Michael Hudson continues his discussion of banking on Real News Network by focusing on the role banks played in different economies in the early period of industrialization. He discussed this idea at length in his 2010 article, “From Marx to Goldman Sachs: The Fictions of Fictitious Capital,” which explained the difference between the German and Anglo-Dutch model of banking. The Germans thought finance should serve the development of industry, essentially an equity-oriented approach, while the British and Dutch banks preferred to lend against existing collateral. The result was that both inventors and important projects often had trouble securing funding. As Hudson wrote:
British bankers were prone to insist that companies they controlled pay out most of their earnings as dividends and remain highly liquid rather than providing enough financial leeway for them to pursue a long-term investment strategy. By contrast, the major German banks paid out dividends at only half the rate of British banks, retaining their earnings as a capital reserve invested largely in the stock of their industrial clients. Treating their borrowers as allies rather than merely trying to make a profit as quickly as possible, they expected their customers to invest their profits in expanding production rather than paying them out as dividends.
Hudson explains how public banks could provide an alternative to our current model of extractive finance.
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Good interview; this seems to be one step that is left out of a lot of MMT writing, where not much is said (from what I can see) about having a public bank.
It does not need to be a part of MMT, so it makes sense to keep it simple, but it is a natural progression for it, through providing not just a public bank, but a public bank backed by money creation.
It can simplify explaining MMT, in a sense, as a lot of the complexities of explaining the current private banking system, of explaining endogenous money, bank reserves, the interbank market and interactions with the central bank, can be put aside by combining MMT with a public bank.
It would be good to occasionally have more articles, discussing public banks (and reform of the private banking system), both here and at NEP.
Here’s a list of MMT articles and papers on banking and financial reform:
http://mmtinformationservice.blogspot.co.uk/
Nice; cheers.
If a public bank was created,after the US adopted a monetary creation arm of the treasury,as was proposed under dennis kucinich’s 112th congress HR2990 “the NEED ACT”;it could serve part of the function of moving the “US DOLLARS” into the economy.
The bank could be an alternative to dealing with a private bank.And being connected to the actual source of the money.Even saying the public bank, is a “seperate” entity of the new treasury.It could still have a “special relationship”.The public bank idea would be “neater”,than the credit unions.Who would still be “seperate entity” financial providers.
The congress would still cause/decide where much of the treasury spending would go, thru its (wouldn’t it be wonderful IF it was actually reformed)prescribed allocation procedures.Much of this treasury created “greenbacks”, enters the economy as gov’t spending here.Thru the social saftey net programs, and also physically as loans to the little people, and businesses too.Anyone who just wants a “square deal”, reliable banking option.While at the same time, their money/savings/accounts is in an institution that supports the american cause,rather than subvert it, as the current private banking relationships do.
Who gets to run the public bank and what prevents cronyism from looting it?
It seems to me that private banks limited geographically, and functionally (no derivative bets), and kept small enough to resolve if necessary, with owners who know there will be no bailouts, and no exemption for them from criminal laws, provides real advantages.
“Who gets to run the public bank and what prevents cronyism from looting it?”
Yes, well…maybe we should ask Fannie, Freddie, FHA, and whatever the place is nowadays making student loans.
But maybe if we regulated them?
Fannie and Freddie were private when they got in trouble, or did you forget that? Nothing like a little disinformation.
I don’t think I want to get in a discussion about how to sex hermaphrodites.
jake chase says:
Well that certainly was the question that immediately popped into my mind, this freshly having been implanted there from yesterday’s posts:
And when Hudson invokes China as the model, I wonder how all those ghost cities and bridges to nowhere are going to work out for the Chinese in the long run:
Hudson is certainly correct in recognizing the risks of tradition-bound empiricism, von Mises being the bluntest and most simple-minded example of this.
But Hudson seems to be oblivious to the fact that the unshackling of speculative thought which began with Kant, and which eventually progressed to become an unchecked orgy of speculative thought, unmoored from any empirical reality whatsoever, traveled along two separate paths. The new brand of philosophy followed a unified path from Kant to Fichte and Hegel. But then it fractured, with the Marxists occupying one extreme, and the neoliberals the other. With the Marxists it was all about the people, whereas with the neoliberals it was all about the individual. Both monisms believed they could shape reality to make it fit their separate and very different visions of an ideal world.
