Wednesday, March 7, 2012

Michael Sankowski — Banking Tension: Why Do We Keep Creating Banks?


Interesting take. Mike's argument seem to be that the rational course is to maintain the financial sector even though it blows up periodically and produces a net loss over the long run for banks, i.e., banking is not a profitable use of capital, it contributes to economic growth and productivity as a whole through credit expansion, so the country is better off for it.

I'll have to think about that a bit more, but it sounds sophistical to me on the first reading. At the very least, it gives new meaning to "capitalism."

Read it at MMR
Banking Tension: Why Do We Keep Creating Banks?
by Michael Sankowski

Mike writes:
So even though banks aren’t net profitable over time, they perform a massive service. Banks and bank credit allow for real living standards to grow while they expand credit. When the bubble collapses due to the lack of trust of the private credit, people are still better off than they were before the bubble.This is something to keep in mind as we talk more about the sector balances, and horizontal money, and credit. The expansion of credit raises real living standards. It raises standards enough during the good times we end up ahead in the long run in real standards of living.
This is something I think the Austrians miss – credit does get the economy moving much, much faster. We should be asking what we can do to keep the economy moving this fast.
It’s also points out the MMT approach to banks is a bit stunted. Simply issuing more NFA won’t cause banks to go away, and it won’t necessarily make bank lending more stable.
This should provoke some interesting discussion. See as through Mike is saying that economic efficiency is not a reasonable criterion in comparison with effectiveness, with which I would generally agree. Then the claim seems to be that the criterion of effectiveness is growth of production and productivity.

I find that assumption questionable. It is a political choice that is opposed by those who propose other criteria, like distributed prosperity, sustainability, and maintaining full employment and price stability (financial crises are deflationary and result in massive unemployment).

Whether capitalism with all its imperfections is the best alternative is an ongoing debate. It's certainly the view of people like Jamie Dimon, whose attitude is, "Get over it." See Robert Vienneau, How to Defend Capitalism at Thoughts on Economics.

Vienneau quotes Joan Robinson as a starter:

"It is possible to defend our economic system on the ground that, patched up with Keynesian correctives, it is, as he put it, the 'best in sight'. Or at any rate that it is not too bad, and change is painful. In short, that our system is the best system that we have got.
Or it is possible to take the tough-minded line that Schumpeter derived from Marx. The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it's the goods that you want.
Or, conceding its defects, to defend it on political grounds - that democracy as we know it could not have grown up under any other system and cannot survive without it.
What is not possible, at this time of day, is to defend it, in the neo-classical style, as a delicate self-regulating mechanism, that has only to be left to itself to produce the greatest satisfaction for all.
But none of the alternative defences really sounds very well. Nowadays, to support the status quo, the best course is just to leave all these awkward questions alone." -- Joan Robinson, Economic Philosophy: An Essay on the Progress of Economic Thought (1962): p. 140.
I agree that this is a good starting point for discussion. However, I would add that an overriding factor has cropped up since then, which completely changes the nature of the discussion — sustainability. Is the unlimited growth based on infinite resources model still viable?

The other factor, as Schumpeter pointed out in Capitalism, Socialism and Democracy, is capitalism itself politically sustainable in democratic society, taking a position similar to the Marxian position in outcome but tracing a different path to it.

BTW, Mike, if you think that MMT just proposes sectoral balances and functional finance, you need to go over and read Warren's proposals on banking reform and financial reform in general. Other MMTers have said a great deal about this, too, and UMKC professors, Bill Black, Michael Hudson, and Randy Wray have been out in front on it.


25 comments:

Anonymous said...

I've directed Sankowski to Warren's proposals for banking reform before but he's either forgotten that he read the article or is simply choosing to ignore it. For some reason the MMR people seem to be determined to misrepresent MMT at every turn. "The MMT approach to banks is a bit stunted". It's a thoroughly annoying and very disappointing approach.

Ryan Harris said...

If the banks were only run more utilitarian like the post office as a public utility. Rather than a fancy casino in expensive highrises. Polyester uniforms could replace the custom suits.

Matt Franko said...

Tom,

I have a lot to say on this. To me, it is driven by the establishment of small "community" banks. They are a great investment for the founders.

The founders run them a while and make a great return, then eventually sell out to a BBT or M&T, and so on, etc.... (regionals) and the Founders make a killing!

