Michael Roberts Blog: blogging from a marxist economist — Minsky and socialism

Minsky’s journey from socialism to stability for capitalist profitability comes about because he and the post-Keynesians deny and/or ignore Marx’s law of value, just as the ‘market socialists’, Lange and Lerner, did. The post-Keynesians and MMTers deny/ignore that profit comes from surplus value extracted by exploitation in the capitalist production process and it is this that is the driving force for investment and employment. They ignore the origin and role of profit, except as a residual of investment and consumer spending.Instead they all have a money fetish. With the money fetish, money replaces value, rather than representing it. They all see money (finance) as both causing crises and, also as solving them by creating value!

In my view, far from Minsky providing the “necessary ingredients to a to a rethinking of Marxian theory of capitalist dynamics and crises”, as Bellofiore argues, Minsky’s theory of crises, like all those emanating from the post-Keynesian think tank of the Levy Institute, falls well short of delivering a comprehensive causal explanation of regular and recurring booms and slumps in capitalist production. By limiting the searchlight of analysis to money, finance and debt, Minsky and the P-Ks ignore the exploitation of labour by capital (terms not even used). They fail to recognise that financial fragility and collapse are triggered by the recurring insufficiency of value creation in capitalist accumulation and production.

Moreover, by claiming that capitalism’s problem lies in the finance sector, the policy solutions offered are the regulation and control of that sector, rather than the replacement of the capitalist mode of production. Indeed, that is the very path that Minsky took: from his socialism and ‘’socialisation of investment’’ in the 1970s to ‘stabilising finance’ in the 1990s.

Michael Roberts Blog — blogging from a marxist economist
Minsky and socialism
Michael Roberts

Warren Mosler and the Great American Banking Myth — George Selgin

Although I've taken issue with various MMT claims in the past (see, e.g. here and here), I've grown to respect several Modern Monetary Theorists. Far from being ill-informed, people like Eric Tymoigne and Nathan Tankus (the list is by no means exhaustive–these happen to be two whose work I know best) know a lot more than many orthodox economists do about the workings of the U.S. monetary system. Knowing this, I'm not inclined to accuse Modern Monetary Theorists of being ignorant just because I disagree with many of the school's positions and arguments.

But on the subject of bank runs, at least, Warren Mosler shows no signs of being well-informed. Although his talk is laced with knowing chuckles, along with disparaging references to "so-called neo-liberals" who are so foolish as to think markets work in banking, his attitudinizing is so much bluff and bluster. The truth is rather that, so far as knowledge of runs is concerned, Mosler is no less destitute than some of the banks whose demise he so heedlessly laments.

George Selgin disputes Warren Mosler's assertions about the dire consequence of free banking, namely, bank runs.

I would have no problem with allowing free banking for institutions that are not members of the central bank's payments system and have no recourse to either the lender of last resort function or government guaranteed deposit insurance. This would mean that such institutions would have to either issue their own private notes as liabilities of the institution or get currency from raising capital or deposits. A sovereign government would be advised not accept such liabilities in payment of obligations to it in place of the currency that the government issues, since this would be ceding sovereignty.

I would also require such institutions to advertise that customers' have no recourse in the case of bank failure other than the civil courts. Let people take a chance if they choose but the choice should be an informed choice. Thus, I would also require all financial institutions other than banks that are member of the government payments system to adopt the partnership model that characterized financial institutions before they were allowed to incorporate and thereby limit the liability of the owners. Note that is is not bank regulation but rather definition of legal liability.

"Let a hundred flowers bloom." Chairman Mao.

Alt-M
Warren Mosler and the Great American Banking Myth
George Selgin | senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and Professor Emeritus of Economics at the University of Georgia.

Michael Hudson— The Coming Savings Meltdown

Debts that can’t be paid, won’t be. That point inevitably arrives on the liabilities side of the economy’s balance sheet.

But what of the asset side? One person’s debt is a creditor’s claim for payment. This is defined as “savings,” even though banks simply create credit endogenously on their own computers without needing any prior savings. When debts can’t be paid and debtors default, what happens to these creditors? 

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
The Coming Savings Meltdown
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

Peter James Hudson — How Wall Street Colonized the Caribbean

The expansion of banks such as Citigroup into Cuba, Haiti, and beyond reveal a story of capitalism built on blood, labor, and racial lines. 