While Hudson is fully aware of the risks of unbridled speculation coming from the right, he doesn’t seem to share a like concern for that same threat emanating from the left.
Public banks can be forbidden from earning any sort of profit.
Any excess return is simply debited from existence.
Hmmm…Maybe you should ask the folks who run the Bank of North Dakota.
Guess what jc, some government institutions do actually work, and work efficiently. I know it’s hard to remember sometimes, what with all the national news we get. Check out today’s link to the Alternet story on Public Banking in ND and you will find this info:
I was on a conference call with Hardmeyer and he seems like a very legit, public spirited guy (besides also being a conservative banker-type).
I wouldn’t care either way if banks were public or private, provided that you can keep either from turning into another black hole for money.
The main problem is you can’t let TBTFs exist because they can now blow up the world economy and government along with it, so having a little safe banks operating side by side with TBTFs doesn’t really help, other than give you maybe some peace of mind, and then the big kaboom hits anyway.
So the other path is to break up TBTFs, reign in derivatives and CDS – whittle down banking back to what commercial banking used to be – what we have been sometimes calling “utility banking” around here. Then if for some reason state run banks emerge along with safe private banking, then so be it.
How the Nation’s Only State-Owned Bank Became the Envy of Wall Street
MJ: What makes your bank unique today?
EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that’s only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism.
MJ: Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state’s own economy?
EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history.
MJ: Are there areas that you invest in that other banks avoid?
EH: We made the first federally-insured student loan in the country back in 1967. So that’s been a big part of what we do. It’s become almost a mission-critical thing. I don’t know if you have been following the student loan industry lately, but it’s been very, very interesting as many have decided to leave. We will not though.
http://www.motherjones.com/mojo/2009/03/how-nation’s-only-state-owned-bank-became-envy-wall-street
Ya, ok. So they are making federally insured student loans (at 7% now I hear), helping feed unbridled education inflation, and helping grow the next multi-trillion dollar federal bailout boondoggle.
Sure Wall Street would be envious.
Though mostly unreported in the media, ND suffered very little fall out the GFC. This is mainly because the people and businesses of the state generally not exposed to Wall Street Banks. Subprime didn’t happen to any appreciable degree in ND, so they’ve largely avoided MERS issues as well. Another thing BND does is provide a secondary market for ND mortgages, which ensures that mortgages originated in the state get serviced by people in the state.
State-owned Public banks could go a long way towards insulating the citizenry from the vagaries of Wall Street, imho.
But ya gotta admit striking oil probably helped the economy a lot too?
Private v public? The current policies have made the private banks defacto public, only we don’t get the profits. Are you all seriously going to continue to debate the merits of a failed current system? Well ok then, if it makes you feel better.
It’s just sad to see, how US rednecks think, that it is socialism, (in some bad meaning) if government owns companies or part of those. That’s completely normal in Nordic countries, after 90s of course this neoliberal thing have been going on, where right-wing wanna sell all government owned corporations, especially banks, theres very little owning left at these days, thats something what I wont get, cause its most profitable business on the earth at the moment…
At 90s depression and banking crises hit first to Norway, what decided to nationalize all these poor banks, who had too little capital to survive. Left stock price to hit zero and then took control of those banks.
Of course theres some government people sitting in boards, who aint know a shit about running business, but boards have very little to do with anything real anyway and they are just rubber stumps. They get some benefits from these positions, from which press sometimes reminds us. At least government should own all natural monopolies. It would also be good to have at least one fully government owned bank.
Its just stupid to think that government shouldnt have its fingers on banking business, even China is doing pretty good job at it…
The public bank idea, creating money by spending it into circulation by building critical public infrastructure, roads, schools, hospitals, weather proof transmission and distribution lines of communication (wireless and satellite)and buried electric lines in densely populated areas, not just downtown central business districts, as well as municipal solar electric utilities, is not a hard concept to grasp. Nor are there insurmountable obstacles to make it operational and integrate within current social institutions, such as credit unions operating as financial utilities.
The political questions of power, command and control, over the public bank is also implicit in the concept of the public, but needs to be unpacked for all to see clearly. A public bank would by its structure and function begin to be an anti-commodity. This has been discussed by Yves on more than one occasion, posed as the question: Should banks operate like a utility? But the more political aspect, the one where conflict is involved, as opposed to the administrative discussions on how to best tweak the mechanism of banks and finance, is where Michael Hudson is headed more so, than the academic run of the mill moot points of the pure intellect.
