Originally published at the Institute for New Economic Thinking website
Adair Turner, Chairman of the Board of the Institute for New Economic Thinking and former Chairman of Britain’s Financial Services Authority (2008-13), is the author of a new book that takes aim at economic and political orthodoxies, Between Debt and the Devil: Money, Credit, and Fixing Global Finance. As Turner sees it, policy makers and economic thinkers across the globe remain in thrall to the belief that only unfettered financial markets deliver the best for societies. The resulting bias favors fixed rules and mathematical models often wildly out of touch with real world conditions. Turner calls for a reality check — the recognition that circumstances change, that the future is uncertain, and that we need flexible approaches to shifting market circumstances at a time of inequality and instability. He warns that taboos against printing money and disproportionate fears of fiscal deficits are keeping central banks from taking crucial measures to stimulate economies. These taboos and fears also make us blind to the threat of out-of-control private debt and credit wasted on real estate and speculation rather than growth that lifts everyone. For Turner, thinking radically is the most practical way forward.
Lynn Parramore: You’ve noted that economies have become dangerously focused on credit in recent decades and that rising inequality is connected to this trend. Can you explain the link?
Adair Turner: If you look back at the story of advanced economies over the 20 years before 2007, you see an interesting pattern. During that period, the total value of national income — what economists call “nominal GDP,” meaning income unadjusted for inflation —grew at about 5 percent per year in a reasonably steady fashion. The central banks patted themselves on the back and said: This is great! Things are running smoothly. We’ve got the “Great Moderation.”
Yet during all of that time, the value of all credit, unadjusted for inflation, grew at about 10 to15 percent per year. At the time, it seemed like we needed that pace of credit growth, but when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem. This isn’t a stable system. In my view, one of the reasons that it seemed that credit had to grow faster than total income was rising inequality.
LP: Why are people borrowing more when inequality is rising?
AT: The richer people, when they get another $100,000, or another million, or 10 million, don’t tend to spend it as much as the poorer people would if they got another $100 or $1,000 or $5,000. All the empirical evidence suggests that the rich tend to consume a lower proportion of income than middle and lower-income people. So rising inequality can lead to a major problem with the demand for goods and services. The rich aren’t spending their additional money, so overall, more money gets taken out of the economy. Unless the richer people decide to invest their money, there would be a slowdown in the economy. This idea goes back to economists like John Maynard Keynes and Alvin Hansen.
But before 2007, we didn’t have a slowdown. Instead, the savings of the rich ended up going through the financial system and being lent to middle and lower-income people, who had 30 years of no real income increase whatsoever. The figures for the U.S. are really quite startling. If you look at the bottom 20 or 25 percent of the population, their real wages haven’t gone up for about 35 years! Meanwhile, the incomes of the top 1 percent have gone up 200 percent. This is a dramatic increase. The savings at the top have to go somewhere. At the bottom, there is a group of people who don’t feel that they’re participating in the growing prosperity, so they become very vulnerable to the delusion that if they borrow the money and buy a house, they’ll make up for their lack of real wages by house prices always going up.
LP: For a while, it seemed to work. People felt like their house was the ticket to prosperity.
AT: Yes, for the decade leading up to 2007, a whole lot of people who weren’t getting raises felt that they were doing ok because they managed to buy a house that was going up in price. But it all came to and end, a catastrophic end. Rising inequality can create a more highly leveraged economy, and it can then make the economy vulnerable to a crash like 2008. And in that crash, the really malign thing is that the crash itself tends to further increase inequality because it tends to be the people at the lower end of the wealth distribution who were highly leveraged and had to borrow lots of money to buy their house. In the downswing, they lose all the wealth they’ve got.
There’s a wonderful illustration of this by Atif Mian and Amir Sufi in their book, House of Debt. They show that the process of debt-fueled booms and busts is a very effective way of periodically redistributing wealth from the poor to the rich.
LP: What can we do about this? Are we making any progress in stabilizing the financial system and getting all this private debt and inequality under control?
AT: I do think that we need far more radical policies than we’ve had so far. I spent 4 ½ years of my life from September, 2008 to March, 2013 deeply involved in all of the details of the re-regulation of the global financial system. I was the chair of the main policy committee of the international Financial Stability Board and deeply involved with designing Basel III, which overhauled rules on banking. I was knee-deep in the nitty-gritty. I would defend what we’ve done and I think that the job we did has helped make the financial system itself more stable, and therefore less likely to cause a rapidly-developing crisis of the sort that developed in 2007-8.
That is the good news, but I think we’ve made almost no progress at all in dealing with the fundamental drivers of economies that are too reliant on debt. We have not dealt with the fundamental fragilities that arise from inequality, from the bias of the lending system towards real estate, and from global imbalances. I think we are still stuck in a post-crisis malaise — you see it less in the U.S. but you can clearly see it in Europe or Japan. Even in the U.S., the pace of job creation has picked up, but employment rates are still well below what they were in 2007. Real wages have not gone up. The capitalist system is not delivering those decade-after-decade increases it promised. We’re not where we should be in terms of our national economies. We don’t know how to get out of this malaise and I think we now have to consider more radical policies. That’s key to moving forward, particularly in Europe and Japan.
We need more radical policies so that we don’t just repeat the debt-fueled booms all over again and do another blow-up in 2025 or 2035.
LP: If you could wave a magic wand and put one of these radical policies into action, which would you choose?
AT: Today, because the Eurozone is in a very vulnerable position, I would like to see a small, coordinated fiscal expansion in all the countries of the Eurozone simultaneously. We would have to do it in that coordinated fashion across all member states because there isn’t a central federal budget within the Eurozone system. We could have a proportionally equal fiscal expansion in each of the member countries, financed as a one-off by the European Central Bank. Now if you print that, many people in Germany will just sort of explode over their morning coffee! But I have argued this in Germany and I have very good relationships with many German economists. Lots of them share my analysis of how we got it into this mess but they are very wary of agreeing to my proposal for how we get out.
LP: Do you think it could really happen, this expanding of public spending?
AT: There’s a very particular reason why this won’t happen in Europe. You asked me if I could wave a magic wand, right? Waving a magic wand means that you are free from all the classic, nasty, tricky bits of politics. In Europe, those are even more difficult than in any other country. Suppose you said, ok, I’m going to expand public expenditure in all these countries simultaneously. The German taxpayer, with perfect legitimacy, will say: Do you promise me that this public expenditure is honest and clean, and not some of the corrupt practices that we’ve seen in Greece? Can you really credibly promise me that this is one-off? That it will be moderate? That having agreed to it this year, you won’t come back next year and say, oh, let’s do a bit more of it? Convincing people is difficult enough even in one country with one central bank and one electorate that feels it’s part of one nation.
