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Tuesday, June 26, 2012

Is the purpose of banks to generate profits for their owners?


Cullen Roche put up a post at Pragmatic Capitalism today that argues the neoliberal position that the primary purpose of private firms is to increase shareholder value, that is, to maximize owner utility. The neoliberal idea behind this is that by doing so, the invisible hand of the market will guide the economic toward utility maximization for all participants.

I regard that as a gratuitous assumption. It also overlooks functional differences among firms in the economy.

Most pertinently here, the financial sector has fiduciary responsibilities that the non-financial sector does not. Its role in financial intermediation also makes it a lynchpin in the performance of the economy. Moreover, systemic risk due to leverage hangs over the economy like a sword of Damocles.

As a result of these and other factors, there is considerable public interest at stake in financial institutions, rules, incentives, processes, and potential outcomes. Much negative externality involved, especially since the financial sector deals much more in extracting rents rather than earning gains from productive contributions.

Moreover, modern banking is institutionally constructed by law as a public utility, and it is therefore subject to careful regulation, oversight and accountability as far as what is allowed, with a view to public safety and interest.

In addition, modern banking, including central banking, is based on the premise that banks are franchises of government, as it were, in money creation denominated in the nation's currency as the unit of account and settled in the currency of unit of account and medium of exchange, and saving in banks is also denominated in the unit of account and enjoys government guarantees.

So representing banks as purely private enterprises seems to be going beyond the facts. Is this view the way the author would like things to be or the way they actually are, as he believes?

Read it at Pragmatic Capitalism

Misunderstanding Banking is Helping Bankrupt an Entire Society
by Cullen Roche

86 comments:

  1. "...that argues the neoliberal position that the primary purpose..."

    Tom,

    Which world do you inhabit? We live in a market determined world. (It doesn't take away the fact that the government has a big role or potentially can have a bigger role). But people create and run firms not to serve "public purpose".

    Firms make profits. Ever heard of the phrases top-line and bottom-line?

    "The neoliberal idea behind this is that by doing so, the invisible hand of the market will guide the economic toward utility maximization for all participants."

    Am not sure where he invokes the power of an invisible hand. Neither does he say utility maximization.

    Are you dreaming?

    "I regard that as a gratuitous assumption."

    He is just describing behaviour of firms. That's all.


    "In addition, modern banking, including central banking, is based on the premise that banks are franchises of government"

    C'mon Tom. You are mixing how you want banks to work with how the are at present.

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  2. "C'mon Tom. You are mixing how you want banks to work with how the[y] are at present."

    C'mon Ramanan. You are mixing how you THINK banks work with how they are at present.

    Is it OK if I think you are completely wrong and worse, that you have framed your question so that any opposing view is assumed to be obviously wrong?

    After all, it's only your opinion. It's not the same as 2+2=4.

    You know what they say about opinions and a**holes. Everyone has one.

    Regards,

    Not Tom

    P.S. - I love this game.

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  3. Tom, banks are owned by shareholders and exist to generate a profit for them. Not to serve public purpose. Besides, lots of industries are subject to government rules, regulations and subsidies. This doesn't make them public utilities.

    I find it a bit disingenuous for MMT to constantly attack banks for their profit seeking actions while also claiming they are public utilities to satisfy holes in your economic theory.

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  4. One question is what drives the behavior of an individual enterprise, and the behavior of the people who run that enterprise. A related question is what rules and laws currently apply to the way these firms conduct their business.

    But another question is how we want to structure and regulate our economic institutions to get the best outcome for our society. It's up to us to decide what kinds of economic institutions and systems we want. We can decide when we want to depend on private enterprise, and where we should depend on public enterprise. We can decide when we want private firms to be guided entirely by the profit motive, and when we want to compel them to take account of other factors.

    One thing we should look at is the large body of research on the varieties market failure.

    For example, it is entirely possible to have a prisoners dilemma phenomenon in which a collection of firms, each effectively pursuing it own best economic interest given the behavior of other firms, nevertheless generates an aggregate outcome that is not optimal for the society as a whole.

    And I personally feel that banking and finance is one area in which we need some rather paternalistic supervisory rules, since the record of human history is quite clear that when it comes to the markets for credit and debt, human beings have a clear tendency to borrow more than they should and lend more than they should. When you buy an apple, the apple is present and right in front of you. When you buy credit or debt, you are buying pieces of an imagined future, where hazy but attractive dreams of riches excite the lust for gain, and are not checked by clear, visible evidence in the present.

    One of the easiest and cheapest things to manufacture in this world is a promise. And if you make the promise gaudy and exciting enough, someone will probably buy it and pay more than they should for it. But the leveraged payment networks of extravagant promises that are created by this activity cause massive destruction when they collapse, even for more responsible parties who cannot avoid becoming entangled in them.

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  5. "I find it a bit disingenuous for MMT to constantly attack banks for their profit seeking actions while also claiming they are public utilities…"

    I find it a bit disengenouous for people to constantly attack MMT because they think that banks would be profitable if they weren't backed up by the US government and had to compete with a nationalized banking system.

    I think BankBucks would be a tough sell in that environment.

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  6. @ Paul,

    As if that matters remotely. You all act like banks are the first and only entities that were ever bailed out. Obviously some of you were not around for the US Airways bailout, the Chrysler bailout, the NY City bailout, the Mexican bailout, the constant IMF funding/bailouts, Lockheed aircraft bailout.