Conflict, among those with power who dominate and between those who are pushing a policy, the consequences of which create adverse material problems, pain, and human misery for those who wind up dominated, is the central issue of what is public, not bourgeoisie opinions on the role of government and who produces real jobs. This is irrelevant misdirection. Mr. Hudson wants a public bank, so do I. And I agree, we do not want something called a National Infrastructure Bank, which is platform for a public-private partnership to build publicly used assets that in fact are turned into commodities and profit taking opportunities for Wall St and the 1%.
So, what will help us in the forward moving attempts to establish a public bank, that will build infrastructure, as well as supporting businesses where we can work and be paid and live a life of prosperity, free from poverty, indebtedness, and mindless paperwork to claim anything useful from a lottery system economy of opportunity. You know, you got to play to to win, but of course, while 99% pay, only 1% win. Gee, what are the odds of that happening, generation after generation?
The first question of analysis needs to be: What is being turned into a commodity that can be bought up, and placed beyond the reach of public control, by democratically appointed authority? We need to separate out from the field of economic activity what is no longer an innovative and proprietary process of any sort, and what falls into the public interest, and need not be protected as private property for the sake of justice or individual freedom. Perfectly clear examples are pubic transit systems, cobbled together from previous private for profit corporations, who have exited the businesses of commuter rail roads, buses, trolley services etc and have become regional, public authorities that own and operate mass transit services. So vital is mass transit, that even the most auto dominated city in history, Los Angeles, has been moved to build a subway and expand it, along with surface light rail and bus lines.
This initial example is not that hard to understand, and as banking has already collapsed, much like the rail roads did by the mid 20th century, it is not hard to see a public banking sector emerge to take over the vital credit granting functions of banking without the indebtedness, just as public transit agencies have developed from the ashes of the age of the robber baron railroad tycoons.
this interview is an example of pendulum of thought and opinion in human history.
State owned banks, if widespread, would lead to state socialism. I grew up under state socialism — it was not pretty, and if allowed to continue would lead to something like collapse of civilization, primarily through environmental destruction.
The problem of banking today is a side effect of the globalization project. If your labor is offshored and works for food, you can only prevent rapid collapse of consumer markets by fraudulent banking. So, deregulation of finance hit the themporary sweetspot because it propped up consumer markets.It also created a frankenstein monster of parasitic banking which gains the power to counterfeit currency with impunity and feeds that power back into the political system thus protecting itself in perpetuity.
The solution is less globalization, which unfortunately means regional protectionism ,and re-regulation of banking. The solution is not a state owned uber-bank. This would indeed lead to state socialism and central planning.
Banks are already “state-owned” and have been since the Federal Reserve Act of 1913. The Fed tells them what financial assets they can have, supplies their bonds and reserves and can walk right in and fire every last manager and executive at any time.
We just pretend banks are private entities so useless financiers can continue looting the public purse. Forbidding banks from earning profit is not going to herald the triumph of Marxism-Leninism, and you should not be attempting to frighten people with such hysterical thinking.
When the raiding of the US Postal System is discussed and ideas brought up to help save the sytem, sometimes making Post Office’s a type of bank, especially for underserved areas comes up.
I wonder if the moves to sell off USPS real estate, especially in underserved areas, is part of a plan to make such use of the USPS impossible….
Government backed credit creation is INHERENTLY DISHONEST regardless of who is in charge UNLESS every citizen is entitled to the exact same amount of credit on the same terms regardless of ability to repay. Why? Because credit creation is a hidden inflation tax on all money users. It steals from the less so-called “credit-worthy” to give to the more so-called “credit-worthy.”
It’s not like that are not ethical forms of private money creation because there are. Common stock is an ETHICAL form of private money creation that “shares” wealth and power rather than steals them.
Thank you for your comment, F. Beard. You have suggested common stock be created and used as “an ethical form of private money creation” a number of times. I would like to understand why you believe this to be so, and have also struggled to understand your proposal conceptually; i.e., whose common stock would qualify and at what stage of the corporation’s business life cycle (venture, mezzanine, IPO, secondary?); the long-term business attrition rate of issuers and inherent destruction of money (including through force majeure, wars and other events); whether the current group in control of Markets and the distribution of money would continue to control the Markets for equities (and thus money); and other related issues you might consider salient?
