro­duc­tive activ­i­ties in the future the econ­omy will need to con­tract by the exact amount that the unpro­duc­tive ponzi credit expanded — simples.

  2. Lyonwiss says:

    @ Alain­ton April 22, 2012 at 9:04 pm

    I agree with a lot of what you say. But some­things you say are just not 100 per­cent accu­rate. Less than 100 per­cent accu­racy in some­things can lead to seri­ous errors of con­se­quence. This defi­ciency is appar­ent when things don’t behave nor­mally e.g. defaults, bank runs, etc, then your slight mis­un­der­stand­ing lead to absur­di­ties and an inabil­ity to com­pre­hend the full picture.

    @ NeilW April 22, 2012 at 5:42 pm

    True. “Cash isn’t real”. But cash is much less unreal than credit. Cash is only unreal, when gov­ern­ments abuse their fiat, in which case peo­ple take refuge in pre­cious met­als. The dis­tinc­tion between cash and credit (and bank deposits) is very real and crit­i­cally important.

  3. Lyonwiss says:

    @ Koonyeow April 22, 2012 at 2:32 am

    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.

  4. koonyeow says:

    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.

  5. koonyeow says:

    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?

  6. barrythompson says:

    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.

  7. Steve Hummel says:

    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.

  8. barrythompson says:

    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?

  9. Lyonwiss says:

    @ 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.

  10. mahaish says:

    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 ;)

  11. mahaish says:

    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

  12. Dannyb2b says:

    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.

  13. Lyonwiss says:

    @ 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.

  14. cancerward says:

    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.

  15. Steve Hummel says:

    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.

  16. Lyonwiss says:

    @ 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.

  17. mikeh1980 says:

    @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?

  18. Dannyb2b says:

    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.

  19. Steve Hummel says:

    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.

  20. mahaish says:

    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

  21. Derek R says:

    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.

  22. Steve Hummel says:

    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.

  23. alainton says:

    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/

  24. Dannyb2b says:

    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.

  25. Steve Hummel says:

    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.

Leave a Reply