    If we want to get really crazy we could just say that everything that ever got federal funding was bailed out and it part of the government! Come on guys. This is a very narrow view of the world.

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  7. "We live in a market determined world."

    What world do you live in, Ramanan?

    Everything is politically determined. Whether you live or die is decided by some authority. Markets exist or don't exist at the pleasure of some authority. If they want to enforce public purpose banking--which is the implicit intent at least when you look at the way the whole thing is structured--then that's what we would get. Banks bought their profit-seeking-over-public-purpose roles.

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  8. Well I agree with you on this part:

    "Much negative externality involved, especially since the financial sector deals much more in extracting rents rather than earning gains from productive contributions."
    The only public purpose that banks must serve is to obey the law, beyond that their duty is to their shareholders (but you can say that about any corporation).

    The govt has handed over its money creation powers to private banks, whether that's better or worse than if it kept it itself (as Milton Friedman among others urged) is an open question.
    However, let's not confuse a duty to obey the law with having "fiduciary responsibilities that the non-financial sector does not".

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  9. "Banks bought their profit-seeking-over-public-purpose roles."

    Mike, you might want to keep this opinion to yourself since it conflicts with the widely held MMT view and contradicts other parts of the theory.

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  10. I think that "purpose" needs to be more clearly defined. It sounds to me like we're headed into a matter of semantics, or 'talking past each other'

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  11. "This is a very narrow view of the world…"

    Banks create state money. When they are limited to creating BankBucks get back to me.

    None of the companies you mentioned have a franchise to create state widgets.

    That may not seem important to you, but it's a game-changer.

    I presume you wouldn't be opposed to a National Banking System to compete with BankBucks?

    After all it is our money.

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  12. "However, let's not confuse a duty to obey the law with having "fiduciary responsibilities"

    They have fiduciary responsibility as long as they are backed up by the Federal Reserve Banking System and by extension the full faith and credit of the United States Government.

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  13. The fact that banks issue money denominated in $'s doesn't change the fact that they do so in the effort to make a profit. If MMT thinks this is a conflict of interest then MMT should argue for change rather than trying to claim that banks serve public purpose when they obviously don't.

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  14. @ Ramanan

    Not according to Warren and he owns one.

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  15. beowulf: "The only public purpose that banks must serve is to obey the law, beyond that their duty is to their shareholders (but you can say that about any corporation)."

    Exactly. beowulf (Carlos) being a lawyer understand the system.

    And banks are different from non-banks wrt public purpose and the law reflects that.

    The law forces banks to act for public purpose where they often would not.

    And the reality is that some banks attempt to skirt the law, get the law changed, capture regulations and if needed, flout the law as happened in the run up to the crisis.

    And is still happening because the people running control frauds (Bill Black) feel sure they can do it with impunity due to their political clout.

    And this is not about enhancing shareholder value either. Look at the market valuation of bank equities.

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  16. "The fact that banks issue money denominated in $'s doesn't change the fact that they do so in the effort to make a profit"

    Utilities make profit also.

    When they start acting against the interest of their customers they get reigned in somewhat.

    If there wasn't any public purpose involved there would be no reason to have any government backing for the banking system.

    Why is that so hard to understand?

    If banks want to act in their own private interest then let them do it without using the people's money.

    The fact that banks have been ignoring their fiduciary responsibility makes them criminal enterprises.

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  17. Anonymous: "As if that matters remotely. You all act like banks are the first and only entities that were ever bailed out. Obviously some of you were not around for the US Airways bailout, the Chrysler bailout, the NY City bailout, the Mexican bailout, the constant IMF funding/bailouts, Lockheed aircraft bailout. If we want to get really crazy we could just say that everything that ever got federal funding was bailed out and it part of the government! Come on guys. This is a very narrow view of the world.

    The point is that this invalidates the claims of neoliberalism about the market as an optimal distribution mechanism for scarce resources. In the end, a command system has to be implemented to pull markets out of the hole they dig for themselves over and over.

    We don't have a capitalistic "free market" economy whatever that is. We have a mixed public-private economy and the political question is over the ratio of the mix and how it is to be implemented. The alternatives have economic consequences due to institutional differences.

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  18. Mike,

    Agree with you.

    I am not arguing that this is the best possible world. Far from it. However what I am saying is that a discussion ought to be framed in a way that clearly separates out what the best way to run an economy is.

    Banks should function differently which allows a society to achieve its goals better. However there is no need IMO to say that banks exist to serve public purpose or something along those lines.

    Perhaps if the word "is" is replaced by "should" in MMTers writings then things are clearer.

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  19. Anonymous: "Mike, you might want to keep this opinion to yourself since it conflicts with the widely held MMT view and contradicts other parts of the theory."

    You haven't read widely what the MMT economists and especially, theMKC school (including Black and Hudson), have been saying, have you?

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  20. Public purpose in the US is stated in the Preamble, and very specifically as general welfare. Policy including economic policy is about welfare (utility) aka the common good.

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  21. Talk to a bank owner about that. I am sure Warren would oblige.

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  22. Rmanan, I apologize if my expression was confusing. I did not mean that banks as firms do or even should pursue public purpose insofar as they are private firms. Public purpose is institutionally imposed by law. Warren goes even further based on his own experience as a bank owner and claims that banks are mostly public due to the constraints imposed by institutional arrangements that have been legislated by Congress.