To achieve that degree of coordination and trust within the extraordinary, wonderful, and yet difficult thing that is the European Union — it is probably just impossible. What I say in the book is that the Eurozone will have to progress to a much greater degree of federalization with an element of a federal budget, federal taxation, and federal expenditure. If it can’t agree to that, it would be better to break up.
There need to be changes in who does what. There need to be changes to the constitution of Europe. I fault myself: I didn’t get it right in the late 90s. I was, in principle, in favor of European monetary union. But I think the experience has clearly shown that this is an incomplete political and economic union. The unsustainability of the political constitutional form has made the impact of the debt overhang even worse in the Eurozone than in countries such as the U.K. or the U.S. In the latter two, debt overhang has still created huge problems, but they haven’t been multiplied and made even worse by an inappropriate set of constitutional structures.
LP: To move forward, do we need to fundamentally change the way we think, particularly about the financial system?
AT: My work suggests two particular areas which economic theory has not paid enough attention to. One it used to pay attention to, and then it forgot. This strange amnesia concerns the role of the banking system in creating credit, money and purchasing power. It is absolutely fundamental to how a monetary economy works.
There were economists of the early 20
th century like Knut Wicksell, Friedrich Von Hayek, and John Maynard Keynes to whom that was obvious. Also Irving Fisher, Henry Simons, and Milton Friedman in his earlier writings. Then something very odd happens in the 1960s and 70s — economists stopped talking about the banking system and the credit system. We then develop a set of modern monetary economics—whether New Keynesian Economics or New Classical Economics — where we imagine that we can think about the dynamics of the macroeconomy without a rich understanding of the banking system and without understanding that the banking system creates credit, money and purchasing power.
We have got to go back to that. We’ve got to integrate that within our models and integrate that within our thinking. And reading some books written as much as a hundred years ago is a good starting point. In my book I quote, at some length, a book by Knut Wicksell called Interest and Prices, published in 1904. Remedying this amnesia is one of the priorities of the Institute for New Economic Thinking, so ironically we have to start by reminding ourselves of some old thinking.
The second crucial area of economic theory, which I think is more new because the phenomenon is new, is that we need to focus on the importance of what economists refer to as irreproducible existing assets, and particularly land. Everybody’s probably heard of Thomas Piketty and his Capital in the Twenty-First Century, a very important book. Piketty describes very significant increases in the ratio of wealth to national income, rising in many advanced economies from about 2 to 3 in 1950 to about 4 to 6 today, and he develops a theory of why that occurred. But what is striking, when you look at Piketty’s own figures, is that in countries like the U.K. and France and in several others, though not quite to the same extent, the majority of all wealth resides in the value of urban real estate. And the vast majority of the increase in the wealth-to-income ratio, which Piketty describes, comes from the increase in the value of urban real estate. The majority of that increase derives, in turn, not from new construction investment but from the increase in the value of land.
If you pick up an economic textbook, it will always describe capital like this: capital in year two is the same as capital in year one, plus net investment in that period. We have complicated mathematical theories of the determinants of returns on capital, returns on labor, in which we talk about two factors of production, capital and labor.
Well, it turns out that there is a lot in the economy that you can’t think straight about unless you add a third thing, which is land, where the value of that in year two has got nothing to do with new capital investment. It’s the land in the previous year, plus or minus what happened to the price. That makes land quite different in the economy.
LP: Are these two things related, the role of the banking system and the distinct role which land plays in the economy?
AT: Yes. You need these two things together to understand how modern economies really work. Instability mostly comes from the interface between the fact that the banks (or shadow banks) can create credit, money, and purchasing power in infinite quantities if we don’t constrain them, and the fact that credit is primarily created to fund the purchase of urban real estate and land, which is somewhat fixed in supply. In economics, when you put together a highly elastic thing and a highly inelastic thing, you create extraordinary potential for turbulence, volatility, and for unstable prices. Both of those issues are largely absent from the way we have taught economics over the last 50 years.
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Love the headline. Radical thinking is absolutely required. What I think is interesting to mirror back to this dialogue is how traditional it still sounds. It is still ultimately rooted on things like GDP as a measure of the economy and the notion of a middle class and the general intuitiveness of growth. For example, I found this explanation illuminating:
At one level that’s true. But at another level, it’s remarkably ignorant for someone extolling us to think radically about inequality. People in the lower socioeconomic classes do not borrow money to buy a house. They rent housing – substandard housing, at that. Renting households are much poorer, both directly in terms of financial balance sheets and indirectly in terms of influence in neighborhoods and political processes and social circles, than homeowners.
Moreover, there are deeper public policy issues that affect the most disadvantaged and voiceless members of society much more than the choice of whether or not to stretch their budget to a take out a loan to buy a house in a ‘good’ neighborhood (there are many houses for sale – and even vacant lots – in the less desirable areas of our country). For example, we run the largest prison system on the planet. Heck, our prison system is the primary vehicle for delivering publicly supported mental health services. Lots of educated Americans pocket a rather comfortable paycheck targeting poor and minority communities through the legal system. Indeed, the wage inequailty in public spending is a direct cause of the systemic oppression and injustice which falls so harshly on the unluckiest members of our society.
That’s the kind of radical thinking we need: making economics address issues that are generally taboo to discuss in polite company.
>> At one level that’s true. But at another level, it’s remarkably ignorant for someone extolling us to think radically about inequality. People in the lower socioeconomic classes do not borrow money to buy a house. They rent housing – substandard housing, at that. Renting households are much poorer, both directly in terms of financial balance sheets and indirectly in terms of influence in neighborhoods and political processes and social circles, than homeowners.
I am going to quibble with this. Up to the housing crash, new homes were so available that literally any one could buy a home. As was said elsewhere, “Liar loans.” It had even cut into the rental markets. So yes, the lower and middle social strata were barrowing to buy homes.
I do take issue with this statement however. “…they become very vulnerable to the delusion that if they borrow the money and buy a house, they’ll make up for their lack of real wages by house prices always going up.” This I find an absurd statement that is factually untrue. No one INTENTIONALLY barrows more than what they can afford. And when they are faced with stagnate or falling income, the barrowing attitudes are adjusted downward to remain within their means – not upward in order to compensate for lost income. (That’s why we don’t see homeless people taking out massive loans.)
