Chris Marterson Interview
Jun12
on June 12, 2012
at 9:54 am
Check out Steve’s latest interview with Chris Martenson.
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My lawn mower just goes when I turn the switch on!
The new book sounds exciting. Would be great to have a software package with it that allows individuals to play with their own scenarios and maybe extend the parameters modeled.
Having plenty of capacity in fiscal, exchange rate and monetary policy does make one feel confident about the situation in Australia…
Regarding the example about banks counting reserves post deal. This is simply a misinterpreted operational technicality. Banks “counting” reserves post deal, is absolutely true, it would not really make sense to do so otherwise, from a reporting perspective. But it does not necessary imply anything about money creation behaviour of banks.
For the money to be lent out, it has to be on the balance sheet in the first place. Not even talking about some small reserve percentage, the entire capital has to be pre-funded. Taking Australia as an example, the capital is prefunded months in advance. During the heights of the crisis, the big 4 Australian banks could turn off their funding taps and wait for better market condition as a result.
Wish I had a dollar for everytime I wrote this on this website, banks do not lend first and fund later, it does not happen, believing otherwise shows lack of understanding of risk, a concept fundamental to banking. Lending and treasury are seperate operations, treasury obtains funds and is mandated to do so well in advance. After obtaining funds treasury sets an internal cost of capital to various lending and investment parts of the bank. Anyone who understands banking knows this. The problem is most people don’t understand how banks operate and as such are vulnerable to such misinformation.
@ TruthIsThereIsNoTruth June 12, 2012 at 11:50 pm
True: “Anyone who understands banking knows this”; but few economists do and erroneous theories of lending and money have been misguiding public policy and leading to chaos.
@TITINT
“Wish I had a dollar for everytime I wrote this on this website, banks do not lend first and fund later, it does not happen, believing otherwise shows lack of understanding of risk, a concept fundamental to banking”
WRONG
EXCELLENT!
I have some news for those in the first world: “You ain’t seen nothin’ yet!”
The first oligarchies to employ neoclassicism and neoliberalism to give their political, social and economic projects an air of intellectual and moral legitimacy were those in Latin America. Chile was the first in 1975, with Argentina and Mexico following close on its heels.
In Latin America, the imposition of neoliberalism along with the neoclassical paradigm was achieved with a great deal of overt repression and violence. To use such a level of violence in developed nations to impose neoliberalism, however, was unacceptable, as Greg Grandin observes of Margaret Thatcher, one of the great neoliberal gurus:
Neoliberalism isn’t always imposed in one foul swoop. In Mexico it was more like the story of slowly boiling a frog. In A New Time for Mexico, Carlos Fuentes relates the sordid tale. Lopez Portillo began its implementation during his presidency in 1976-1982. Using Mexico’s oil wealth as collateral, he ran up massive public debt that, when oil prices cratered in 1982, could not be repaid from oil revenues. As a result, austerity and a harsh level of political repression, something that always accompanies austerity, were imposed, and the crisis was used as justification to unleash an even greater level of neoliberalism upon an unsuspecting public. You could say Mexico went from level 1 neoliberaism to level 2 neoliberalism.
Carlos Salinas Gotiari repeated the same trick during his presidency from 1988 to 1994. Massive debts were run up and then when the debt crisis came in 1993, austerity and a wave of political repression were unleashed upon the people. The crisis, just like the 1980s crisis, was used to justify implementing another whole new round of neoliberal measures. Mexico moved from level 2 neoliberalism to level 3 neoliberalism.
The fruits of neoliberalism are quite stark. As a result of over three decades of neoliberal governance, the purchasing power of Mexico’s minimum wage has decreased by 71.3% (between 1982 to 2011). The pay of the average union worker has lost 50% of its purchasing power since 1982. There are 7 million young Mexicans now between the ages of 18 and 29 who neither work nor go to school. Twleve million Mexicans have fled to the United States. The narcotics industry employs 600,000 people, and since Felipe Calderon came to office in 2006 and began his “War on Drugs,” over 40,000 people have lost their lives. The rapid increase in organized crime, fueled and exacerbated by the hopelessness of the economic situation, is then used by the neoliberals in their propaganda war to justify ramping up their project of political repression even more. It’s a vicious circle, probably nowhere explained better than by Al Jazeera in these two videos:
http://www.youtube.com/watch?v=A-4ALKGBbOE
http://www.youtube.com/watch?v=2Rc72FZYlCM
The reporting is absolutely outstanding.