    Cullen's post seems to me to miss that. It's not a matter that this should happen in the future. It happens now, as Warren makes abundantly clear. I'll take Warren's word as someone who is in a position to know.

    Yes, the institutional rules need to be reform and so does regulatory procedure, but that is another matter.

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  23. One problem we are having now is that since the Obama administration chose to be very lax about prosecuting banks for the practices leading up to 2008, we have a dearth of court cases telling us which of those practices were actually illegal, and which were just bad business.

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  24. I work at a commercial bank and I can assure you that there is not one employee who thinks we are serving public purpose. We receive weekly memos about the maximisation of firm revenues and profits so we can hit our goal to generate bigger bonuses year after year. That's just how it is. If Mosler claims otherwise then he's not being totally honest with you about the internal environment in the banking industry.

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  25. Tom,

    The reason I take your time is that I understand there is a thought process in what you want to present.

    For example, you could easily say that ... the fathers of our nation had a clear vision on how the United States should run so that society is happier (or something similar or more powerful). They assigned various roles to different types of institutions both implicitly and explicitly. For banks this is/was [xyz]. We have forgotten all that. We need to go and reread their works because reading an economics text or WSJ won't provide any answers. What has happened is that because of chimerical ideas of economists, we have created a world in which we have forgotten what the fundamental function of a bank is.

    Now if you present it like that (assuming that is true, i.e., the creators of the nations really saw it that way), it appears more coherent.

    However if you avoid all the background, and simply say that banks exist for public purpose or something similar, you will confuse the reader.

    Something like that is what I am trying to say ...

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  26. That's good advice from Ramanan. I am really critical of MMT because I see through the smoke and mirrors. You can't criticize the companies I work for and at the same time claim they serve public purpose. That's a logical inconsistency. It seems like MMT dislikes the structure of modern banking and would like for banks to perform actions that are more in-line with public purpose. If that's true then MMT needs to frame the discussion in this way rather than always insisting that banks already serve public purpose.

    I don't know how you all plan to fix this contradiction because nationalised banking is not going to be popular in the states, but it makes no sense to criticize banks all the time while also claiming they serve public purpose.

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  27. Lets see my local Applebees has a state corporation charter, county health permit and a city business license. Since the govt has an interest in keeping its citizens from going hungry, we can conclude therefore that Applebes exists to serve a Public Purpose (just like our Founders intended).

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  28. "Lets see my local Applebees…"

    Applebees doesn't lend dollars it doesn't have for profit, and doesn't get Blue Cross-Blue Shield free to cover it's mistakes.

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  29. "…it makes no sense to criticize banks all the time while also claiming they serve public purpose."

    Let the banks lend only the money they have on deposit and when they screw up let them fail.

    As long as the public purse makes their business model possible they are beholding to the public.

    It isn't that hard to understand.

    You want to privatize the profits and socialize the losses.

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  30. The US government spends hundreds of billions every year on corporate subsidies. Agriculture, energy, transportation, etc.

    Are MMTers so naive to believe that the financial sector is the only sector receiving financial aid from the government? Or do you guys just think that every single company in the world that has a relationship of any kind with the US government (through regulation or subsidies of any kind) is automatically serving "public purpose"?

    It's hard to take some of you seriously. You're so blinded by politics that you can't even see reality for what it is.

    This post combined with Bill Black's daily rants at New Econ Perspectives are a comedic juxtaposition of conflicting opinions.

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  31. FDO15; "I work at a commercial bank and I can assure you that there is not one employee who thinks we are serving public purpose. We receive weekly memos about the maximisation of firm revenues and profits so we can hit our goal to generate bigger bonuses year after year. That's just how it is. If Mosler claims otherwise then he's not being totally honest with you about the internal environment in the banking industry."

    I appreciate your point of view. And WM is a bank owner while you are a bank employee and Cullen is looking at the process from the outside. Big difference in perspectives.

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  32. Mosler is on the board of directors of a very small 3 branch Florida bank. He is not an executive or on the management team. This hardly makes him more qualified than I am since I oversee the daily operations on the credit and fixed income side of a large commercial bank with thousands of branches and direct control over a several hundred person team in an operation that is substantially more complex than Mosler's tiny little community bank.

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  33. "Are MMTers so naive to believe that the financial sector is the only sector receiving financial aid from the government?"

    Haven't seen anyone here making that argument.

    Those other industries aren't responsible for bringing down the world economy while producing nothing except more money for rich people.

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  34. Ramanan, I appreciate your interaction and realize it is in the interest of improving the state of the art. As I imagine you have noted, I have taken some of your advice to heart.

    That said, here the founding fathers didn't have all that much to say about banking in the founding documents. Right out of the chute there was a kerfuffle when Alexander Hamilton of NY, a friend and agent, really, of banker and founding father or maybe uncle Robert Morris, was appointed Tsy sec and began setting up the institutional infrastructure of the US financial system. Many were horrified and objected loudly when he used the British/European banking system as his model, including a cb.

    Those who objected held that this when beyond the enumerated powers of the federal government and infringed on state sovereignty. Those who objected, led by Jefferson, lost the argument in the Supreme Court under JOhn Marshall. In McCulloch v. Maryland, the court agreed in general with enumerated power but said that the "necessary and proper" clause allowed for institution of the means to exercise the enumerated powers.

