I don't think it is possible to address the issues involved in banking in a capitalistic economy without beginning with risk management, since doing so avoids the central factor involved. A capitalistic economy is based on risk-taking through investment and investment is funded financially through equity as commitment of savings, and borrowing, largely from financial institutions.
There are good reasons that most capitalistic economies choose to fund risk chiefly through the private sector rather than directly by government. The question, then, is how best this should be done in different contexts, as well as the proper balance of exogenous money issued by government and endogenous money created by banks through credit extension based chiefly on liquifying collateral in light of reasonable expectations of repayment as agreed.
New Economic Perspectives
J. D. Alt
13 comments:
"There are good reasons that most capitalistic economies choose to fund risk chiefly through the private sector rather than directly by government."
Can you specify these good reasons, please?
1. Fear of democracy as rabble rule drives the ownership class to control the levers of power, and one of the chief levers is money creation.
1a. The ownership class fears that if the rabble take control they will vote to fund the have-nots from the public treasury, destroying the economy and society (read ownership class) through inflation.
See Significance of MMT for Progressives and the Left
2. Risk assumption in expectation of reward is the essence of capitalism.
2a. If government funds investment directly, that's the end of capitalism and the beginning of socialism.
2b. Government issuance invites political corruption and cronyism.
3. Extraction of financial rent.
4. Whoever controls money creation controls those who use money. "Give me control of a nation's money and I care not who makes it's laws" — Mayer Rothschild
5. Bankers are the overseers of capitalism. "The banker is the ephor of the market" — Joseph Schumpter.
5a. “Today’s narrowly focused financiers do not conform to Schumpeter’s vision of bankers as the ephors of capitalism who assure that finance serves progress. Today’s financial structure is more akin to Keynes’ characterisation of the financial arrangements of advanced capitalism as a casino.” — Minsky, Hyman P. 1992. “Schumpeter and Finance.” Hyman P. Minsky Archive, Paper 280
A lot of people calling for money creation without banks haven't really thought through exactly what would replace the capitalistic system that is in place. Is possible to do wrt to money creation by governments alone, but what would that look like in practice and how would the present society move to it. These are knotty questions not resolved by handwaving.
The present system doesn't work too badly in principle although in practice it is corrupt. Replacing it with government would just move the corruption to a different locus. Thus the issue is dealing with the corruption.
but Tom imo they miss the biggest "risk" of all which is that fiscal policy will fall behind and govt spending flows will become inadequate to support the payments on the liabilities (loans) that they (banks) create...
No one in that industry monitors at least the top level system flows vs system liability requirements to see if at least at the system level, there will be enough income created to service all of the new liabilities...
So all of the austerity talk is advocating for policy that will increase this form of systemic "risk" (there really isnt any meaningful risk if govt is maintaining adequate flows....) as the austerity lowers income while the liability requirements remain fixed..
Until the industry realizes this and starts to self-regulate, banking to me continues to look like extremely "risky business"... I dont know why anyone would want to get into it knowing this...
All you could do is try to lay it off on someone else a la Goldman.. but not all can do that someone is still going to get shit on in the end...
This whole thing is a moron-fest where you have a bunch of unqualified people running things... scary!!!
rsp,
Its like going to use the bathroom up by the cockpit and the cockpit door opens for a second and you would see chimpanzees sitting at the controls with the tune "Yakety Sax" blasting in the background....
https://www.youtube.com/watch?v=ZnHmskwqCCQ
Matt, two factors. First, modern banking relies heavily on government as a backup. It could not exists as it does otherwise.
Secondly, look at the post I linked to yesterday about the translational that basically control the global economy. Mostly the big financial institutions. It's about "private sector" control, which is what capitalism is really all about. The myths just distract from what is really doing down.
Can this be fixed? Not permanently under capitalism, as history shows. Given a chance, they'll be back and roll back the fixes.
The other option is to nationalize banking and keep the rest of capitalism wrt to entrepreneurship. This is where the risk management issues mounts.
The other option is to jettison capitalism for another economic system to be worked out in practice. That's a daunting undertaking.
I see what you mean by "good reasons."
Also:The present system doesn't work too badly in principle although in practice it is corrupt.
Other than destroying the planet and men's souls, you're right, it's not a bad system.
What is unsustainable will eventually be recognized and priced in, as non-economist astrophysicist Neil deGrasse Tyson observed recently, and they step will be taken to address the vice of climate change that is already tightening. But it is questionable how well the invisible hand of market forces will be able to deal with this adequately.
