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
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.