    The history of the US is one of financial turmoil, culminating in the Federal Reserve Act of 1913, when the bankers, fearing nationalization, decided they had better compromise and get a head of the curve. Since then the FRA and financial regulation have generally tightened rather than loosened, especially during and after the Great Depression.

    In the years following the banks attempted to reverse that direction and arguably this led in part to the crisis of 2008. Now we are in new round of the battle between the public interests and private financial interests.

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  35. In fact, I just looked up the annual net interest income of Mosler's "bank". My one unit does 5X the annual revenue his whole bank does. He isn't even running a real commercial bank. It's just a small (very small I might add) community bank with mostly residential mortgages. Odds are there are 10 or 20 guys on my floor who could run his entire shop.

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  36. I like his article for its practical non-inflammatory approach. I'm not sure I agree that government loan programs are a huge disaster as he claims though. Compared to private student loans, Dept of Education Ford loan program works better, The Perkins loans have worked quite well too, Stafford Loans also. The Government real estate GSEs were about the only housing finance left standing after the 2008 crisis when almost all the private lenders went bust. Though they were not without their own problems and risk management issues.

    That said, the banks are easier and friendlier to use than the rigid, inefficient government loan programs. Applied for a MTG lately? It takes months and thousand(s) of dollars to create one. The FAFSA application? How long does that take?

    I just think we elect the legislature that creates the rules and regulations that allow banks and the economy to operate. The politicians have been meticulously scrutinizing those rules and regs as we have demanded. I don't see the point in demonizing banks with "neoliberal" name calling anymore than demonizing hog and corn farmers in Iowa for polluting rivers and the Gulf. Both work to corrupt politics but as voters we see a problem, we ask the politicians to fix it once, twice and again until they get it right.

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  37. beowulf: "Lets see my local Applebees has a state corporation charter, county health permit and a city business license. Since the govt has an interest in keeping its citizens from going hungry, we can conclude therefore that Applebes exists to serve a Public Purpose (just like our Founders intended)."

    And if Applebees gets lax in its kitchens, it is not only liable to civil suit, it can be fined and if the offenses are repeated it can be shut down. This does actually happen to restaurants and bars. They are not always shut down directly, but they go out of business when their liquor license is revoked.

    Yes, serving the public with food and drink is a public utility, and if you know any restaurant owners, you have probably heard that they have to meet very strict regs and are open to surprise inspections. Liquor violations are even more closely supervised, and bar owners face a lot of issues in a college town where under-age students are using all their wiles to get in. There is now zero-tolerance policy here in Iowa City, and the bar owners have to police themselves rigidly or their licenses will be revoked, due to many unfortunate incidents that have resulted in tragedy.

    When one travels outside the developed world, one has to take a completely different stance than one does here in the nanny states. There is little regulation and oversight in many places, and where there it is, it is meaningless due to corruption.

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  38. FDO15, I am against all subsidies that cannot be justified as being for the common welfare as a matter of public purpose. Subsidies to protect interests or "improve the economy" or "save jobs" or "enhance the country's competitive" don't count with me as public purpose. These involve redistribution of wealth" through govt favors, to use a favorite objection of the right.

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  39. FDO 15: Are you aware of the responsibilities and resulting legal exposure of the board of directors of anything. What are your responsibilities and legal exposure as a bank employee?

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  40. FDO15: "In fact, I just looked up the annual net interest income of Mosler's "bank". My one unit does 5X the annual revenue his whole bank does. He isn't even running a real commercial bank. It's just a small (very small I might add) community bank with mostly residential mortgages. Odds are there are 10 or 20 guys on my floor who could run his entire shop."

    Has zip to do with the issues we are discussing. Here, size doesn't matter. Position does.

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  41. This comment has been removed by the author.

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  42. Ryan: "That said, the banks are easier and friendlier to use than the rigid, inefficient government loan programs."

    If operational reality were understood, there would be no govt loan programs. There is no need for govt to loan money since they don't need it back for anything. If govt wishes to fund something that for the common good then it should just do it. If not, butt out.

    Essential services should be nationalized in the sense of paid for by govt. At the same time, private credit creation should be limited to investment with very little consumer credit available in comparison and only on high standards. This would improve the ratio of outside money to inside money and it would greatly reduce the cyclical behavior and financial instability. the credit thing has gotten out of hand, and govts have to more active in reinging in a system that is running amok. The effects are bad enough in the developed world. The knock-on effects are disastrous in the emerging and under-developed world.

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  43. "There is no need for govt to loan money since they don't need it back for anything"

    I think the neoclassical view was that society would be better off if students put downward pressure on the cost of education when they had to pay for it. Obviously the invisible hand along with indifference and all that wasn't realistic and had like zero impact on tuition.
    You are absolutely right, we probably would have been better off just paying for the universities to operate.

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  44. This is easy....

    The purpose of a bank is to make money (profits).

    The purpose of the banking system is to facilitate transactions.

    You cannot have a banking system without banks, of course, or without the rules that govern them.

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  45. I was kidding about Applebees serving a public purpose. My point is that banks are no more civic minded than any other law abiding, profit seeking company. That they're too big to fail and Applebees isn't just means that banking lobbyists are more powerful than restaurant lobbyists.