The problem faced by most barrowers however is one) the rising market gave the appearance they were barrowing within their means. And two) Official consoling not only recommended expanding credit – but encouraged and enabled it. The only real “vulnerability” here was that the people make the mistake of believing the experts.
What happened was that the conditions of the economy changed – when the experts were convinced that it would never change.
I think it’s somewhat location dependent, somewhere rural and cheap is going to be different than most of the major cities in the U.S.. And most of the decent sized cities on the East and West coast and some of the Midwest in the U.S. are approaching unaffordability it seems, not just the usual suspects. Economic basket cases like Detroit can of course be excluded. So I do think that in most urban areas of the country poorer people tend to rent. And if we’re talking straight out “the underclass” they rent (other than the homeless who are the most extreme case, having nothing).
I don’t’ believe noone borrows outside there means. Way too rosy a view of human nature. The whole crash of 1929 was people borrowing beyond their means for stocks. And the same can happen for housing if people hope to get rich. But I don’t think that was everyone’s motivation either, I think some were probably just over their head in their understanding of what they were getting into, and some people’s means of course declined and they didn’t predict losing a job or something, that can happen to anyone. But some people will fall for get rich quick schemes – of course they will!
I think you’re drawing out what bothered me about Turner’s particular approach here. I don’t disagree with your quibble in that lots of marginal borrowers did not intentionally borrow more. The lack of agency in Turner’s analysis is rather consistent with the general hesitancy in established economics to employ the f word and hold people in positions of power responsible for their decisions.
My observation, though, was that Turner speaks as if marginal home-buyers [forced by the looting class into] stretching their budgets with borrowing are the bottom of the socioeconomic ladder. This is the huge blind spot in the intellectual bubble world. It is strictly taboo to talk plainly and clearly about the reality encountered by those actually at the bottom of the pile of systematic oppression and injustice.
Their invisibility is part of the complicity amongst educated thinkers who should know better; their dehumanization and deprivation of dignity is the whispered threat to the lower middle classes hanging on by a thread to not cause too much trouble lest you end up in the same boat, figuratively (and sometimes literally) disappeared into nothingness.
In order for the purchase of a house to be a profitable venture the value has to raise faster than the carrying costs and the cost of buying and selling.. Carrying costs include insurance, taxes and maintenance/general repairs from both obsolescence and wear just wearing out. When was the last time you had a house painted or a new roof put on or replaced the floor coverings or…. This whole theory of houses I think has more to do with the public, which is not very sophisticated, buying into false premises and false promises sold to them by the financiers who wanted them to borrow money from them. House prices have gone up more because of the lowering of interest rates than any other reason. The sure didn’t go up nation wide due to rising income of the average worker as that has been debunked. There wasn’t any. Add in the Venture Capitalists and the Private Equity who purchased hundreds of thousands of homes after the big event and house prices and rents have be artificially manipulated upward. Many people have been taken for a ride on a house and this ride is partially why the recent retail sales numbers have been bad. Money into a house rather than any where else. A house is a tool, a place to live and store your things and every thing else is emotional. Emotions can be manipulated by a smart salesperson. And have been for years now.. The American Dream is the American Nightmare.
As for Turner thinking out side the box, it appears to me the only thinking outside the box he did was in coming up with the statement.
In the Information Age, the Financial Age, the real problems are income inequity. It is difficult to purchase the production with out adequate incomes. There are many things that need to be done but the money to do them is unavailable. It is all being accumulated at the top levels where those who control it don’t care about public schools or it seems anything other than accumulating more money. The ONLY way I know to redistribute this inequity is thru a progressive tax where the more you make, the higher percentage you pay in taxes.
Of course, then you need a functioning government that isn’t fraught with fraud and corruption for things to work.
Oh well
People will borrow a lot more than they are comfortable borrowing, especially when there is strong competition for housing. Turner is coming at this from a British perspective, there is a culture of buying “the most expensive house you can afford”. Maximising leverage to make the greatest capital gain. By and large this view has been vindicated by rising house prices.
Banks added fuel to the fire by increasing the maximum loan to income ratio, reducing the deposit and lengthening the repayment period. The criteria went from 3x salary, 10% deposit over 25 years to 7x salary with 0% over 35 years. People still levered up to the max monthly payment they could afford, finding they could “afford” more when more credit was offered. They think they are on a sure fire bet of ever rising house prices, so some people over extend themselves.
For washunate: some of those supposed policymakers are about 26 years old, wet behind the ears, and trying to figure out their own rent.
Carlos —
I live in the Seattle area, and its clear that people in Asia want their money ‘safe’ in the US. The Seattle area is desirable.
Under current US tax, and immigration regs, foreigners can ‘invest’ in ‘creating jobs in America’ and buy their way to a visa for $500,000. In addition, they can also buy a nice house — waterfront! — that they’ve seen on the Internet. Or at least, that’s what I’m hearing.
https://en.wikipedia.org/wiki/EB-5_visa
The values of properties are skyrocketing, and in large part is is being driven by ferocious levels of foreign investment. Failing to account for the role of land in economics has been a huge blunder traditionally, and I hope that Adair Turner’s work gets a lot of traction.
Anyone trying to find reasonable housing in the Seattle area no doubt agrees with me!
Buying or even renting housing is now risky, so no basis for economic justice:
https://theintercept.com/2015/09/18/leaked-seattle-audit-concludes-many-mortgage-documents-void/?comments=1#comments
Leaked Seattle Audit Concludes Many Mortgage Documents Are Void
…..
Better and though perhaps currently thought of as radical, this monetary reform has been initiated six times in our country’s past with brave Presidents like Washington, Lincoln and Kennedy. Protect all leaders who do this again:
The N.E.E.D. Act gives an Immediate, Seamless and Non-Disruptive Overnight Transition from a Crisis-Prone Bank Debt System to a Stable Government Money System.
http://www.monetary.org/
http://www.monetary.org/seamlesstransition/
The NEED Act is an elegant and simple law which overnight converts our crisis prone bank debt money system into a pure, reliable U.S. money system in fully secure accounts. It is painless, everybody’s money is maintained safe and secure, and all debts can be payable, meaning no losses from systemic defaults (thus restoring confidence in crisis ridden markets).