Would appreciate if sometime you might expand on your thoughts about this as I would very much like to better understand the advantages and disadvantages of various proposed monetary and financial system alternatives, including your’s. I have also noticed you have from to time cited Australian economist Steve Keen and MMT. I have interpreted this to mean that you separate public and private money creation and distribution. If so, does this mean you continue to support the current system of central banks and primary dealers for issuance and distribution of money, regardless of whether that money is backed by U.S. Treasury debt or equities?
Again, thank you very much for putting it out there. If you or others have already addressed these questions, I would welcome links.
I have interpreted this to mean that you separate public and private money creation and distribution. Chauncey Gardiner
Indeed. Government money should be legal tender (as it was originally) for government debts ONLY though it could, of course, be voluntarily used for private debts too.
If so, does this mean you continue to support the current system of central banks and primary dealers for issuance and distribution of money, regardless of whether that money is backed by U.S. Treasury debt Chauncey Gardiner
Not at all. The US Government should simply spend its money into existence and tax some (not all! Deficit spending by the monetary sovereign should be the norm, not the exception) of it out of existence as necessary to control price inflation in the dollar. Nothing else! No borrowing, no lending, no recognition of private or foreign currencies, no use of precious metals or anything else to back its money.
or equities? Chauncey Gardiner
Common stock should be a private money form only. Government money is backed by government’s taxation authority and power; it should not and indeed cannot be backed by anything else.
You have suggested common stock be created and used as “an ethical form of private money creation” a number of times. I would like to understand why you believe this to be so, … Chauncey Gardiner
1) Common stock as private money requires no borrowing or lending; assets can simply be bought with new stock issue.
2) Because common stock requires no borrowing or lending, the ethical and mathematical problems of usury are bypassed.
3) Because common stock requires no borrowing or lending, deflation is not built-in as it is with the present system.
4) As for price inflation in a common stock money, all of that is born by the owners of the common stock issuer since every recipient of common stock money becomes, by definition, a co-owner of the issuing company. This is an important moral consideration and differs from the present unethical system wherein the non-receivers of bank credit (typically the poor and other less “credit-worthies”) bear the price inflation.
5) Common stock money is backed by the real assets of a company which, unlike precious metals, can be performing assets.
6) Common stock money is democratic, at least per share
It seems to me that the GFC and the fall of communism, shortly before that, have shown up big problems with current governance structures. Thus, we may need to work on new and effective forms of governance, immune as far as possible to corruption and dysfunction. Hudson gave a lucid explanation of wealth-creating banking, but placing banking in the hands of revolving-door (and other extant) governance structures may just be a another recipe for disaster. Hence I view him as asserting something more general – that banking can do a lot of good if properly structured and governed.
I wonder sometimes if the jury system, designed to reach decisions without inappropriate external influences, and direct democracy, designed to bypass inappropriate external influences, can be combined to form the nucleus of a corruption-resistant and progressive Pareto-optimal form of government.
When you redirect this link to your facebook page it says “why we need PRIVATE banks”. It needs to be corrected
Economics 301: Translation
Capital is attempting to reverse economic emigration. What do you suppose is going to happen? If you were on a “bullet” train right now, you could spot me in a lineup going by. What does that tell you about the investment, grown men with no better idea than to play trains? The more things change, the more they stay the same. So much for America. How hard do you think it would be to shut down construction in San Francisco?
So, nature is distilling and corporate is aggregating. At top dead center, old man labor decides who will and who will not be working, net. At bottom dead center, an arbitrary, capricious and malicious teenage female decides who will and who will not work, aggregate. Women breed on wealth immobility. Men breed on income mobility. On the efficiency stroke, capital builds a slush fund of free money to begin the next round. That money only has value if labor chooses to accept it. With two senators, of course Vermont can inflate real estate with nothing more than drug dealers posing as farmers.
You are at bottom dead center and capital is maximizing the slush fund, by liquidating the middle class, with maximum expediency, short term behavior. The “good” thing about being at BDC is that you can easily pivot into another economic dimension, because you can zero out all the equations and there is no difference between the integral and the differential. It’s a true lottery. The “bad” thing is that the economy of those that do not pivot will collapse.