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  46. As I commented at PragCap, I thought the major omission was any real discussion of how the government currently influences banking. The conversations here also seem a bit lacking in this respect. Deposit guarantees, creditor bailouts and various tax provisions are among countless govt actions intended to subsidize/promote the use of credit. Lax enforcement of regulation is also the govt's decision.

    Is this system ideal? Certainly not. But it has emerged from a confluence of interactions between the public and private sector. Getting to a point of banks as public utilities is no more likely than private banks without any guarantees. I think more time/focus should be spent on understanding why the current relationship (disliked by both sides) has emerged rather than what the purpose should be.

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  47. Adam 2,

    I was taught in business that the purpose of a business is to serve the customers or clients, and that profit is the by-product of service and good management. Both high-quality service in meeting customer demand and excellent management are the sine qua non of success, and sustained profits come from success.

    That changed when top management started managing to analysts expectations in order to enhance shareholder value, i.e., equity price, which benefited top management when compensation shifted away from ordinary income to reduce tax liabilities.

    The worst idea in business management is managing to increase shareholder value as the top priority. It will result in ruining perfectly good businesses due to poor policy (wrong goals skewed priorities), strategy (planning) and tactical (means).

    This is basic Drucker and is repeated and nuanced by most savvy management gurus since. Failure to follow this path is asking for an ass-kicking down the line, as the banks learned. The big banks would be in resolution if the rules had been adhered to. This, too, is destroying the US and contributing heavily to turning it into a failed state.

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  48. Woj, banks are public utilities until we go to free banking and banks issue their own credit money with their name on it rather than the currency. Money creation denominated in the currency is a public utility. Banks are govt franchises in this respect.

    I don't understand what is so hard to get about this, other than interested people not wanting to get it.

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  49. Maybe we should separate the banks into parts. The bank and the investment bank. One has a clear public purpose and should be held to higher standard and scrutiny and prohibited from speculating. That does not mean the investment bank should not be regulated for those things like CDS.

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  50. I think banks are different to other regulated businesses given the fact that they are deeply dependent (in the current setup at least), on the minute-by-minute support of a centralised system that essentially 'belongs' to, is administered by, and is ultimately determined by, the 'state'.

    In brief, they exist in a symbiotic relationship with the government.

    However, we live in a capitalist society, and in a way, even the government is out to make a profit.

    As such 'public purpose' in this capitalist society necessarily includes 'making a profit' somewhere along the line.

    The profit motive is at the core of the way our society functions, and despite all of its flaws, in the abstract it can be quite a wonderful thing.

    Everyone loves the thrill of making a profit, and dreads making a loss. The vital energy of our society does depend on this to a great extent, though of course that's not all there is to life or all that there is to living in a well-functioning society. Also, as our austrian friends love to point out, without a market to create prices, efficient economic calculation can become extremely difficult.

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  51. The government in what we might call this 'mixed economy' has the difficult job of trying to encourage private enterprise and profit-making behaviour whilst also balancing this against the wider public interest. As such, in this 'mixed economy' society, what can be termed 'public purpose' necessarily includes a degree of profit-making activity.


    This issue becomes particularly complex in the case of banks, given that they exist in such an close-knit, incestuous relationship with the state.

    So, if the goal of government is indeed to further "public purpose", the question becomes to what extent this requires government control, and to what extent it requires autonomous self-directed (profit making) behaviour.


    I think we can all agree that no one here wants to live in a totalitarian state in which the market has no place and everyone is forced to live by government diktats.

    Personally I also don't want to live in a world dominated and controlled by 'plutocrats'and private financial interests.

    Ideally, I'd like the best that the government and the free market have to offer, combined, for the benefit of all.

    So the question for me is how to achieve that.


    As I mentioned, banks are a special case given that they have this strange quasi-public role as 'agents' of the state's monetary and fiscal policy. Practically all transactions between "the people" and the government have to go through banks - and they benefit handsomely from this fact.

    So we shouldn't pretend that they are just private businesses like any other - but nor should we think that their sole purpose is to do everything the government says.

    Rather, they exist at that almost indefinable limit between State and Market.

    As such they should ideally be constituted in such a way, and also behave in such a way, that reflects this necessarily dual nature.

    This is why, I think, Warren Mosler advocates reforming the banks such that they can continue to act as market participants - i.e. pricing risk and evaluating credit worthiness from the perspective of profitability rather than political motives - whilst still serving the greater 'public good' as responsible public institutions which (whilst making a profit) provide a beneficial service to the wider society.


    We need to return to the concept of a private profit-making business which also has the wider interests of the public embedded within its structure and corporate goals, rather than the somewhat distorted system we have today.

    I think that achieving this balance would result in greater wealth and wellbeing for all.
    The current system, in contrast, is more likely to lead to a more divided and chronically dysfunctional society and economy over time.

    Anything which impedes progess towards a better banking system, better government, a better economy and a better society, is frankly just a waste of time as far as I’m concerned. That’s the only reason any of this really means anything to me.

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  52. Tom, you're really proving that you don't know what you're talking about here. A bank has a board of directors who usually become "owners" through stock issuance. I also "own" a bank in the same way and it's a bank that is several thousands times larger than Mosler's bank. But the BOD has almost no role in the functioning of the bank. In fact, 8 of the members on our board has ZERO banking experience and are from large European corporations with no relationship to this industry. They're glorified executives. Mosler is on the BOD of a very small community bank. Big deal.