Then as there are no longer founders involved, the rats take over and you get a Chuck Prince dancing while the music is playing as it is not the management's money anymore, it is anonymous "shareholders" and mutual fund fiduciaries who dont do shit for the shareholders and the insiders are left to rob the bank.... Corzine being the latest example with MFG.

This goes on and on... if the founders were to stay the course and not sell out, run their community bank, I think things would turn out differently...

Resp,

Ralph Musgrave said...

Sankowsky claims “Simply issuing more NFA . . . won’t necessarily make bank lending more stable.”

“Simply issuing more NFA” would just be inflationary, if the economy was already at capacity. But if NFA actually REPLACES private bank created money (i.e. if we make a move towards full reserve banking) then more stability ensues. Two reasons.

1. Private bank created money is inherently unstable: the volume expands in a boom and contracts in recessions, which is the opposite of what is needed for stability purposes.

2. In the event of a bank going bust, the effect is less destabilising under full reserve. Reason is that under fractional reserve, debt is money. So when a bank goes bust under fractional reserve, money is destroyed. Under full reserve, the loss of NFA is the same as under fractional reserve, all else equal, but the “financial asset” destroyed is debt, not money.

The latter point is abstruse, so I’ll do a post on it on my own blog in the next hour or so hopefully.

Anonymous said...

Since I'm not permitted to comment over there, I will have to comment here.

I'm puzzled about the thrust of Michael's argument. He seems to be running several distinct questions together.

1. Do we need a system of credit creation to finance economic growth? I would say yes.

2. Do we need a system of for-profit private banks to provide that credit creation? It's debatable, but I will say yes, at least for the sake of argument.

3. Can a system of for-profit private banks provide credit without an ongoing injection of NFA's by the government? No.

In our system, private sector banks can't conduct their business of credit creation without government participation. The ongoing expansion in the volume of credit requires an ongoing expansion in the volume of payments. In fact, that's the whole point of the credit: to finance payments for production or consumption. Most payment orders in our system initiate a sequence that concludes with a payment from one bank to another, and these payments are all settled and cleared through the banks' reserve accounts at the Fed. The volume of payments can't increase unless the volume of reserves is increasing, and the volume of reserves can only increase if the government supplies them, since the government is the monopoly supplier of reserves.

I really have no idea what Michael means when he says:

"It’s also points out the MMT approach to banks is a bit stunted. Simply issuing more NFA won’t cause banks to go away, and it won’t necessarily make bank lending more stable."

Injection of NFAs has nothing to do with either "making banks go away" or stabilizing bank lending. Stabilization is a regulatory function that is not accomplished by NFA injections. Government NFA injections through the banking channel are, as just described, a routine and essential concomitant of the banking system. And injecting NFA's via the treasury channel as opposed to the central bank channel also plays a different role than regulating banking: it's about supporting aggregate demand. All of those private sector banks will only wish to expand credit if their are business to lend to who have a need to finance expanded production because they have customers with the income to turn their desires into market demand. Treasury injections of NFAs directly increased demand for products - and thus the demand for credit.

Anonymous said...

Hey Dan, why did you get locked out of MMR.com?

Ryan Harris said...

"And anyone who looks at banks can’t help but notice how many times they go back to the government for funds to remain solvent,"

In the same way the public keeps going back to the Federal government for more dollars to spend. The Federal Reserve sets interest rates and is always going to be lending to banks in various markets to keep interest rates where they want them to achieve their policy goals. This article is amusing in the same way the national enquirer is amusing: because it makes bold claims that are complete nonsense.

Anonymous said...

Too negative I guess anon. Cullen said I was trolling.

Matt Franko said...

What may be interesting to think about in this regard is whether Minsky's financial instability theory would be valid in a world where only depository institutions would be able to do leveraged lending...

In the 2008 debacle, a lot of it was caused by the Broker/Dealers who got involved with lending funded by CP.... those BDs (Bear Stearns/Lehman, etc..) didnt have access to the lender of last resort... true "banks" (depository institutions) always have that access.

Resp,

paul meli said...

Dan K.

Kind of funny really. I'm sure he reads everything you write over here anyway. From his point of view he "won" every exchange but we obstinate MMT-types just don't know when we've been whupped.

Anonymous said...

CR needs to be ignored, really.

innocent_bystander said...

Between these comments and Wray's childish post you MMTers sound just like you always do. Like a group of jaded little brats involved in a tiresome little cult.

paul meli said...

MMR isn't a cult?

Jonf said...

Too bad really. CR was pretty good until he went off the rails. Started with the JG. I haven't been there for awhile, as they seem pretty stressed out with any comment not to their liking.