Scrubbed from the pages of glossy coffeetable books, the history of U.S. imperialism can be found in the archives of Wall Street’s oldest, largest, and most powerful institutions. A deep dive into the vaults and ledgers of banking houses such as Citigroup, Inc., and J. P. Morgan Chase and Co. reveals a story of capitalism and empire whose narrative is not of morally pure and inspiring economic growth, technological innovation, market expansion, and shareholder accumulation, but rather of blood and labor, stolen sovereignty and pilfered resources, military occupation and monetary control. Sugar comingles with blood, chain gangs cross spur lines, and the magical abstractions of finance are found vulgarized in the base manifestations of racial capitalism.

Boston Review
How Wall Street Colonized the Caribbean
Peter James Hudson

The Delphic Oracle Was Their Davos 4/4: A Four-Part Interview With Michael Hudson: A New “Reality Economics” Curriculum Is Needed (Part 4)-John Siman interviews Michael Hudson

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
Up in Arms
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

John Siman — Everything You Thought You Knew About Western Civilization Is Wrong: A Review of Michael Hudson’s New Book, And Forgive Them Their Debts

Must-read.

Naked Capitalism
Everything You Thought You Knew About Western Civilization Is Wrong: A Review of Michael Hudson’s New Book, And Forgive Them Their Debts

John Siman

Brian Romanchuk — The Financial Instruments Associated With Crises

This article is a continuation of previous comments on financial crises, with two lines of discussion. The first is a bit of a primer, explaining why I and other commentators associate financial crises with a buildup of private debt. The second part discusses the main problem with associating crises with private debt buildups: growth in debt stocks is by itself not enough to trigger a crisis. The catch is a variant of the efficient markets hypothesis: if we could easily forecast crises, it would be easy to outperform markets. However, other market participants are trying to do the same thing.…

Private sector financial crises are associated with private debt buildup. Unfortunately, we cannot expect simple rules based on debt growth to be able to accurately predict such crises.

Bond Economics
The Financial Instruments Associated With Crises
Brian Romanchuk

Felipe Rezende — Banks, Capital Markets, and Institutional Investors as Providers of Long-Term Finance

This is the second in a series of blog posts on financing infrastructure assets.

Multiplier Effect
Banks, Capital Markets, and Institutional Investors as Providers of Long-Term Finance

Felipe Rezende | Director, Economics and Finance Program, Bard College and Research Fellow, The Levy Economics Institute

Brian Romanchuk — Housing Bubbles And Their Financing

Housing finance is interesting, and offers an interesting take on some theoretical issues. Although the theoretical issues sound abstract, they are critical issues in economies facing a housing bubble. This article looks at one aspect of housing finance: the limit to financing is credit risk, not funding. Monetary flows in a credit-based economy are circular.

Bond Economics
Housing Bubbles And Their Financing

Brian Romanchuk

Raúl Carrillo — Hy Minsky, Low Finance: Modern Money, Civil Rights, and Consumer Debt

Lawyer and Monder Money Network director Raúl Carrillo's presentation at the MMT conference. Must-read for all interested in MMT.

(1) First, I’d like to impress upon folks a theme that I’ll be stressing throughout the conference: when it comes to the economy, law is not merely a governing force (as many on the right would have economists believe) nor a reflective force (as many on the left are inclined to think). It is also a constitutive force. What I mean by that is that the law doesn’t just intervene into the economy on the back end, and it doesn’t merely reflect deeper forces in the economy either. Rather, a lot of the economic concepts we talk about not only have a particular meaning in the context of specific legal parameters, but they only exist given the deeper architecture of legal regimes, in the sense of systems design. I’m going to do my best to articulate what that means and what that looks like when it comes to consumer finance.

(2) Second, I’m going to talk about how people actually experience the government’s failure to sufficiently spend money for public purpose. People don’t experience the absence of MMT-insights as policy failures in a grand sense. They experience it as personal pain. Over time, that pain can become chronic, but at first, it’s acute. For some of us, it’s devalued assets, houses, cars, etc., but most people in this country live paycheck-to-paycheck — or no-paycheck-to-no-paycheck — and thus experience the survival constraint pain on the liability side, where their debt is expounded, compounded, and sometimes straight-up fabricated. And within this group…there is what we call “disparate impact” in the legal world. As Sandy Darity, Darrick Hamilton, and other fellow travelers consistently point out, for many folks on the periphery, especially people of color who lack intergenerational wealth, the lack of MMT informed-policy means permanent austerity and perpetual depression.