However, the present system is the best system that humans have been able to develop to date. There are fixes and even overhauls proposed that could make things better, but there is no alternative plan either on the table or lying around for an alternative to capitalism and representative democracy, which are still mostly regarded as cutting edge.
That's why I am in favor a gradualist approach that this point and I see MMT as a key piece in that. Capitalism can be made to work a lot better than it is now, and representative democracy could be greatly improved by getting the money out of politics and locking the revolving door.
However, I don't think that either capitalism or representative democracy represent "the end of history" unless we are headed toward an extinction event, which I rather doubt, or a massive cull that results in a huge setback, which is looking more likely.
So my preference would be gradual social, political and economic change, but as quickly as possible to address the huge challenges that have emerged as a result of technological innovation rather than a quick change that is messy and would probably involve wider war.
Capitalism has too many internal contractions to be sustainable, and representative democracy is too open to capture to actually be democratic.
So we need to be thinking outside the box about the next social, political and economic system. The hopeful thing is that environmental collapse is provoking that. The way governance and markets are function now is proving to be to dysfunctional to be sustainable. The longer we wait the greater the possibility of revolutionary change and the chaos that involves.
The question now is the timeframe of climate change ratcheting up. Then there is Fukushima, which is looking like it's a lot worse than previously admitted, and ebola, and the spread of hostilities war. But so far, markets are hardly blinking.
Smart Talk with Andrew Mazzone, Yanis Varoufakis, and Scott Baker
http://www.henrygeorgeschool.org/Smart_Talk_TV.html
The technology god will save us all.
The technology god will save us all.
That's the hope, and it's possible. Technological innovation is the driver of capitalism, and investment based on risk-reward drives innovation. However, governments step in when there are emergencies with public investment in R&D and even scaling up big projects quickly when it is perceived to be necessary.
But challenges are now global as well as national and they need to be addressed through global coordination. So far that has proved elusive.
You've never read Faust, The Sorcerer's Apprentice, Prometheus Bound, the myth of Icarus?
Of course, we 21st men are wiser, better. We have evolved. We know how to manage it all. Character, principles, they mean nothing. It's all relative, man.
At root, like most people today, despite phony spiritualism, you are all materialists to the core.
But let's just start with the "earthly" perspective:
Planetary life is the total earthly good. Yet what may appear to be good for particular people or even for humanity, may actually be a grave, even mortal error and may actually throw the entire system into great disequilibrium--destroying much or all of nature and humanity in the process. Technology just gives more leverage to this potential for error, and very little leverage in the other, positive direction, to judge by actual events, and given the innumerable existence of human beings with a preponderance of crude passions,selfishness, and a corresponding low quality of intelligence, shortsightedeness, shallowness. All this, is attested to ad nauseum by historical events and human suffering, and are magnified immensely by the powers of technology. The god of technology and the more fundamental god of experimental science have led to this state of affairs, and they certainly will not lead to their reversal in the hands of corrupted human beings by the technology and their ignorant materialistic scientific outlook. Humanity is now, as the Greeks and Hindus would have surely noted, in the grip of a strong delusion and of enormous hubris. We live in an age wherein any fool with a laptop riding in a jet plane feels he is superior to Christ, the Buddha, or any sage and saint, and who lived life as it should be lived even thousands of years ago. They were innocent of biochemistry, but intimate with the actual immutable core of the real. Modern man is not one whit closer to having resolved what is essential in the human condition, quite the extreme contrary. When your materialist, technically ever-so-sophisticated biochemist or physicist has 10 seconds left to live, what has he in the way of an essential advantage to the sage of a thousand years ago? "The world destroys Tao, and Tao destroys the world."
Well, China and ancient Greece are examples of the challenge. Taoism and Confucianism emerged around the same time in China during the Axial Age. Confucianism greatly predominated and China became a Confucian culture with Taoism peripheral.
Similarly Athens was only one polis among many and even in Athens, the citizens managed to condemn Socrates to death for impiety and corrupting the youth.
Lofty ideas and ideals are as old as mankind but they have seldom been put into practice on a large scale. Which many attribute to the deficiency of collective consciousness characteristic of the larger group as shown through its effect in terms of culture and institutions.
New thinking is not required as much as new feeling and being.
But new thinking is required on the institutional level in response to the uniqueness of contemporary challenges. However, the assumption that this needs to be chiefly new economic thinking is misplaced.
New economic thinking and new technology may be necessary but are not sufficient. Every era has to revisit the perennial question of what constitutes the good life in a good society not only in general but in particular wrt to contemporary opportunities and challenges.
Then that new thinking has to be scaled up culturally and institutionally. That's the really daunting challenge in that many interests attempt to shape the process in their favor.
Post a Comment