Overnight Conversion of Bank Deposits1
Upon the NEED Act becoming law, all bank deposits are designated and treated as United States Money (sovereign money, just as circulating coins from the U.S. Mint are now). All bank deposits become “safekeeping accounts;” they are no longer owed by banks to their depositors, as they now are; but are instead maintained in safekeeping for depositors (what people think they are now). They’re still exchangeable at will for U.S. currency notes and coins. This change happens overnight and won’t disrupt business. It relieves banks of a liability they now have to their depositors. All these liabilities (bank deposits) are equal in value to the bulk of the U.S. money supply.
In exchange for removing this liability from banks, an equal liability is put in its place which requires banks to pay over to the U.S. Treasury the repayments from outstanding loan balances2 due to them, when banks are repaid by their borrowers.3 The interest remains income of banks. This applies only to the amount of bank loans (or security purchases) that resulted in the creation of bank deposits out of thin air – from so called fractional reserve banking.
Thus overnight, banks are relieved of liabilities that might be payable at any time (whenever the depositor asked for them), and these are replaced with liabilities that are only payable as and when the borrowers repay their bank loans.
Any bank loans that arose from banks borrowing money from others will still be paid back to the banks’ lenders in the normal course of business.
Thus banks have no more liabilities in total than they had before.
Thus banks’ liquidity situation is dramatically improved, while their net worth is unaffected.
Also banks’ income situation is dramatically improved since they will no longer pay interest on deposit accounts (their main expense) and can instead charge fees for their deposit services.
It’s an Overnight, Seamless Transition to a Just Monetary System
As the principal on bank loans is paid over to the U.S. Treasury it goes into a “Revolving Fund Account” and is recycled back into the economy to maintain the money supply levels. The Treasury revolving fund can lend this real U.S. money back to banks if needed and it can provide funding to pay off the national debt as it comes due; it can provide (on a per capitabasis) interest-free loans to state and local government entities (including school and fire districts), and provide a source of instant funding in case of a national emergency. “
But Wait – There’s More – Much More”
The Fed presently holds about $4.2 trillion in various securities in its System Open Market Account (SOMA) as “backing” for present day currency and management purposes. Under the NEED Act these are no longer required4 and can be sold back into the market. This can easily provide funding for a onetime tax free dividend for all citizens living in the U.S. It could also be used to pay off all outstanding student debt (about $1.2 trillion).
As the economy needs more money5, the Monetary Authority will advise Congress the amount and the Treasury will be authorized to create it instead of borrowing/taxing, and can fund programs for infrastructure, education, assuring social security, and resolving mortgages, as authorized and appropriated by Congress (again on an equitable per capita basis).6 For example it can be used to fund a sorely needed national health care system.
The NEED Act also grants one fourth of all new money created each year directly to the states7 for their needs – for example pensions. Since the federal and state and local governments will have an interest-free source of money, they will normally no longer need to borrow. Thus as investors holding various government bonds are repaid; if they want to keep earning money from such investments, they will have to re-invest in businesses in the private sector, thereby generating more economic activity and more employment. Interest rates could fall.
Removing interest expenses from federal, state and local government budgets means taxes can be reduced, which would increase the disposable incomes of consumers and producers alike, thus generating more economic activity and thus more employment.
Good-paying jobs will be generated in engineering, education, health care, construction and manufacturing, estimated in 2012 at 27.2 million full-time jobs.8
In this way, the economy can generate enough income to pay off all outstanding debts. Therefore banks’ solvency situation is improved even if their net position is unchanged. As the NEED Act makes banks’ business model more profitable, it will enable banks to reduce the margin between the interest they charge and the interest they pay, which will be good for both borrowers and lenders, and the economy as a whole.
Summary
The NEED Act enables the Federal Government to achieve its mandate of full employment under the Employment Act, and enables the re-constituted Fed to achieve its “dual mandate” of maximum employment and stable prices under the Federal Reserve Act.
Thus the NEED Act enables a non-disruptive, seamless and painless correction to our presently mis-structured money system that is causing havoc and hardship.
The NEED Act is simple and not really radical in any sense because it is what our Constitution explicitly calls for and is essentially what most Americans erroneously believe we now have!
- money is created by our government, not by the banks making loans;
- banks are acting as intermediaries, borrowing money from some and loaning it to others;
- government has power to create money for infrastructure, education, and health care.
OK, so Turner has figured out land and money. As soon as he gets labor he will understand Polanyi’s three fictional commodities and maybe be able to see a way out of the neoliberal hall of mirrors.
+1
+ 2
The biggest mistake David Cameron made was firing Turner and hiring Canada’s dipshit former governor of the Bank of Canada.
I have a radical proposal that I would like to get a serious answer to from the MMT researchers. The US Treasury can deposit into the Social Security Trust Funds, including the disability fund based upon the the stock buy backs of corporations which simply takes cash and destroys it by converting into outstanding shares of stock in their buy back offers to shareholders. It seems to me, the cash on the balance sheets represents profits that could have been wages and benefits commensurate with increases in productivity, but instead are used in financial engineering to reduce the amount of outstanding shares via buy backs. The shareholders get cash, fine. The corporations take shares and destroy them, raising the price per share of remaining stock. Fewer shares outstanding create fewer opportunities to buy into a profitable company, raising their share price in the market, fine. Without taxing the profits, the US Government can develop a policy to deposit an amount equal to the dollar amount of buy backs into the Social Security Trust Funds.
The asset of stocks is being destroyed, serves as a real measure of the wealth produce by business, that they do not even want. The public can be served by using this abandoned asset as the basis for distribution of surplus wealth. The people who have worked and paid into the Social Security system represent the uncompensated labor that contributed to the productivity gains. The nation state can serve as a distribution mechanism of surplus wealth, based on the policy of credit creation without debt or taxation by coupling the working system of Social Security, which is directly tied to people who work for a living and contribute a portion of their pay to fund this social insurance program. The inequality, which is bad enough serves up an additional slap in the face for extra measure in the form of stock buy backs, which are based upon profits that could not be used for real wage increases, pension fund contribution or other benefits. The money which was saved out of the hides of the working population is simply destroyed, not used for any tangible purpose such as reinvestment in upgraded plant and equipment, expansion, better working conditions, higher wages and benefits. IT IS DESTROYED while we go wanting for jobs, and a better life. The Federal Reserve has said it could see printing money if there was an asset. Well, tell me that corporate stock is a worthless asset not to be used by the US Treasury to issue deposits dollar for dollar into the Social Security Trust. I would like to hear that argument!
Nice creative thinking.
Similarly all those dollars hoarded in tax havens by corporations and individuals…but just send equal checks to domestic tax filing households.