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  53. If promoting commerce isnt a public purpose I dont know what is. Public purpose doesnt mean doing something equivalent to the Peace Corps, it simply means that most people view it as something that is worth doing and makes our lives easier. Banking meets that criteria most of the time, in my view.

    Pawn shops serve a public purpose. They provide ways for people to liquidate assets quickly when they need money. This is certainly something that many people need. So arguing that banking doesnt have a public purpose seems silly. Just because others invest in a venture and look to increase the value of their shares does not mean their is no public purpose to the venture.

    I dont understand this line of reasoning from Cullen to tell you the truth. I dont know why he picks this fight. Does he really think Dimon and Blankfein and co would stand up before Congress and say "We are not about doing anything for public purpose, we simply serve our shareholders, to hell with the rest of you!"

    If you are responsible for greasing the wheels of commerce you are certainly serving a public purpose. You may take a profit from it but that doesnt mean you dont serve a public purpose.

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  54. The purpose of an individual bank is to make a profit but like a telecom company that has a franchise on airwaves, we place special social responsibilities on their operation because of their privilege in the monetary system and access to the CB.

    It incenses the public when bankers fail to acknowledge that along with their enormous privilege they have enormous responsibility for acting cautiously, responsibly and ethically. They not only have to operate within the law, but also have to act as a steward or trustee for the portion of the monetary system they manage on behalf of the public. When they lie, steal and cheat, the public probably thinks they should lose their access to the monetary system.

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  55. FDO15, if you think a board is not a big deal and that board members are essentially decoration, you need to study up on boards and sit on one. I have done so, and well realize that should the corporate veil be pierced, the BoD is a prime target. This is deadly serious stuff.

    The BoD appoints the officers and oversees operations, representing the owners as their elected agents. The company officers report to the board and serve at the pleasure of the board. The BoD of a financial institution is the contemporary replacement of the old partnership model that used to prevail in the financial industr limited liability corps. That doesn't mean no liability.

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  56. Jonf, see Waren's proposals for banking and the financial sector at moslereconomics.com.

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  57. We need to return to the concept of a private profit-making business which also has the wider interests of the public embedded within its structure and corporate goals, rather than the somewhat distorted system we have today.

    The consequences are growing more obvious every day, if you aren't in denial. Read Randy Wray's predictions of the next crisis, which is already baked in unless major changes are made pronto.

    Widespread realization that global warming is resulting in impending catastrophe, not in some far off nebulous future. This will shift the playing field as much as war does.

    Furthermore, the US is toying with becoming a banana republic and is showing signs of turning into a failed state, while remaining the global superpower militarily and one that is bent on empire-building. Anyone care to speculate on the national and global consequences of that?

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  58. FDO15 said...
    "I work at a commercial bank and I can assure you that there is not one employee who thinks we are serving public purpose."

    You may not think you are serving public purpose, but how many laws are you forced to obey that serve a public purpose? As one example, Does your bank do any environmental assessments before you loan money on commercial property?

    Your arguments seem to stem from confusing microeconomics with macroeconomics. At your bank, are deposits used to create credit or the opposite?

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  59. Greg, if Blankfein was honest that's exactly what he'd say since the Goldman Sachs mission statement mentions nothing about community, public purpose or anything similar. In fact, it directly says:

    "OUR GOAL IS TO PROVIDE SUPERIOR RETURNS TO OUR SHAREHOLDERS."

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  60. Greg, I think that there is distinction between public purpose, i.e., that which govt. is involved directly by its nature, and in the public interest, were govt is involved indirectly by its responsibilities.

    IN the US the Constitution places currency under the purview of the federal govt as the courts have interpreted art.1 sec. 10. The public purpose of the currency is to provision the govt. Other uses are subsidiary. The US can run free banking along with govt currency issuance if it chooses. That would create a different relationship with banks from the present system and its institutional arrangements.

    The commerce clause is broad, but it relates to interstate commerce. But state govts are sovereign, too, and what the constitution doesn't assign to the federal govt is left to them. Even local govts take commerce seriously as in the public interest in their locale.

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  61. Tom, which of Warrens proposals did you have in mind. I see he wants the fed to sell insurance to the banks. That's good. But I don't want banks speculating to maximize their profits and risk taking down the economy as they very nearly did, o wait, they did. Time to reel them in or break them up as Jamie Dimon just proved to us.

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  62. Isn't it really more accurate to say that we all wish banks served public purpose and that we're dissatisfied with the extent to which they actually do this?

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  63. The neoliberal label is a bit unfair, Tom. The purpose of Cullen's article is to highlight the need for greater regulation. Neoliberals would never support this position.

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  64. I think one has to agree that CR has it right. Corporations are there to increase shareholder value. At least that is the paradigm up until now. If they do not do that then their competitors will ultimately put them out of business (assuming they don't put themselves out).

    What I think I am hearing here is that we think banks have a public purpose and therefore should behave differently. Not gonna happen. That would require regulations or the break up of the big money center banks. But then you will have the problem of competition with foreign banks.

    I would add that the "invisible hand" in this scenario is the mandate to keep up with your competitor in profits. That is a fiduciary responsiblity to your shareholder. You would not want it any other way, unless you can describe the new paradigm.

    All of which leads back to some form of regulation, like a public utility, or a dismantling,if we are to avoid this nonsense in the future.

