Introducing Michael Hudson's new book.
Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
The Destiny of Civilization
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University
10 comments:
re: Michael Hudson does loanable funds
It's sad to say, but Michael Hudson is on a list of economists who don't understand the S = I identity. It's a long list. I was reading his article titled "Financial Capitalism v. Industrial Capitalism" to gain an understanding of how he defines the difference between the two, and then I get to this:
How the Bubble’s health requires a dying economy
The bubble’s health (if one can refer to a financial cancer as having health) derives from the economy at large losing momentum by employing its savings in an unhealthy way. Any threat of restored health in the ‘real’ Main Street economy threatens to doom the Wall Street bubble, for not only must savings increase, they must be diverted away from tangible capital investment to continue to bid up the prices of stocks, bonds and real estate. What is healthy for Wall Street is thus anathema to Main Street. This is why Wall Street investors instinctively recoil when employment and investment rise.
The essence of the global financial bubble is that savings are diverted to inflate the stock market, bond market and real estate prices rather than to build new factories and employ more labor. The system threatens to collapse in such a way that will leave a legacy of financial cleanup costs for the bad debts that form the counterpart to the economy’s ‘bad savings’, that is, savings lent to speculators who use the money simply to buy existing properties rather than to create new assets.
source: Financial Capitalism v. Industrial Capitalism
He's doing the "savings create investment" thing instead of the other way around. He's also suggesting that money used to buy existing assets is not available for other purposes, forgetting that the seller ends up with the money.
In any event, here's Keynes:
Contrary to the loanable funds theory, finance in the world of Keynes and Minsky precedes investment and saving. Highlighting the loanable funds fallacy, Keynes wrote in “The Process of Capital Formation” (1939):
Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.
This is more of a deep dive
https://www.counterpunch.org/2014/11/21/why-mainstream-economists-theory-of-finance-is-useless/
So you have to be careful as he generalises a lot due to the word count. Often when he refers to savings he means private sector debt.
Hudson knows the loanable funds theory is nonsense. It was what the whole Keen V Krugman debate hoopla was about.
Hudson was on Keens side and wrote about Krugman's failure to grasp that the loanable funds was bunkum many times.
https://michael-hudson.com/2017/05/review-of-steve-keens-can-we-void-another-financial-crisis/
I think it can Been boiled down to this and what his view point has been for at least a decade.
80% of loans are now mortgage loans. That these loans are being taking out against collateral. For speculation purposes.
With hardly any loans now being given to increase productivity and proper investment in the economy.
Debt service on both households and businesses makes a country an expensive place to do business.
That's it that's his stance.
Now compare that with MMT.
Loans should not be given out just against collateral.
The job of a bank is to provide capital development loans to the economy based solely upon credit analysis. All other activities deflecting from that purpose are Ultra Vires.
That means:
Banks can only lend directly to borrowers for capital development purposes (i.e. business credit lines and household loans), and the banks keep those loans on their books until cleared.
Banks must operate on a single balance sheet. No hiving things off into ‘off balance sheet’ subsidiaries to try and hide them.
Banks cannot accept collateral. Collateral is a fixed charge over an asset as an insurance policy and aligns the incentives of banks with those possessing assets, not ideas. It stops banks being capital developers and turns them into pawn shops. That is the wrong alignment of incentives. We want loan officers with skin in the game. Their success should depend upon the success of the borrower. Banks should line up in insolvency with the other unsecured creditors (and importantly behind the remaining preferential creditors — employees).
Depositors are protected 100% at all amounts. A depositor in a commercial bank is holding nothing more than an outsourced central bank account. They are not investors in the bank and should never be treated as such.
Regulation is provided by the bank resolution agency, which is a public body funded entirely by government. There is no charge or levy to the banks for the operation. The job of the bank resolution agency is to ensure the banks are properly capitalised given their loan book and declare them solvent. If they are not, they take the bank over and resolve it with any excess losses absorbed by government. This aligns the incentives of the regulator. If they get the solvency calculation wrong and the capital buffers exhaust, the regulator stands the cost.
The Central Bank provides unlimited, unsecured lending to regulated banks at zero interest rates. Collateral serves no purpose since the bank has been declared solvent (and therefore there is no reason for it to be illiquid), and collateralised Central Bank lending just shifts the losses to depositors who are protected 100% anyway.
Once you get rid of interbank collateral and funding requirements, you get rid of one of the final excuses for keeping Government Bonds. National Savings annuities for pensions (allowing retiring individuals to receive a secure lifetime income) would get rid of the final one. Transferable instruments that confer government welfare on the owners do not serve the public purpose. Government welfare receipt is a social decision, not a market driven one.
