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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  • 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.

  • 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.

  • F. Beard

    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!

  • F. Beard

    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.

  • John­Smith

    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? 😉

  • John Bent­ley

    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.

  • Ulrich

    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?

  • Derek R

    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.