US Treasury actions and capabilities have nothing to do with corporate buybacks of stock, not should they. You’re mixing apples and ball bearings. And Social Security payments to citizens are mandated by law; it’s the social security payments into the system, the fiction created to make people feel they are contributing, that are destroyed.
The US Treasury simply issues Government Account Series securities to cover the annual Social Security nut amongst all the other government expenses including fed agency programs, salaries, real estate, building maintenance, etc. (The US Treasury collected a mere $2.6 trillion in total taxes in fiscal year 2015, hardly enough to pay for anything.)
In fiscal year 2015, the US Treasury issued a total $69.8 trillion in new USD via securities–$69,813,829,000,000–which pays for all the things mandated by Congress in the last 221 years. (It redeemed $68.7 trillion–$68,727,941,000,000–allowing US citizens to keep the difference, $1.08 trillion–$1,085,888,000,000–in their own bank accounts. The $1.08 trillion is noted on the US Treasury’s Daily Treasury Statement–the government checkbook–as “Net Change in Public Debt Outstanding”…aka the “National Debt,” the record of what the country owns, not owes.)
Corporate buybacks benefit management, who get bonuses for raising the value of the stock. That’s why they do it. It’s fast and easy. Productivity, “real wage increases, pension fund contribution or other benefits,” and capital investments, or new products, be damned. They want the short-term gain of a bonus. Buy the stock back, jimmy the value up, make a million or seven at Xmas.
Those shares aren’t destroyed. The company retains them, after paying the seller.
Rising inequality can create a more highly leveraged economy, and it can then make the economy vulnerable to a crash like 2008.
And Later:
I do think that we need far more radical policies than we’ve had so far. I spent 4 ½ years of my life from September, 2008 to March, 2013 deeply involved in all of the details of the re-regulation of the global financial system. I was the chair of the main policy committee of the international Financial Stability Board and deeply involved with designing Basel III, which overhauled rules on banking. I was knee-deep in the nitty-gritty. I would defend what we’ve done and I think that the job we did has helped make the financial system itself more stable, and therefore less likely to cause a rapidly-developing crisis of the sort that developed in 2007-8.
My first reaction on reading that was WTF? This guy is talking about inequality like it’s some inexplicable artifact of our economic/monetary system that just sort of pops up out of nowhere on its own. How F’ing insulting. No mention of the Federal Reserve or central banking in general and corrupt politicians as the main driver of inequality at all.
The fact is that any centralized monetary regime is prone to the abuse and corruption of those who are close to it, and that fact explains perfectly well why just about every centralized monetary regime we have to today is completely corrupt. Go ahead, create a new centralized regime based on whatever fancy ideology/theory you happen to believe in and that one will be corrupted too in short order. The problem lies in the basic idea that a centralized/controlled monetary system is a good idea at all; with such a system in place you will always have continually intensifying inequality, inequity, and injustice. Even if everything else is arguable, the basic precept has been bought into, even by the left, that will always guarantee that powerful and well-connected come out ahead.
You (meaning the citizen) are innocent until proven guilty.
Under the Constitution, the government is assumed guilty until proven innocent. Witness the 10th Amendment – The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
They didn’t trust the government (enough).
Prove yourself (here, meaning the bureaucracy) innocent, then you can have that power (or the People will grant you that power).
Trust must be earned. And you are on a budget.
Why would decentralised monetary systems be any less corrupt than centralised ones?
I don’t think you can get rid of corruption by simply changing the organisation structure from big to small. You really have to tackle the root causes, which are social problems and power structures.
Large organisations are constantly switching from centralised to decentralised. Centralised systems develop one set of problems, Decentralising cures some of those problems but in time a different set problems develop, so they switch back to centralised.
An absurd example: If less government cured corruption. Somalia would be less corrupt than Australia which is clearly not the case.
‘This guy is talking about inequality like it’s some inexplicable artifact of our economic/monetary system that just sort of pops up out of nowhere on its own. How F’ing insulting. No mention of the Federal Reserve or central banking in general and corrupt politicians as the main driver of inequality at all’
I felt the same thing. Good analysis as far as it goes, which is not far enough. Radical? Come. On. More like Limited Hangout. I appreciate having good cops like Turner and say Haldane, to balance out all the bad, but while they may serve to inch the Overton window leftward inside the Big House, genuinely radical movement must come from outside of the structure of greed that is strangling the rest of us. I wonder if working for (or is that ‘with’) Soros has any bearing on the distance he is willing to travel outside of the mainstream.
It’s great that Steve Keen’s debt/credit – money/banking doctrines are making headway into financial circles, likewise Henry George/Michael Hudson teachings about the value of land (real and imagined), and that nod to the notion of bubbles and busts being tried and true mechanisms for upward wealth transfer is very encouraging too. Even better is the hat tip to the need for monetary sovereignty should full fiscal and political union prove impossible.
But then,
‘I think we’ve made almost no progress at all in dealing with the fundamental drivers of economies that are too reliant on debt’
No allusion to the fraudulent conveyance of so much of that debt,
or the fact that there was not only no penalty for perps
but also no shirt loss thanks to the implicit Greenspan put TBTF backstop,
which means that the regenerative ‘creative destruction’ aspect of capitalism has withered
and that while profits from the above were privatised in favour of speculation and wealth-hoarding
at great cost to the real economy,
losses were socialised, handicapping those actors most likely to revive it, and their children and their children,
while at the same time the surplus productivity of the economy purloined thru this debt peonage trickled (nay, blasted) upward into realms where it could be safely offshored tax free and repatriated into
FIRE sectors which account for 8 times as much of the economy (as a percentage) as they did a generation ago, and
political and judicial and educational institutions and structures, in order to make them more amenable to ensuring a continuation of this state of affairs
‘We have not dealt with the fundamental fragilities that arise from inequality’
Ass-backwards – if we dealt with the arising of the inequality in the first place we would not need to deal with anything arising afterward. Prevention is better than cure.
The article was far more descriptive than prescriptive, coming across as educated hand-wringing, and when asked directly for solutions, he plumps for undefined ‘co-ordinated fiscal expansions’ but frets about Northern suspicion and ‘politics’ getting in the way of sound policy.
’employment rates are still well below what they were in 2007. Real wages have not gone up’
Job Guarantee. Legislated and government backed wage rises. Collective bargaining enshrined in the constitution.