As the asset side is heavily regulated, you want the liability side to be as cheap as possible. Unlimited central bank access ensures liquidity for depositors and allows lending-only banks to arise. It gets rid of the Interbank overnight market and replaces it with central bank overnight accounts. It puts the Central Bank ‘in the bank’ as a major investor — with open access to the commercial bank’s loan book via the work of the solvency regulator.
All levies, liquidity ratios, reserve requirements and the like are eliminated. The cost of maintaining the collateral system is eliminated. The result is loans at a low price with the quantity restricted solely by credit quality. As an economy heats up, credit quality declines and loans become restricted — systemically preventing the Ponzi stages of finance that lead to a Minsky Moment.
Proscribed banks, forced to rely on credit analysis for profit, help prevent a boom by issuing less credit as project quality declines.
You get a natural and steady withdrawal of funding that is far more surgically targeted and responsive to local conditions, than the carpet bombing approach of interest rate adjustment.
This leaves the payment system, which should be as costless as cash and clear just as instantly to eliminate transaction frictions. Whether that should be publicly provided, or remain outsourced to the banks is an open question. Depositors are a cost to the bank and would effectively be a tax, but leaving them with the banks would give them an incentive to get the cost of clearing provision down. It may boil down to a political question that depends upon your view of the effectiveness of public and private provision. I’d lean towards an Open clearing system created by the state (or even states) and available to all on an open licence. We want one good clearing system like we have one good Linux.
Banks are currently too complicated, too large, too impersonal, too intertwined and systemically dangerous. They need to be simpler, smaller, more local and relationship oriented in scope. All of which are easy to achieve once you adopt the Mosler Mechanics for banking.
Once again, because there is a Job Guarantee and a government that will use fiscal policy, we don’t need the banks to provide endless credit, any more than we need private firms to provide endless jobs. Banks and firms can be maintained at their appropriate natural size and location as determined by the technological level of the economy and where people actually reside.
So Hudson's viewpoint is pretty much identical to MMT.
Neil takes it further and says
The Only Bonds We Need Are Granny Bonds
https://new-wayland.com/blog/the-only-bonds-we-need-are-granny-bonds/
Which would also deal with collateral issue when it comes to bank lending.
"Loans should not be given out just against collateral."
That's not really the initial MMT view. That's a view that has been developed by certain sections of the USA contingent who are getting ever more Post Keynesian with each passing day - largely because their spending desires don't balance with their ability to get people to pay the tax to fund them. So they go where all economists go to die - trying to mess around with credit criteria that doesn't have to go through that annoying 'democracy' process.
Banks provide liquidity against collateral. That's all they do. They don't invest, and they don't "fund business". Real things with value fund business. Banks just allow you to spend those real things easier and charge you for that service.
What always attracted me to MMT, particularly after listening to Warren, is that it got the central planners out of the way - including the clowns at the central bank.
Banks then just operate largely in pawnbroking mode, and the interest rate becomes a private matter for the horizontal circuit to work out amongst themselves. Banks can then fail like any other business and nobody should care. Plenty more where they came from.
The vertical circuit should have no interest rate or interest payments in it. The horizontal circuit in a country is pegged one-to-one with the vertical circuit and system reflexivity pushed out to the floating exchange rate boundary.
A combination of the Job Guarantee and countercyclical taxation provide the automatic stabilisers to offset the horizontal circuit credit cycle - including the inevitable ponzi blow offs.
MMT has suffered because too many people got into it and saw it as free money to fund their political fantasies.
I saw it as a better autopilot
US banking system Residual/Equity/capital/retained earnings now down to 1,945B about same as it was before Covid….
XLF pre Covid high 31 recently 32… up a buck in 2 years…
“Neoliberal conspiracy!”
If you asked someone like Hudson what XLF was doing he wouldn’t be able to tell you..,
Reading between the lines and trying to keep up with the debate.
Did the " Loans should not be given out just against collateral"
Not Grow out of the "stop hoarding at source" idea ?
Be proactive in dealing with pre - redistribution rather than deal with the distribution of wealth after it has taken place and the horse has already bolted ?
" stop the hoarding at source" grew a lot of arms and legs.
"Not Grow out of the "stop hoarding at source" idea ?"
You can't hoard something that is dynamically created.
The private sector should largely be left to its own devices if we are to operate with capitalism, and we offset it with the containment shell.
There are far too many people who have come to believe we need them to look after everybody else.
If there are hoards, create more. Then the hoards become worthless. Nobody hoards production cars because we just make another one. They only hoard classic cars.
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