LVG said...

@ Innocent_bystander

MMTers are bitter because they took their two biggest media outlets (Roche and Carney) and made enemies out of them. And they seem to think attacking them more and more will make it all better.

Anonymous said...

My 1:56 comment was completely substantive. Could we please all stick to the topic? I'm tired of the BS.

Ryan Harris said...

Matt,

Preventing leveraged lending outside banks would be difficult, wouldn't it? I don't know how you would contain it because virtually every industry utilizes it.

Tom Hickey said...

Matt: "What may be interesting to think about in this regard is whether Minsky's financial instability theory would be valid in a world where only depository institutions would be able to do leveraged lending..."

There have been deflations resulting in panics and depressions metallic and credit systems. Those subscribing to Minsky's analysis would say that the general cause is the financial instability along the lines Minsky describes.

The only "sound finance" is to lend 100% against capital with collateral of the same value pledge, and even that is not immune to failure. The result in ancient times was as in Monopoly™ today, someone or some few end up owning everything in fairly short order. The ancient solution was the periodic jubilee, which is pretty much equivalent to hitting reset.

Unknown said...

Dan,

Good Comment here.

You do raise good points, and it's a matter of knowing when enough is enough.

I think Cullen was correct in banning you over at MMR - you just wouldn't leave well enough alone.

We're not going to change our minds about the JG and well, it's our house and you were not behaving.

But good points here about that particular post and I'll address them.

I've been a bit under the weather, and not always that cogent of a writer, but I try.


You agree with me on points 1 and 2, but in 3, I think you're misunderstanding the point of the post.

First, its not a post supporting private credit creation exclusively. The point of the post is the absolute awe at why humans would reinvent something apparently so damaging over and over again.

Banks are massively, inherently unstable - as Ralph points out. The free banking era in the U.S. is basically a history of bubbles and crooks and busts.

Banking isn't profitable, but is it useful? People create banks over and over again, even after the worst happens.

" Can a system of for-profit private banks provide credit without an ongoing injection of NFA's by the government? No."

I don't disagree with this statement. I am fully in favor of the government running deficits. I proposed the TC rule.

By the word stunted, I mean MMT doesn't spend enough energy exploring how to manage banking. Look at Warren's 7 DIF's, and you won't find much on banking.

Look at Mosler's site and you won't find much about banking reform, or how to get banks to be both more effective and less damaging to the economy.

So what just what are the MMT proposals on banking? Just restrict it entirely? Full Reserve like Ralph says? Entirely vertical like Mitchell? Public banking like Ellen Brown? Back to Glass-Stegall?

Warren proposes banning the use of Libor, and it's a good start. Let's face it - banning libor would rewrite millions of private sector contracts between lenders and borrowers based on floating rates. It's not something which can easily happen even over a year.

My point for this post wasn't to slam MMT. I know there are like 10 people working on it, and there is so much to do.

My points are: People like to make banks. Banks aren't net profitable. There must be a reason people create banks despite this lack of profitability.

If you apply Godley's Theorem, you can then see why societies might like to create banks.

Anonymous, can you please direct me to those proposals? I've forgotten.

Letsgetitdone said...

I think Mike makes a pretty good case for socializing the banks. After all, why should they be private if they're unable to keep themselves in business without Government assistance to cover their losses. It seems to me that if the public is going to be responsible for the periodic losses then there should be no excessive salaries or profits drained from these enterprises during their "profitable" periods. Any other position on this is just "lemon socialism."

On banning from the MMR site, I don't know if I've been banned. Last I heard I got accused of trolling too, and Cullen said he had cut links to other sites out of my comments. In view of this I decided to decline to comment over there any longer.

What I'll do, instead, and I'll advise all MMTers to do the same is to comment at a site that won't play censorship games like this one, and also write blog posts critiquing the MMR positions at our own sites. Then if MMR people want to reply they can come to our sites to do it.

reslez said...

Finance types like Roche and Carney skew to the right. They tend to agree more than disagree with the idea that government can do no good and private business can do no evil. Hence the MMT suggestion government might possibly be able to run a successful program that benefits citizens becomes anathema. Of course, daily experience (SSI and Medicare are hugely popular) and the historical record (WPA, WWII) dictate otherwise.

Regardless, the split was inevitable and had more to do with Roche chasing himself out of MMT (and Carney never totally on board) than the reverse.