There are lots of other ‘radical’ solutions not touched upon, and I guess it’s unfair of me to complain that Mr Turner doesn’t cover each and every one of them. Still, the absence of such ideas as North Dakota style public banking (or the Islamic option mentioned below) and interest free deficit spending for public goods, and also much enhanced regulatory control of finance – Glass Steagall, Tobin tax, clearing desks for derivatives trading – is a bit of a worry.
Greater understanding of the role of money, banks credit and debt, not to forget land is important, that’s true. And ‘fiscal expansions’ would have a role to play, no doubt. But they’re not really radical and they’re certainly not enough.
I agree w your comment jgordon. I was irritated by the hard title and the soft-to-pointless analysis. OK, go back to controlling bank-created credit, stg. like a modern gold standard. Then you have what we have right now, only probably worse bec. we’d be starting off with billions of already impoverished people. Focus on the disconnect between elastic money supply and inelastic land supply and control sales to maintain stability. I’m not sure what this accomplishes except an economy that is still impoverished but at least it is in balance. There are hundreds of other “assets” the rich and privileged can capitalize on without a shred of capitalism being involved: diamonds, patents, art, yachts, plantations, overstocked inventories, whatever. They can create their own 1% economy and lock the rest of us out. The instability the banksters worry about is always a credit bubble that blowsback on them, as bagholders. And they’ve even figured that one out with special securities and derivatives (illegally but who cares). When a finance person says they are interested in stability, that only means bank profit stability. We’d have more common-person stability under a lotto. Or a computerized financial system. Who needs these clowns?
The problem, it would still be the same kind of meaningless on-paper “economy” as currently thought of, which ignores all the externalities. (Damage to the environment, diminishing resource base, non-existent well-being in societies both “rich” and “poor” from the purely monetary perspective–a perspective that omits many of the most important considerations.)
The capitalist system is no more capable of promising anything than my pen is. Only people can make promises.
What person promised these “decade-after-decade” wage increases? Certainly not a person who actually understood anything about market-based economies.
Truly radical thinking would start with the premise that markets, as a method of allocating resources, would go into the dustbin of history.
Prices will also go into the dustbin.
What does it mean to pay $5,000 to get out of a disaster zone like Syria?
Can one’s life be measured like that?
When we exchange money for something, the act distills meaningful human interaction to zero.
Turner is in the “save capitalism” camp, he’s not that radical. He is however progressing in the right direction, we should thank him for that.
Probably safe to say the “markets” haven’t been a good mechanism to create and distribute wealth for many decades. In desperation we’ve tried everything to make it work and it has only gotten worse. Time for a new idea.
“To Fix Inequality and Steady the Economy, Let’s Think Radically”
OK……here’s a worthwhile article by Harris Irfan from The Guardian for consideration:
Could Islamic Finance Save Capitalism?
http://www.theguardian.com/sustainable-business/2014/dec/04/could-islamic-finance-solution-capitalism?CMP=share_btn_tw
The unusual thing about Islamic finance, is that essentially, it doesn’t allow for money to be made from money! You’re obliged to make money from tangible assets which you own but share risk over, and it doesn’t allow interest or ‘gharar’ (uncertainty……..ruling out speculative bets, short sales for example….).
> when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem
This guy was at an investment bank 2000-6. He went to the FSA in 2008. Late to the party as the UK was already inexorably going under but he did nothing to challenge received “wisdom”.
It was very clear the UK had problems. The phrase “liar loans” was in common use.
> But before 2007, we didn’t have a slowdown. Instead, the savings of the rich ended up going through the financial system and being lent to middle and lower-income people
Savings do *not* drive lending. Demand does. From the BoE blog who apparently Turner didn’t speak with when at the FSA:
http://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/
Turner is stuck in the old world. He’s a guy who won’t challenge authority if it means losing his pay packet. Forget this guy.
I don’t like Turner. I think his “softly softly catchee monkey” approach won’t work. The banks and the establishment know full well economic rent taxes the poor. That’s *why* they do it.
Agreed and well said. The person who got to the heart of the matter of bank created money as debt was Michael Rowbotham twenty years ago in his book ‘ Grip of Death ‘ which was a truly radical ( meaning thorough ) analysis of the stranglehold banks have over all of us on the planet because of their ability to create money as debt. Turner is no radical . He’s a good talker , but nothing more.
And Rowbotham proposed a negative interest rate. Interestingly, I haven’t seen any discussion about the significant potential benefits to economies if people had to pay a fee to “park” their money instead of using it.
A problem in modern society might be the hit on pension funds and Social Security, if interest rates were below zero. (But maybe not, if the “parking fee” were only for private citizens.)
Can you remember any other suggestions from the book?
I think you are wrong, Turner does get the monetary system. I’ve seen his work elsewhere. I think he is trying to explain in terms (he thinks) the general public understands. Most people still believe banks lend out deposits.
It’s a dilemma, do you use accurate terms and have it rejected by what everyone calls common sense or do you represent the intent of MMT using inaccurate terms that people do understand.
Maybe he “gets” the monetary system, but damage is done by assuming that changing the monetary system is enough when our understanding of what comprises the economy remains in a brainwashed state of denial about the things we exclude from considering.
It would be interesting to hear Mr. Turner or some other economic thinker answer this question:
Income inequality was arguably far less in the 1960s, the financial sector was restrained by sensible post-Depression regulation, credit growth was restrained, and the U.S. was largely a domestic manufacturing based economy that offered ‘good jobs’ to a wide cross section of the population — all things that now seem distant aspirations on the road to recovery of an economic golden age.
Yet during the same 1960s, U.S. inner cities burned from riots driven by rage over poverty. Today there is no hint (other than scattered outbursts in Ferguson and Baltimore) of any similar level of discontent.
Why is that? And does your answer at all illuminate the related topics of money, wealth and economic theory?
The fraud today is well hidden. Economic rent is the hidden tax. People do not know who to blame.
I agree.
You might say, in the 1960s, income inequality was less, but you had to ride in the back of the bus.
Today, 99% of us are riding in the back…thus, less discontent.
Turner is useful as he’s an insider who can help open the door for overt monetary financing. This helps to provide the firepower that would allow a suitably progressive government to tear down some of the rentier structures.
Don’t look a gift horse in the mouth. I’ll take whatever breaks we can get.