Time is a tree of pendulums, and at the base of those pendulums is a fulcrum. If there is no perception of a pivot, you have distribution tides, between labor and capital, which will build quantum momentum, loading the spring action. The minute fulcrum triggers the hour fulcrum. If there is no perception of a pivot into a non-linear dimension, the status quo continues in the linear dimension until another dimension is recognized. When that happens, the non-linear dimension becomes linear relative to another quantum non-linear dimension. A relatively stable vortex is one thing; a moving vortex is another. Timing is everything, when you inject the nitrous.
You have a bunch of monkeys, working for an ape, all randomly punching keyboards, beginning with the letter A. One monkey gets to C by going through B. Most of the other monkeys copy. The Ape reproduces the algorithm. Another monkey goes to E through D. The ape now wants a bridge from C to D, upon which he can charge a “property tax” at the least cost and greatest revenue. What do you do?
In a couple of minutes, I can write an algorithm that will wipe out a million middle class jobs, and capital will gladly pay me a percentage, assuming that it can strong-arm it back at a later date. Liquidating an economy is easy. Building one is complex, tedious, and has no immediate payoff, because the process works against capital mythology, that capital is all powerful.
Banking is a family business. For labor, children are an investment. For capital, children are a source of slave labor. The process is not rocket science, but the middle class gets it wrong nearly every time, until it doesn’t. Life is a battery, which is why capital, for all its money, can never successfully build one. All capital can do is present its latest failure, hoping to profit before backlash blows it up. The middle class chases its own tail accordingly in concentric circles.
There are precious few on this planet that can argue that they were not warned to increase their distance from capital. The Japanese had every reason to evacuate their big cities before the A-bomb was dropped. What do you suppose they were thinking when they realized they were at ground zero? What do you suppose their dependents have been thinking since? What happened during the Eisenhower administration? Truman sold out his own, which is exactly what should have been expected, as has Obama, for a few trinkets and a round of golf. They always do.
No matter where I go, there is an old man waiting to give me his property, because he instantly recognizes that I can put it back into production and extend his life. If I don’t show up or do not accept the property, which I will not do without a wife that listens without reservation, the economy collapses. You don’t have to understand the system. I even did you the favor of eliminating the mathematics. All you need to understand is that you are the nitrous oxide. I have been ready to meet my maker for quite some time.
If you no longer have Willie Mays, all you can do is advertise, ending up with Barry Bonds, a shadow of the immortal. Do you really think you are going to find a Willie Mays among pot farmers wearing firefighter suits in a bubble built with monetary steroids? As a black man said, “ politics is drama for the ignorant.” Buying PM to hold with US dollars is like the Fed buying Treasuries. JPM holds all the best cards either and both ways.
Hiring in San Francisco Pauses…
If Warren Buffet is not a train/oil/bank “Robber Barren,” what is he? Take a look at his leverage system.
(let’s watch and see, from a distance)
… Thanks Yves, … the link to Prof. Hudson’s article “From Marx to Goldman Sachs … ” will help me to add context to the interview on TRN. … i posted a brief comment there which i will repost here, just to add something to the conversation … i wrote … ” Thanks Paul,… i appreciate Michael Hudson’s opinions and passion to articulate an alternative. … Further, a comment below expressed the frustration felt when people know that the system is ‘designed’ against the ‘social contract’: that the ‘abuse’ felt world-wide, is an inherent characteristic of the major global institutions maintaining the neoliberal, crony-casino capitalism’s oppression of sovereignty and democracy. i believe Micael Hudson speaks of how finance is todays WMD … aiming to centralized global control of the socio-political-economic system in this material consumer based world . … In any case, based on my feeling that the parameters of the discussion are not comprehensive enough , if time permits, would you expand the narrative such that … Prof. Hudson might speak on … how the financial sector and fictitious speculative money has been used to destroy the sovereignty of nations and remove any chance for deliberative representative democracy ? … Maybe Prof. Hudson would speak on the macro supra-sovereign trade deals coming down the line (TPP,etc), as representative of the new world order. … Banking is just the tip of the iceberg which has so much momentum . … with respect … phrase … “
Public or private, profit-making or “non-profit” … the whole article and discussion here ignores the fact that in this case, regulatory methods drive results.
Killer example? We have a public, non-prifit Congress, POTUS and SCOTUS.
Nothing’s prevented THEM from being pawned either. Get real folks. FOCUS!
ps: If Goldman Sachs ever develops an interest in North Dakota, don’t think for an instance that the Bank of ND couldn’t also be quickly bought.
Perspective. We’re helpless without it.