As the people in the developed world slowly get converted into the last “subject races,” as Lord Cromer put it, they will gradually awaken to what the neoliberal-neoclassical project is really all about.
I just saw this today:
If we look at the families in the bottom 90% of income, the fall is even more precipitous, since families in the top 10% of income actually saw their net worth increase over the period.
Family income also fell by almost 8% during the period, from $49,600 to $45,800.
All I can say is get a bag of popcorn and get ready for the show, because the neoliberal-neoclassical road show has just began in the developed world.
TruthIsThereIsNoTruth said:
Where have we heard this rhetorical strategy being used before? Ah yes, when the mouthpieces for the finance industry were fighting against regulations on predatory lending in Georgia. The tale begins here http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/ in Episode One at minute 26:30. The actual argument is made at minute 31:30:
Financial Industry Lobbyist: None of these people have a clue of what’s going on. Nobody here understands the business….
Gov. Roy Barnes: You would have though that I had recommended that we repeal the plan of salvation. And why were they so opposed to it? Money. Money.
Financial Industry Lobbyist: This bill will cripple the mortgage business. It’s going to cripple real estate sales. It’s going to absolutely devastate the whole market in Georgia. I can guarantee you.
The Polish psycholigist Andrew M. Lobaczewski says the sort of rhetorical strategy used by the banker apologists is intended to induce what he calls “reversive blockade.” The desired psychological effect is to provoke ambivalence, diminishing the conviction and will to act. As he goes on to explain in Political Ponerology:
I worked in a bank treasury as a the latest crisis developed. What I’m saying is common and obvious knowledge to anyone who has seen how the cogs turn…
The ‘thin air’ conclusion really hinges on sticky deposits in a one bank model. Hanging on to this conclusion blocks the extension of this model in a direction which would alter the conclusion and reconcile better with reality. I agree with the double entry book keeping mechanism, but you only need to extend the model to more than one bank and allow competition for deposits to turn the ‘thin air’ conclusion on it’s head. Once there is competition for deposits banks need to consider both the cost and liquidity of funding. If in a hypethical model you had one bank funding first and one bank lending first, having only thought about this, I can still say that you could show that the bank lending first is less competitive.
You have to ask yourself as well, what advantage is there in lending first anyway? Banks have to come up with the money eventually. How would you work out whether you are able to obtain the deposits in time at the right cost?.
TITINT
“For the money to be lent out, it has to be on the balance sheet in the first place. Not even talking about some small reserve percentage, the entire capital has to be pre-funded”.
What do you mean by it?
if you mean money = bank credit then this is obviously not correct. Money is a bank liability. A liability can not be lent out
Then you refer to reserves and capital. They are different
So what do you mean by it. Bank credit or bank reserves or bank capital
“You have to ask yourself as well, what advantage is there in lending first anyway? Banks have to come up with the money eventually. ”
Once again what do you mean by money. And deposits from the banks viewpoint is a LIABILITY
A DEPOSIT CAN NOT BE (AND IS NOT) LEND OUT
Banks need reserves to settle with other banks. Deposits can result in additional reserves flowing to one bank from another but this depends on the balance owing between banks.
Reserves can also be purchased as required.
And the advantage of lending money to a sound borrower is obvious. The interest charged will be greater than the interest cost = profit
“And the advantage of lending money to a sound borrower is obvious. The interest charged will be greater than the interest cost = profit”
That is the game RJ – and my point is this game would hard to play if you lend first without knowing exactly what the interest cost will be.
In regards to your other points. Not sure actually but you seem a bit conceptually confused. Whatever you want to call it, funding comes from 2 main sources, retail deposits and wholesale bond issues. Either a retail client deposits money in an account or the purchaser of the bond transfers funds to the bank, the bank pays interest on either the deposit account or the bond and that becomes the cost of funding. Of course it is a liability, how does that stop the bank from lending that money out?
“Of course it is a liability, how does that stop the bank from lending that money out?”
The bank can not lend a liability.
Many do not understand financial accounting or double entry book keeping. So do not really understand money and banking. As money is created and destroyed by journal entries.
A loan is just a journal entry that creates both new money and new debt. They do NOT loan out a deposit.
Is 16% of Australian bank liabilities denominated in foreign currency a problem?
About half of the current AUD365bn is hedged – uncertain of security of counter parties! That leaves AUD180bn exposed to exchange rate movements.
Last time commodity prices were low in 2001 the AUD went to USD0.48. So the AUD180bn in exposed foreign currency is going to be become roughly AUD360bn; increasing bank liabilities by AUD180bn.