The twin pillars of reactionary messaging are deficit reduction and small government. Both are there to prevent any form of nationalisation or socialisation that can break up the rentiers institutions.
you imagine that it matters. Turner has no idea about what to do because things are so far out of balance that the wheels are going to come off the bus and the bus is going to crash. His idea of inflating away the debts is delusional. Get all the countries to increase their spending… Make everything even by filling all the holes by devaluing someone elses assets.I’ll dig up your road to fix mine, ignoring that the problem is the wheels are severly out of balance.
I hope your not wishing for a complete meltdown so a new brush can sweep clean.
Don’t know who will end up sweeping away who.
We need to use new ways of interacting–financially and otherwise–right now. We can’t wait for government and institutions to change, or we’ll be too late. The good thing is that we can put new principles in place in our daily life–if we want to, and if we have sources to resources that demonstrate what that might look like.
That’s why I mention David E. Martin’s work. He’s been actively doing this for over twenty years, in >160 countries, including projects large and small.
One doesn’t have to follow in his footsteps. But he shows that one can’t wait if one wants to move forward. And he has the credibility in terms of his government, business and finance experience. What he does is practical and honors individual human creativity and well-being in the process.
I like to blame the banks, but when I stop to remember the 80s I have to make myself back off because it was the politicians who set the agenda for free-market finance. The beginning of it was not unregulated banking, that came later in the 90s, I assume the thinking behind it was to release the awesome power of capitalism and the world would be ours. Our delusion. But what happened was trickle-down. Supply side economix was intended to preclude inflation of the demand side, of wage and price increases, because that inflation devalued the dollar and a strong dollar was the biggest weapon we had in the Cold War. A strong dollar and a fake and hollowed-out economy. And then trickle-down promptly turned into a necessity – we began offshoring everything, even the stuff that was nailed down. Supply side sucked all the money straight to the top.
Problem? What problem? The FIRE sector is doing well, and plans on being bailed out, or bailed in, after any “who could have foreseen,” event, because:
bribes to politicianssystemically importanteffluenceimportance.‘The figures for the U.S. are really quite startling. If you look at the bottom 20 or 25 percent of the population, their real wages haven’t gone up for about 35 years! Meanwhile, the incomes of the top 1 percent have gone up 200 percent. ”
http://www.oftwominds.com/blognov15/social-disorder11-15.html
We have pretty much turned out economy into all finance all the time – the only way you can make any money is with gobs and gobs…and gobs of money – “investing” or hedging, entrepreneurial doodling, or loaning, or any other bullsh*t term you want to conjure up. And if your rich enough, and lose enough money, well – the taxpayer eats your losses (OH YEAH, the banks paid it all back!!!! Those rich people sure are smart – they always get richer and we always get poorer….God sure must love the rich)
It seems pretty simple to me.
What seems remarkable to me is how the very, very few can manipulate the very many so very, very well…
THINK HIGH UNION DENSITY — for SUBJECTIVE satisfaction automatically:
I am working on a — or working out — a socio-economic market theory (theory may be too grand a word) that high union density automatically leads everyone to feel SUBJECTIVELY satisfied and successful about their economic level — regardless of their ABSOLUTE level.
IOW, in 1956 workers earning the $8.75 minimum wage thought they were doing okay — and were willing to work at it w/o the excuse that they were making a better life for their immigrant children or whatever (think today’s taxi drivers). In the movie Bye, Bye Braverman we see upper middle class Manhattanites living in their small upper West Side apartments — happily — no thought of more space or up-to-date kitchens (whatever the latter might be). Ditto in 1956 for $500 a week cab drivers. Subjectively content because they are doing alright for their economic era.
Collective bargaining, by definition, brings all three sides — labor, owners and consumers — together on an even power plane where they all tend to receive something like equal human satisfaction. Subsistence-plus wages (plus an increment or more depending on how much we want from employees) by definition leads to endless squeezing of more for less (especially as employees gradually get used to getting less — or are even undercut by immigrants who will take less to start with): AUTOMATICALLY resulting in subjective unhappiness with your economic level in your economic era — whatever your absolute level might be.
In the 50s and 60s (white) economic contentment ran by auto-pilot (fair political power balance too) on high union density. Density or doom — that’s the struggle.
$8.75 minimum wage in the 1950s? $500/week cabbies in the same decade?
I don’t think so. My dad never made more than $8,000 a year in the 50s. On that, he supported a family of 5 and sent two sons through college without any college loans. Both of my (MUCH older) brothers worked while they were in school of course– and graduated from Amherst in one case and Oberlin in the other.
And it still might work today.
Aren’t there Harvard students from China whose parents make less than $30,000 a year? I don’t know, but I am guessing there must be some.
Scholarships? 2 parent families working two jobs each and the Students working as well? And possibly the extra moonlighting jobs in combination with financial aid and or a loan?
FWIW, $8,000 in 1956 equals $70,000 today, in inflation adjusted dollars.
http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=8%2C000&year1=1956&year2=2015
$8,000 in 1956 = $70,000 today your source says. Ha, I say! No way could Carla’s father replicate his success today with that income.
Trying to fix the human-created game we call the economy?
Isn’t the elephant in the room that all ‘economic’ thinking is based on wishful-thinking humans creating a game with special rules for the elite minority, rather than evolved from an understanding of any natural physical reality beyond the extractive limits of various materials – and is thus a) fictional bullshit; b) in no way ‘fixable’; and c) cannot even see through its own dumbshittery (Upton S. And all that).
The Miami Beach idiocy is just one of a host of examples.
I suggest we need a new distribution/motivation technology just as we need new social and political technologies.
Old ones provably DONT work…didn’t Einstein have a statement about relying on already failed strategies..?
I am for ‘change from the bottom.’
No more token Nobel Peach winners.
Just implement the People’s Money…and since money = power, the People’s Power.
I second that.
I think Turner, in his new book, raises some great issues: For example:
Turner states:
” As Freidman illustrated, deficient nominal demand is one economic problem to which there is an obvious and always possible solution–money-creation by government fiat…But using central bank money to finance fiscal deficits or to write off past public debts remains a taboo policy, and for some good reasons. For if we first admit that money finance is possible, how will we ensure we do not use it to excess.” (pg.230).