With that in mind, we must cultivate a way to talk about Modern Money from the bottom-up and from the outside-in. We have to draw maps from people’s suffering to the macro failures. I personally think we can do this best by talking about (1) consumer debt, (2) criminal justice debt (which Prof. Harris is going to cover), and (3) taxes (which Prof. McCluskey will discuss).…

Modern money is a legal institution first and foremost, as chartalism, or the theory of state money, makes clear. There is no "natural money." Money-use, initially as credit, grew out of informal custom and was later was institutionalized formally in law. and The constitution and operation of this now highly formalized legal institution has vast social, political, and economic implications, especially considering that it can be captured by special interests through a political process involving asymmetric power.

New Economic Perspectives
Hy Minsky, Low Finance: Modern Money, Civil Rights, and Consumer Debt
Raúl Carrillo, staff attorney at New Economy Project, an economic justice non-profit in New York City

Michael Roberts — Blockchains and the crypto craze

Are blockchain and cryptocurrencies as over-hyped? Michael Roberts thinks so and explains why.

Michael Roberts Blog
Blockchains and the crypto craze
Michael Roberts

Robert C. Hockett & Saule T. Omarova — The Finance Franchise

The dominant view of banks and other financial institutions is that they function primarily as intermediaries, managing flows of scarce funds from those who have accumulated them to those who have need of them and can pay for their use. This understanding pervades textbooks, scholarly writings, and policy discussions – yet it is fundamentally false as a description of how a modern financial system works. Finance today is no more primarily “intermediated” than it is pre-accumulated or scarce.

This Article challenges the outdated narrative of finance as intermediated scarce private capital and maps the basic structure and dynamics of the financial system as it actually operates. We begin by developing a three-part taxonomy of ways to model financial flows – what we call the “credit-intermediation,” “credit-multiplication,” and “credit-generation” models of finance. We show that only the last model captures the core dynamic of a complex modern financial system, and that the ultimate source of credit-generation in any such system is the sovereign public, acting primarily through its central bank and treasury. We then trace the operation of this dynamic throughout the financial system, from the banking sector, through the capital and “shadow banking” markets, all the way out to the “disruptive” frontier of peer-to-peer digital finance.

What emerges from this retracing of the financial system’s operative logic is a comprehensive view of modern finance as a public-private franchise arrangement. On this view, the sovereign public acts effectively as franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource: the public’s monetized full faith and credit. We conclude the Article by drawing out some of the potentially transformative analytic and normative implications of a paradigmatic shift from the orthodox theory of financial intermediation to the franchise view of finance.

To read the complete article, click “VIEW PDF” below.
:: VIEW PDF

Cornell Law Review
The Finance Franchise
Robert C. Hockett & Saule T. Omarova

Steve Roth — Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

It’s the debt, stupid = doing economics without balance sheets and awareness of finance.

It’s as if Irving Fisher and Hyman Minsky had never written.

Conventional economists seem to do their thinking without tethering it to the real world though finance as a source of funds and accounting as the record of what actually happens in market exchange. If economists are looking for microfoundations, this is where it is, rather than in "preferences," "expectations" and "confidence."

Asymptosis
Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Steve Roth

Mark Buchanan — Market complexity also makes for instability

Looks like another fallacy of composition is at work in finance to increase system instability by assuming that increasing the stability of individual institutions will increase the stability of the system as a whole. This post suggest that this is apparently not the case owing to network effects.

Physics Perspective
Market complexity also makes for instability
Mark Buchanan

Alex and Don Tapscott — How Blockchain Is Changing Finance

Is this the end of banking as we know it? That depends on how incumbents react. Blockchain is not an existential threat to those who embrace the new technology paradigm and disrupt from within. The question is, who in the financial services industry will lead the revolution? Throughout history, leaders of old paradigms have struggled to embrace the new. Why didn’t AT&T launch Skype, or Visa create Paypal? CNN could have built Twitter, since it is all about the sound bite. GM or Hertz could have launched Uber; Marriott could have invented Airbnb. The unstoppable force of blockchain technology is barreling down on the infrastructure of modern finance. As with prior paradigm shifts, blockchain will create winners and losers. Personally, we would like the inevitable collision to transform the old money machine into a prosperity platform for all.

Harvard Business Review
How Blockchain Is Changing Finance
Alex Tapscott, Founder and CEO of Northwest Passage Ventures, a consultancy, advisory firm and investor in the blockchain industry and Don Tapscott, author of Wikinomics, The Digital Economy, and a dozen other acclaimed books about technology, business and society; according to Thinkers50, Don is the 4th most important living management thinker in the world; he is an adjunct professor at the Rotman School of Management, and Chancellor of Trent University. 