Current bank equity in Australia is AUD166bn. So without any bad debt or counter party risk on hedge contracts the banks have negative equity on foreign currency liabilities through foreseeable exchange rate swings.
My devil’s advocate take is that 16% of bank liabilities in foreign currency is not prudent. Makes Australia more like the EU nations that do not have a sovereign currency. USA is probably the only debtor nation that does not have a problem because they also supply the currency that denominates their debt.
yes RJ, in theoretical fantasy land you are perfectly correct
Glenn,
I could not possibly agree with your assessment of neoliberal economic policy and neoclassical economics enough. I don’t know that your preference is socialist, social democratic or some other flavor of that perspective, but I assert to you that ultimately such theories iare in reality a distinction without a difference.
I come out of a progressive perspective, but have come to the conclusion that the only true and actual economic theoretical choice to capitalism is Distributism. In fact both capitalism and socialism are centralizing cesarist systems. They both rely ultimately on abstractions which increasingly diminish the significance and the freedom of the individual IMO.
Again, not that I am any apologist for capitalism, and I DO agree that labor is almost insignificant as a countervailing power to capitalism and so must not simply acquiesce to its already dominating position, but truly changing the paradigm of consumer finance from ONLY loan to dividend AND loan IF desired
transforms the power relationship between finance and the individual and the elite and the individual. I can see where the libertarian socialism of a Noam Chomsky is perhaps doable, but even it still leaves the underlying cost accounting enforcements of insufficient individual demand in place. The solution is to consider the individual’s significance and true liberation first, last and always. This does not mean that there is not still a need to acculturate each new generation to be responsible and sufficiently civicly engaged. That will always be needed, but how much more engaged could a populace be if they were members of a truly fair and beneficent social order based on human virtue instead of human vices? And how much more could people become if they had the self empowerment, choice and time to develope themselves rather than be “distracted from distraction by distraction and/or burdened by the necessity to spend 40% or more of their time attempting to garner personal economic security…..in systems which cannot actually produce such?
TruthIsThereIsNoTruth said:
I think many bankers are the slightly mad victims of their own brainwashing.
Of the several conclusions one can draw about them, that is surely the kindest and least condemnatory.
TruthIsThereIsNoTruth said:
You really do need to take time out to watch the PBS special Money, Power and Wall Street:
http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/
Some of the subprime loans the bankers were selling earned interest rates as high as 42%.
At the beginning of the boom, the banks were well aware of the risk, and the game was to package these loans up and shove them out the door as quickly as possible to gullible, less sophisticated investors. Credit default swaps (to supposedly offload the risk) and the rating agencys’ indiscriminate AAA imprimatur greatly facilitated this process.
According to Yves Smith writing in Econned:
As the boom progressed, however, the bankers began believing their own hype. As various banking experts testify to in Money, Power and Wall Street, towards the end of the boom many banks, their staffs and their chief executives had no grasp whatsoever of risk.
Glenn,
We are talking about an operational technicality. The facts are objective and not subject to personal or institutionlised beliefs. You are trying to explain how bread is made to a baker…
But believe what you will. Belief has and always has been a cornerstone facet of society. Without belief, you become a mere conduit for your digestive system. Don’t let your beliefs be brainwashed away by technical details.
Steve Hummel said:
I tend to agree. Regardless of how well-intentioned capitalism and socialism are in theory, in practice, sooner or later, capitalism always seems to morph into state capitalism and socialism morphs into state socialism. And once that happens, as Hannah Arendt notes in “Thoughts on Politics and Revolution,” what “we have here are twins, each wearing a differnt hat.” Every great ideology thus contains danger, especially in small minds.
To be quite honest, I haven’t given a great deal of thought to any solutions, as I am still trying to get my head around the problems. However, I believe one thing to be true, and that is we must find a more realistic model of the human being than the highly pessimistic and nonsensically simplistic cartoon upon which capitalism is based, or the highly optimistic and nonsensically simplistic cartoon upon which Marxism, European socialism and American Progressivism are based. As David Sloan Wilson put it in Evolution for Everyone:
@ TruthIsThereIsNoTruth June 13, 2012 at 11:29 am
Spot on. Economists often think of real-life experience as a hindrance to imagining a perfectly running machine. You only have ask what’s the role of bad debt in monetary theories to realize that they are living in a “theoretical fantasy land” where there are no such things.
@TruthIsThereIsNoTruth at 11:29 am
What I believe is of almost no import.