If MMR types believe the MMT view of banks is "stunted", where are the MMR white papers and research arguing their position? At this point I just see bitter name-calling coming out of the MMR camp.

Unknown said...

Dan,

Good Comment here.

You do raise good points, and it's a matter of knowing when enough is enough.

I think Cullen was correct in banning you over at MMR - you just wouldn't leave well enough alone.

We're not going to change our minds about the JG and well, it's our house and you were not behaving.

But good points here about that particular post and I'll address them.

I've been a bit under the weather, and not always that cogent of a writer, but I try.


You agree with me on points 1 and 2, but in 3, I think you're misunderstanding the point of the post.

First, its not a post supporting private credit creation exclusively. The point of the post is the absolute awe at why humans would reinvent something apparently so damaging over and over again.

Banks are massively, inherently unstable - as Ralph points out. The free banking era in the U.S. is basically a history of bubbles and crooks and busts.

Banking isn't profitable, but is it useful? People create banks over and over again, even after the worst happens.

" Can a system of for-profit private banks provide credit without an ongoing injection of NFA's by the government? No."

I don't disagree with this statement. I am fully in favor of the government running deficits. I proposed the TC rule.

By the word stunted, I mean MMT doesn't spend enough energy exploring how to manage banking. Look at Warren's 7 DIF's, and you won't find much on banking.

Look at Mosler's site and you won't find much about banking reform, or how to get banks to be both more effective and less damaging to the economy.

So what just what are the MMT proposals on banking? Just restrict it entirely? Full Reserve like Ralph says? Entirely vertical like Mitchell? Public banking like Ellen Brown? Back to Glass-Stegall?

Warren proposes banning the use of Libor, and it's a good start. Let's face it - banning libor would rewrite millions of private sector contracts between lenders and borrowers based on floating rates. It's not something which can easily happen even over a year.

My point for this post wasn't to slam MMT. I know there are like 10 people working on it, and there is so much to do.

My points are: People like to make banks. Banks aren't net profitable. There must be a reason people create banks despite this lack of profitability.

If you apply Godley's Theorem, you can then see why societies might like to create banks.

Anonymous, can you please direct me to those proposals? I've forgotten.

Tom Hickey said...

Apparently people that thing that government cannot manage anything effectively never served in the military, especially during wartime. As every good manager knows, effectiveness superseded efficiency. Effectiveness is about achieving goals, while efficiency is about means. Generally speaking, the US military is highly effective at doing what it is designed to do. Much less so, when its objectives (assigned by policy) are not consistent with its mission as a fighting force. In this regard, the US military is presently being reconfigured away from the traditional military whose mission was to fight conventional wars on two fronts toward high mobility special operatons and high-tech warfare designed to meet current and anticipated challenges through fourth
and fifth gen
warfare. The military would doubtless have made this transition much more quickly were it not for the military-industrial-congressional complex that plays a key role in the US economy through "military Keynesianism."

Many people argue that the US military is ineffective and inefficient in comparison with large corporations. I don't believe that is the case in that neither the government nor the military are private corporations whose goal is shareholder-value maximization. Rather, the goal of both government in general and the military specifically is serving the public interest as effectively as possible in meeting policy objectives, and doing it as efficiently as possible with the resources available.

The goals of government are much more specific since they are stated in policy and therefore easier to identify than those of private entities. The proof is in the pudding here. The US is the world's sole superpower, and declared US policy is not to permit a rival to US hegemony.

This is very similar to the goal of a large corporation to dominate its market. But large corporations are reticent to take this too far, for fear of running into anti-trust issues.

Conversely, the US seems to have no problem asserting political, economic, and military hegemony and warning others not to challenge this policy, and it has demonstrated it is willing to commit the funds to accomplishing this by fielding the most powerful force yet to be mounted, supported by a significant portion of the economy.

I am even more impressed with the present-day professional military than I was with the military in the days of conscription. This is an impressive organization and collection of people.

Not that I endorse this approach, which I think is misguided. But I recognize its capability and think that people who think that the private sector is vastly superior to government in organization and administration, management and leadership, and execution of mission should look more closely with their eyes rather than imagination.

Anonymous said...

If govt deficit spends without issuing bonds, won't that eventually lead to a piling up of excess reserves, to the point where every unit of bank credit is essentially matched by their reserves? What happens then? This is a part of MMT I'm really ignorant about.

Anonymous said...

Joe Firestone:

Can't you start writing on another site as well as the Daily Kos? I never go over there so hardly ever read your stuff.