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  65. Jonf: "Tom, which of Warrens proposals did you have in mind. I see he wants the fed to sell insurance to the banks. That's good. But I don't want banks speculating to maximize their profits and risk taking down the economy as they very nearly did, o wait, they did. Time to reel them in or break them up as Jamie Dimon just proved to us."

    Financial Architecture Fundamentals

    See banking proposals contained therein.

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  66. "Greg, if Blankfein was honest that's exactly what he'd say since the Goldman Sachs mission statement mentions nothing about community, public purpose or anything similar. In fact, it directly says:

    "OUR GOAL IS TO PROVIDE SUPERIOR RETURNS TO OUR SHAREHOLDERS."


    Golman Sachs is involved in a lot more than banking. See them talk about their banking subsidiary here:

    http://www.goldmansachs.com/what-we-do/investing-and-lending/banking/index.html

    Here they talk about gov supervision, committed to helping communities through the work of the Urban Investment Group, and even brag about their outstanding CRA rating.

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  67. PaulJK: "Isn't it really more accurate to say that we all wish banks served public purpose and that we're dissatisfied with the extent to which they actually do this?"

    According to Bill Black, banks flouted the law and govt has held almost no one of note to account, in contrast to Pecora under FDR and the 1000 + people that were prosecuted and convicted as a result of the S&L debacle. The requirements are not being enforced and there is little accountability so moral hazard continues to increase.

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  68. Tom, thanks. About what I also suggested I think. Sell them credit insurance and keep em out of secondary markets.... Great. But you gotta get the regs past congress or dimon et al will keep on speculating, er hedging. They gotta keep up with the joneses.

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  69. Tom, to be clear, if the banks violate laws then they should be held to account. But I do not think we have anything today to prevent what just happened a few years ago. Dimon is the prime witness to that. Meanwhile, if they are obeying the law then they will pursue profit. I don't want them to do otherwise out of the goodness of their black hearts. If our government is so weak it cannot do it, then we are all F'd.

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  70. "The neoliberal label is a bit unfair, Tom."

    Maybe. But in my understanding this position underlies the notion that private firms maximizing utility as their chief objective results in optimal outcomes in aggregate. Knowingly or unknowingly, intentionally or unintentionally, CR is embracing that view of a market economy IMHO. Of course, everyone is entitled to their own opinion.

    Furthermore, IMHO this position goes a long way in accounting for the failures of market capitalism to deliver on his promises socially, politically and economically in terms of democratic governance and distributed prosperity, i.e., distributed aggregate utility. It has resulted in plutocratic oligarchy and increasing inequality with dire social consequences that we have not yet even begun to imagine, let alone experience, as the consequences of this debacle play out over the next several generations.

    The premise is based on a gratuitous assumption that has been shown to be lacking. See Bill Mitchell's post linked to here today for starters.

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  71. I don't care about the owners of banks and what they feel they are entitled to. They basically made investments into regulated utilities. They're not entitled to outsized returns, period.

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  72. Jonf, if you are correct, the human race can pretty much kill its ass good-bye. We are fouling the nest too fast to clean it up in time the longer we follow this insane path based on false premises. The negative externality is huge, and we remain in denial of its effects while we cling to this path.

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  73. Golman Sachs is involved in a lot more than banking. See them talk about their banking subsidiary here:

    http://www.goldmansachs.com/what-we-do/investing-and-lending/banking/index.html

    Here they talk about gov supervision, committed to helping communities through the work of the Urban Investment Group, and even brag about their outstanding CRA rating.


    Well, we all know that GS is "doing God's work." Lloyd told us so.

    I guess you don't read Matt Taibbi's stuff.

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  74. http://bobcesca.com/blog-archives/2012/06/victory-for-the-epa.html

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  75. I guess you don't read Matt Taibbi's stuff.

    That was me Tom. Was logged out of my google account and didn't notice. And yes, I am very familiar with Taibbi's work. ;)

    'Anonymous' was connecting dots (wonder who THAT could be) to draw a conclusion that doesn't exist. And so it goes: Because of Goldman Sachs overall "mission" and no mention of "community", therefore the entire banking industry solely exists to maximize shareholder wealth. Or however it was worded.

    Except when you go to the description of their banking "subsidiary" at the same website, you find no mention of shareholders or wealth. Want to see the word "community"? Open http://newyorkfed.org/banking/cra_pes/2011/752503_Rvsd_PE_GS.pdf from that same page and find 124 instances of "community development". No mention of shareholder, wealth, and superior returns.

    GOTCHA! This "debate" is so silly, it's hard to know where to begin.

    Banks are private/public partnerships. There is no denying that. FDO's internal memos of "maximizing profits" doesn't mean the various regulatory agencies of the gov can't shut you down this weekend if they don't like the way you part your hair.

    Our congress has been bought. That's all there is to it. As evidenced by Dimon's "hearing" with the Senate Banking Committee in which he received a pedicure.

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  76. I don't think a bank is a "purely private enterprise". Nor a bakery; or any other business down to the guy who mends your bicycle tyre on a street stall in Delhi. Simply because at the core of all of these businesses are human beings, affecting through their world views and actions, other human beings. So "purely public/private enterprises" are just a division in peoples' minds - like drawing a line through water! In juxtaposition to the sovereign reality of human existence - 'vapour' (can be whatever you want it to be) ....