What should be pointed out, however, is that your comments place you solidly within the neoclassical faithful, right there beside Paul Krugman.
There’s been quite a debate going on about money creation recently. And while this thread is hardly the appropriate place to rehash that debate, for those interested in catching up on the debate I would recommend the following:
“Paul Krugman’s Economic Blinders,” by Michael Hudson
http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/
“Predicting the ‘Global Financial Crisis’: Post Keynesian Macroeconomics”
by Steve Keen
http://www.debtdeflation.com/blogs/2012/05/22/predicting-the-global-financial-crisis-post-keynesian-macroeconomics-2/
“Chartalism”
http://en.wikipedia.org/wiki/Chartalism
@ Glenn Stehle June 13, 2012 at 11:11 am
Monetary theories describe the credit creation of the traditional banking system which is regulated (through capital requirements) to protect depositors, who are the true lenders, with the bank as intermediary.
Securitization by-passes traditional bank regulation through a process of disintermediation, where the ultimate lenders are investors of asset-backed securities. These investors are NOT protected by bank regulation. Credit creation through securitization is not described by traditional bank lending of monetary theories.
The global financial crisis was caused by governments erroneously believing that credit creation disintermediated through security markets (instead of being intermediated through regulated banks) is more efficient, cheaper and safer. Banks participating in securitization created in the public an illusion of regulation and protection, which were never there. The so-called banking fraud is mostly not strictly fraud in the law, but an unethical exploitation of a regulatory gap and
public ignorance.
Even though the securities are mostly sold to “muppet clients”, and not on the banks’ balance sheets, the housing bubble also created, through traditional lending, many bad loans (due to bubble price distortions) sitting on the banks’ balance sheets, making many insolvent. Unrecognised bad loans and insolvent banks cause the banking system paralysis which is the problem today.
The GFC was not caused by traditional banks creating too much credit “out of thin air”, described by economists.
Don’t know much about Krugman and his theories and my comments weren’t meant to take a side in that particular debate. My lazy approach is that I take Steve’s word that Krugman work is not worth reading.
But in regards to the current discussion as long as I know purely from expierence that the conclusions of the theory in it’s current state are not consistent with reality, I believe in doing that theory service and pointing that out so it could motivate improvement.
@Lyonwiss said:
This places you squarely amongst the neoclassical faithful, right there alongside Paul Krugman, and in my opinion means you lost the debate with your first rattle out of the box.
From there, your argument only goes down hill. For instance:
You said: “The so-called banking fraud is mostly not strictly fraud in the law, but an unethical exploitation of a regulatory gap and public ignorance.”
Try telling that to Bill Black. This falsehood you are parroting is probably one of the most pernicious lies ever propagated and evangelized by the finance industry, meant to exculpate it from its many crimes.
You said: “Even though the securities are mostly sold to ‘muppet clients’, and not on the banks’ balance sheets…”
But when the GFC struck, many of the securities were on the banks’ balance sheets, where many still remain.
You said: “…the housing bubble also created, through traditional lending, many bad loans (due to bubble price distortions) sitting on the banks’ balance sheets, making many insolvent. Unrecognised bad loans and insolvent banks cause the banking system paralysis…”
Yea right. And I suppose that the $700 trillion in derivative contracts the banks had entered into and the huge volumes of toxic waste (that is those asset-backed securities you think had all been sold) sitting on the banks’ books had nothing to do with it. Granted, the bad loans sitting on the banks’ balance sheets were bad enough, but they hardly tell the whole story.
I was half way through writing a post last night when the power went out here in Perth. Its back on now. My question has been more or less debated in the posts since anyway – but still leaves me confused.
My question was to TITINT and Lyonwiss seeking further explanation of the assertion that banks only lend existing funds.
I wish I could find the exact reference – I think it was another Chris Martenson youtube video from a year ago or so – but he stated that in the US there was $52 trillion of debt in the economy and only $12 trillion of actual money. I might not have these figures exactly right but I am sure the proportion is.
I am not an economist but my take from that was that since there is more debt than money, it is not possible for everyone to pay off their debts at the same time. Not even one quarter of it can be paid back (in the absence of new lending). In my simplistic mind that means that even a slight de-leveraging will guarantee a monumental liquidity crisis.
How can we be in this situation if banks have not been lending money that did not already exist?
@ Glenn Stehle June 13, 2012 at 3:35 pm
Don’t you know that neoclassicals don’t even talk about banks (everything is real)? Your remarks start from a false assumption.
Glenn Stehle
June 13, 2012 at 3:35 pm | #
Excellent post.