See also

McKinsey
Using blockchain to improve data management in the public sector

Steve Cheng, Matthias Daub, Axel Domeyer, and Martin Lundqvist

Noah Smith — A Better Theory to Explain Financial Bubbles

But to gain wide acceptance, extrapolative expectations will have to overcome years of entrenched convention in the economics profession. The near-ban on using anything other than rational expectations is still very strong. In the hunt for truth, sociology is often the greatest barrier.

The problem is equating nominal market price with underlying value, "the fundamentals."

Nominal market price is determined at the margin and can therefore vary both rapidly and widely.

While it is a truism that "in the long run" prices must approximate fundamentals, in the short run a lot of people can be ruined, and there is no model available that is conclusive — because "animal spirits" (Keynes). Traders call it "momo," signifying "momentum," which measured as changes in velocity and acceleration of trends.

The assumptions involved in current models based on rational expectations are too restrictive to account for observed phenomena which include bubbles and busts. The scope of the models are too narrow and miss the "action."

Economics hate to admit that they don't have a model, so they stick with the "best explanation" — which doesn't work at crucial points.

This is a problem affecting regulation and policy since regulators are often economists‚ think Allan Greenspan and Ben Bernanke, and policy is heavily influenced by conventional economic theory and models. Worse, regulators that warn about uncertainty and overextension are sometimes let go as result of being honest.

Bloomberg View
A Better Theory to Explain Financial Bubbles

Noah Smith, Contributor

J. W. Mason — Socialze Finance

We already live in a planned economy. Why not make it a democratic one?

You want to read this.

Jacobin
Socialze Finance
J. W. Mason | assistant professor of economics at John Jay College, City University of New York and a fellow at the Roosevelt Institute

Ellis Winningham — A Brief Note on Loan Payments, Accounting and Bank IOUs

Whenever I discuss banking operations, I usually receive at least one question asking me about how a loan is paid off and where the payments go, in addition to further clarification of bank IOUs. So, I’m going to answer them all at once. First, though, I want to point out that when you ask about how a bank processes your loan payments or terminates a loan, that is not exactly a macroeconomics question. It is an accounting question.

Ellis Winningham — MMT and Modern Macroeconomics
A Brief Note on Loan Payments, Accounting and Bank IOUs

Ellis Winningham

Tony Wikrent — Michael Lewis: The Book That Will Save Banking From Itself

During my visit with Jon last month, we both agreed that Michael Lewis is one of the best USA writers living. Here is partial list of some of Lewis's books:

• Liar's Poker: Rising Through the Wreckage of Wall Street (1989)
• Moneyball: The Art of Winning an Unfair Game (2003)
• The Blind Side: Evolution of a Game (2006)
• The Big Short: Inside the Doomsday Machine (2010)

The Big Short was the basis of the movie Jon reviewed here a couple months ago; I reviewed the book back in June 2011.

Since the article below was written by Lewis, I overcame my grave misgivings, and decided to post it here. It is a rather detailed review of a recent book by the former governor of the Bank of England (2003-2013) Mervyn King. The books is entitled The End of Alchemy: Money, Banking, and the Future of the Global Economy, and it presents King's argument that nothing has fundamentally altered the financial system's stupidity, greed, and appetite for high-payoff risks, then King's detailed proposal for what governments and financial regulators should do before the next crisis inevitably hits. 

Normally, I do not believe that highly technocratic financial discussions conduce to furthering an enlightened public discourse. Frankly, such discussions are usually a steaming pile of bovine manure. But now that it appears that our sole choice for USA President is Trumpillary, it seems very likely that the best we can hope for in terms of forcing the banksters to behave civilly is exactly the sort of proposal King is putting forward.…

Good read.

real economics
Michael Lewis: The Book That Will Save Banking From Itself
Tony Wikrent

Ha-Joon Chang — Making things matters. This is what Britain forgot

It’s being blamed on the Brexit jitters. But the that the latest figures reveal is actually a symptom of a much deeper malaise. Britain has never properly recovered from the [2008 crisis]….

At the root of this inability to stage a real recovery is the serious imbalance that has developed in the past few decades – namely, the over-development of the UK financial sector and the atrophy of manufacturing.…

This is remarkable, given that the value of sterling has fallen by around 30% since the crisis. In any other country a currency devaluation of this magnitude would have generated an export boom in manufactured goods, leading to an expansion of the sector.…

The weakness of manufacturing is at the heart of the UK’s economic problems. Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.

Real-World Economics Review Blog
Making things matters. This is what Britain forgot

Ha-Joon Chang