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  77. Cullen: "a government managed loan system would almost certainly be a disaster waiting to happen"

    I think state-owned or community-owned banks could work well alongside private banks. Examples of successful state- and community-owned retail banks and state-owned investment banks can be found in several european countries.


    "Obtaining money is a privilege, not a right. And a private profit seeking banking system serves to regulate the ability to obtain money before one has necessarily earned it"

    Precisely. Banks are given privileged access to government money. And they can obtain money from the central bank before they have necessarily earned it. As such the government and central bank have to regulate the banks, and necessarily create the terms under which banks can continue to enjoy these privileges.

    You've made my point for me, thanks.

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  78. One thing I always wonder when these banks lose all this money in trading, like JPM did out of it's London office recently is who had the other side of the trade?

    Easily could have been insiders right at JPM perhaps thru a foreign hedge fund account... so as the position moved against JPM, they let it run...

    Dimon doesnt think it was a big deal as JPM still "made money" in the quarter, just around $2B less than otherwise, meanwhile insiders could have robbed out the $2B "trading loss" thru an external account.

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  79. Cullen: "That might not be the most pleasant way to think about it, but it is what it is."


    Ok, so you've described how you think "it is".

    Now could you please clarify whether you believe "how it is" is also necessarily "how it should be".

    Often you seem to confuse the two.

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  80. "if banks make credit standards too lax, fail to properly asses risks and make credit plentiful they can create an imbalance within the system (by lending to people who can’t service their debt)"

    People often say that in the run up to the 2008 crisis "people borrowed more money than they could afford".

    However it could also be said that in actual fact "banks lent more money than they could afford".

    It was actually the banks' overstretching themselves which was the systemic problem, rather than poor people overstretching themselves. Top down right-wing authoritarian types prefer to see it the other way round though.

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  81. Cullen (from pragcap comments):

    "I’m not promoting a policy agenda... To me, it’s all about teaching a message about the way things are."

    - Ok, I really going to have to nail this rank hypocrisy once and for all because it's starting to grate.

    Cullen:

    "Banks are private profit seeking entities who play an important role in our society, but are not public servants and should not be public servants (a government managed loan system would almost certainly be a disaster waiting to happen)."

    Did you notice your phrase there Cullen? "Banks.. SHOULD NOT be public servants". This is a recommendation, an assertion of your opinion.

    You are not only "teaching a message about the way things are", you are also saying how you think things SHOULD and SHOULD NOT be!

    You have made two completely contradictory statements on the same page!

    Do you understand??


    And now here's some policy:

    "we must understand that this is a component of the economy that requires great oversight and better regulation... Better oversight of the institution of money might not be able to fix our current problems, but it can certainly ensure that future generations don’t have to suffer through these same events."

    You are recommending "better oversight and regulation" of the banking sector! This is a POLICY you are advocating!

    Stop saying you're "not promoting a policy agenda... To me, it’s all about teaching a message about the way things are." This isn't true!

    You'd have to be blind not to see that!

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  82. Matt: "One thing I always wonder when these banks lose all this money in trading, like JPM did out of it's London office recently is who had the other side of the trade? Easily could have been insiders right at JPM perhaps thru a foreign hedge fund account... so as the position moved against JPM, they let it run..."

    This is how money "disappears." Where did the MF Global funds "disappear" to. Most anyone with half a brain knew it went into JPM accounts, but it took the investigators how long to find it.

    Due to lack of transparency trillions denominated in various currencies untold amounts "disappear" yearly due to fraud and corruption.

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  83. We live in a market determined world? Really!?

    Market driven as for that mythical 'free market'? Or markets created by government intervention and action (sometimes through war)?

    Yes, we live is a corporatists (state insures and creates profit opportunities for private entities) world, but not in a market-driven world.

    Finance has legalized mechanisms to counterfeit state fiat money by issuing credit for profit purposes, that's how it works, there is no public utility involved by design. They just have the legal capability to 'lever' fiat money while being insured by the state (specially in case of big money who can buy politicians).

    In this the gold standard + free-banking era was way superior at least, but bankers had to accommodate their position by several iterations on central banking experiments which got us finally to the travesty of 2008.

    Nowadays we would only need some dealer services, brokerage firms and with the grade capital markets have reached the capacity to 'lever' using mortgages on real estate as main vehicle of banking could easily stop. Banks financing of productive enterprises is ridiculous right now so they may as well disappear.

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  84. Just to set the record straight for MMR people who believe the garbage that flows out of Colon Roach's mouth:

    Warren Mosler:

    "U.S. banks are public/private partnerships, established for the public purpose of providing loans based on credit analysis."

    Notice: NOT CHARITIES.

    Don't listen to Roach's hypocritical nonsense, please.

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  85. And some more information for those confused by the Colon:

    Warren Mosler:

    "The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks."

    http://moslereconomics.com/wp-content/pdfs/Proposals.pdf

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  86. More Colonic irrigations from MMR:

    "Banks are essentially harnessed as agents of the government"

    HYPOCRITE.

    "Few things are more important than understanding precisely how the US government is able to eliminate solvency crisis through its institutional arrangements. One of the key Monetary Realism contributions is understanding these relationships and how they create the autonomous currency issuer."

    Contributions?

    Ha ha ha ha ha ha ha ha ha.

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