Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed

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I like Joe Stiglitz, both professionally and personally. His Globalization and its Discontents was virtually the only work by a Nobel Laureate economist that I cited favourably in my Debunking Economics, because he had the courage to challenge the professional orthodoxy on the “Washington Consensus”. Far more than most in the economics mainstream—like Ken Rogoff for example—Joe is capable of thinking outside its box.

But Joe’s latest public contribution—“The Great Malaise Continues” on Project Syndicate—simply echoes the mainstream on a crucial point that explains why the US economy is at stall speed, which the mainstream simply doesn’t get.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, 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 private debts accumulated globally, and our very low rate of inflation.
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9 Responses to Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed

  1. Pingback: Note To Joe Stiglitz: Banks Originate, Not Inte...

  2. To convince Joe I thought it would be obvious for him to simply talk to some experts who actually work in the banking industry. People who run banks for a living would know if they originate mainly over intermediate. Surely many high level economists have some friends in banking and finance industry they can talk to. It would be inconceivable that banking CFO,CEO’s etc don’t know they originate loans.

  3. Actually when your both in the same town take him out for dinner and invite a banker along to explain how banks work in reality.

  4. F. Beard says:

    Yes, the distribution of new fiat (your “A Modern Jubilee”) equally to the population is needed. And yes, banning new credit creation is ill-advised, though in theory, with such a ban, the distribution could be metered to just replace existing credit as it is repaid for no net increase in total purchasing power and thus not disadvantage non-debtors.

    But how about this instead? We remove the distinction between commercial banks and everyone else by allowing anyone to have a central bank account? This allows peer-to-peer lending of actual fiat (aka “reserves” if the account holder is a bank) between everyone and everyone else. And since the accounts are risk-free by nature then government deposit insurance and other explicit and implicit subsidies of the commercial banks could be removed such that deposit creation becomes much more dangerous for the banks. This in turn should lead to a net decrease in bank deposits as more credit is repaid than is created – allowing a metered distribution of new fiat to all adult citizens to make up the difference and provide debt relief without harming the banks or disadvantaging non-debtors.

    If interested, this line of reasoning is more fully developed in my comments at Bernie Sanders on the right track but need to address the main game – comments.

    PS: The abolition of government deposit insurance could be done gradually by lowering the amount insured (eg. $250,000) to $0 over time so the commercial banks can acquire the needed fiat (aka reserves) legitimately (asset sales and loans from individual and business accounts at the central bank) and not through cheap loans from the central bank.

    Thanks for the great work you do!

  5. F. Beard says:

    PPS: Adding that the new fiat distribution should be direct-deposited to (the newly created) individual accounts at the central bank and not to accounts held at commercial banks. Indeed, all new spending by the monetary sovereign (eg. US Treasury) should be directed to accounts (individual, business, etc) at the central banks, ie. if commercial banks need reserves (aka fiat balances at the central bank) then let them borrow them honestly from other fiat accounts at the central bank and not receive them by default via spending by the monetary sovereign.

  6. JohnSmith says:

    “The argument [..] leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.”

    Do i get it right?:
    We need a “rising debt level” (!) of about (what was it?) 10% each year to have a constant unemployment rate of 4%, but the debt level itself is already too high (!) to keep the rising going.

    First: Why is the the debt level itself an obstruction for more lending? What are the arguments?
    Secondly, that sounds like a dilemma to me and both parties seem to have their points. What are possible solutions to it?

    Someone willing to discuss this? 😉

  7. John Bentley says:

    Steve maybe you could add a couple of invitees to the dinner Peter suggested. Franco ‘Bifo’ Berardi with his capitalistic absolutism and Gail Tverberg with her take on energy pricing and the outcomes of low paid workers and their correlated low discretionary spending.

  8. Ulrich says:

    Dear Steve,

    I fully sympathize with your attempt to challenge the neoclassical mainstream (and finally to overcome its hegemony). But I do not understand, why it would not be a “problem”, or it would not “matter”, if debtors, that is, those with a need for money higher than their current income, borrow from creditors, that is, those who generate surpluses, they don’t need for their consumption, with this indebting mostly “intermediated” by banks. So, it does not matter that the 1% compel the 99% to go into debt? (Mostly indirectly, as the nominal debtors, it seems to me, mostly originate from the 1%; but the debt burden ultimately falls on workers (cf. your Debunking-book, p. 333, though formulated as an hypothesis).) The 1% do so, as they have squeezed wages (thereby increasing their surpluses), so that “many families could maintain their standard of living (only) by borrowing” (Hudson, Bubble, 2014, p. 507). Instead of getting their fair share, the 99% now need to pay for it via debt service. So they need to double their work efforts (consumption and debt service) in order to maintain their standard of living. And of course that is why unemployment goes down when debt goes up (because the debt financed payments fire up the circular flow of the expenses of the ones and revenues of the others, which are transformed into expenses, etc.) – but the full bill will come later, and they will not be able to settle up.
    Disregarding these conflicting, mostly invisible interrelationships, it seems to me, is Apolitical Economy. The redistribution of income streams from the bottom and the middle to the top (which first of all makes indebtedness a necessity ad hoc), fueled by neoliberal policies, is only, and at best, no “problem”, provided the 1% and the 99% “marginal propensity to spend” (Bernanke), when the only relevant norm is GDP-growth or to avoid its downturn, that is a recession. So, a Plutonomy (that is: the rich rentiers consume their plunder instead of reinvesting it – or of hording it?), where a rentier class gets, say, 30% of the national income pie, engaging an army of servants with it (as in the Belle Époche), would be no problem, if this could be maintained? And we should applaud it, if it is accompanied with growth, falling mostly to the rentiers? Possibly, an “optimum” might be calculated.
    If economics should overcome its ideological direction, it should be reestablished as Political Economy, that is analyzing the economy as a societal field of conflictory interrelationships with the focus being ultimately on fairness. With regard to the debt problem (why, after all, is this a problem?) some questions are: Who are the creditors? Who are the debtors? Why do they run into debts? Why do the creditors are able to indebt the debtors?

  9. Derek R says:

    Quick response to JohnSmith’s questions:

    1) Why is the the debt level itself an obstruction for more lending? What are the arguments?

    The argument is that debt levels cost money. Debtors are constrained by the maximum amount that they can afford to repay every month. So a debtor whose debt level is such that they are already spending $4,000 per month on repayments may be extremely reluctant to take on more.

    Initially some debtors may be convinced to take on more by reducing the rate of interest but eventually even that stops working as interest rates approach zero. At a zero interest rate a debtor might still have to repay the maximum that they can afford to repay (even though it’s all principal) and at that point it is likely that they cannot be persuaded to take on more debt. In fact most people will by that time want to reduce any debt that they have.

    2) That sounds like a dilemma to me and both parties seem to have their points. What are possible solutions to it?

    The dilemma is really that existing loans lead to money being taken out of circulation by the principal repayments during the term of the loans whereas new loans put money into circulation at the time they are issued. But of course new loans then become existing loans and start taking money out of circulation. So the dilemma is real. We know that we can put in a short term fix by making new loans. But only at the expense of making the problem worse in the long term.

    Possible solutions? Well, the only one that makes any sense to me is Prof Keen’s Modern Debt Jubilee which is described elsewhere on this website and which you should Google if you haven’t already read about it.

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