“..if we allow governments to run money-financed fiscal deficits there is a danger that they will do so in excess or will allocate the spending power inefficiently for short-term political advantage. One of the books messages is that we must not assume private credit creation is perfect nor treat fiat money creation as taboo, but neither should we iconize fiat money and demonize private credit.” (pg 189)
“Allowing monetary finance is dangerous, since governments may create fiat money in excessive quantities and misallocate the resulting spending power to inefficient ends. But the alternative route to adequate nominal demand–by means of private creidt creation–is also dangerous, since free financial markets left to themselves are bound to create credit in excessive quantities and allocate it inefficiently, generating unstable booms and busts, debt overhangs and post-crisis recessions.” (pg.239)
“Pre-crisis orthodoxy treated free market private credit creation as by definition optimal and fiat money creation as in all circumstances dangerous–the work indeed of the devil. But in fact we face a balance of risks and benefits. A totally relaxed attitude to private credit creation produced the crisis; and a total prohibition on fiat money creation has made recovery weaker than it could have been . Absolute beliefs and simple rules are dangerous.” (pg. 250-251).
The point about govt printing money being taboo amazes me. How much money did the banks print ramping land prices up to 2008? The state would never have dared to go that far.
I don’t understand why people would not want, in a capitalist economy where money is god, that money created by the state. It’s then under democratic control.
Well if the state was under democratic control …
We are definitely not supposed to know what Government is capable of doing.
Recalling this article from a couple years ago, I too appreciate Adair Turner and look forward to reading his book:
http://blogs.reuters.com/anatole-kaletsky/2013/02/07/a-breakthrough-speech-on-monetary-policy/
folks need to read henry george and mario gissell about the role of land and money, and why the way money works is bound to create problems.
the reason why you will never get a resolution is that the people who benefit from the crisis run the system. Not one economist or central banker got fired due to the crisis. Bernanke got fired for trying to end the QE, a way to print and give money to the oligarchs. basically power is never given up without a fight. With every crisis they grab more and more power (“financial repression”) to extract more rents.
I grew up ( late gen-x) with the idea that the American dream was to become wealthy. Wealthy is a relative term, so we can’t all be wealthy. Thus, the American dream is to be richer than one’s friends and neighbors. My dream requires your nightmare. I wonder if the American dream was different before my time. Maybe it meant being successfully middle class in an improving socioty. As for prescriptions, we just have to stop accepting nice euphemisms and recognize hoarding for what if is. When we do this as a socioty, the solutions won’t be so difficult. We are a “Christian nation” and Jesus did not think highly of the rich. A wealthy Christian is an oxymoron.
The UK and the US seem to have one thing in common: it’s acceptable to trick your way into money and then use this to have other people do work whilst you kick back.
Yes there will always be scumbags – but this is *mainstream* thinking now. The phrase “it’s business” covers all immoral behaviour.
Until this is unacceptable by the majority these places will see inequality rise as the proles fight over scraps in a game they don’t know they cannot win.
And you know what – these people looking to do this – I don’t care if they fail or if their culture is eventually destroyed. It’s vile.
I’m no longer religious. Perhaps this is due to the idea (modern i think) that “Jesus wants you to be rich”. Does this mentality exist in the UK? Christianity came to dominate the West by appealing to the lower class of the Roman Empire. It seems to me that wealth has often been an embarrassment requiring repentance in the forms of charity and public works. “Love you’re neighbor as you love yourself” is irreconcilable with personal wealth. I hate to focus on religion, but that is the basis of our ethics, and without the right ethos we will always be playing wack-a-mole in a losing battle against hoarders.
Christianity has been corrupted and convoluted to fit into the “capitalist” way of life. The “Jesus wants you to be rich” is just a justification for the relentless individualism and focus on accumulation to the detriment of everything else.
Then, there is the ‘I want to be rich so I can help the world’ siren song.
Many would sell their souls to have that talking arrow-point in their quivers.
Jesus… Massive socialist.
Jesus… massive ghost writer….
Skippy…. no sales traction till empire incorporated it into the larger narrative…
Also: http://www.micahbales.com/jesus-anti-capitalist/
You are right. Wealth is relative.
The brainwashing is to get one to think that wealth is absolute. So, to address wealth inequality, they get to think about a larger pie, so your smaller share of the bigger pie is just a little bigger than your old share of the previous smaller pie.
What is the external cost here?
Well, let’s ask Nature about all the concrete poured in China to stimulate her economy.
We could have a proportionally equal fiscal expansion in each of the member countries, financed as a one-off by the European Central Bank.
This guy’s idea of radical thinking is pretty humorous. The above statement is more of the same that has been done for 30 years. Or we could get real radical and do more of the same at a much higher level like the Japanese have done. All this does is lead to more of the rich getting richer. Those closest to the stimulus get all of the money!
Oh and history is full of examples that there is never just one hit of the bong! The first hit did not get us where we are going (but did not kill us) so let’s make it a second bigger hit this time. Still not enough and we are still alive so let’s go really big for a third one (I promise it will be the last).
Oops, we are on a gurney in the morgue!
Think radical?
Adair Turner: If you look back at the story of advanced economies over the 20 years before 2007, you see an interesting pattern. During that period, the total value of national income — what economists call “nominal GDP,” meaning income unadjusted for inflation —grew at about 5 percent per year in a reasonably steady fashion. The central banks patted themselves on the back and said: This is great! Things are running smoothly. We’ve got the “Great Moderation.”
Yet during all of that time, the value of all credit, unadjusted for inflation, grew at about 10 to15 percent per year. At the time, it seemed like we needed that pace of credit growth, but when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem. This isn’t a stable system.
So, it took $2.50 of borrowing at interest to increase GDP by $1.00
How about firing economists en masse because they are worse than useless idiots. Their seat at the policy table for the last 70 years has been a disaster, and are now costing everyone so much money, one might as well call their salaries theft.
But before 2007, we didn’t have a slowdown. Instead, the savings of the rich ended up going through the financial system and being lent to middle and lower-income people, who had 30 years of no real income increase whatsoever. . .
Loanable funds has been debunked here so many times, I take his claim as evidence that Adair is clueless. If he has any authority at all, he should fire his underlings as a first response, and then himself.
Never mentioned, is supply and demand. Globalization has exponentially increased the supply of labor, with no corresponding increase in demand. That’s what you get when the elite can pay Chinese slave labor, slave wages. How many people think it’s normal that 99% of consumer electronics are made in China?
No economist I have ever heard from, addresses this. It’s as if talking about supply and demand is taboo.
Think radical? Remove the tax deduction of paying interest on borrowed money for corporations.
I noticed that too but you filled it in for me some, thanks. Not to beat a dead horse but I don’t know how else to make it run, moslers interview with bernanke where he dismisses anyone who’s not an economist is telling in this regard.
I spent 4 ½ years of my life from September, 2008 to March, 2013 deeply involved in all of the details of the re-regulation of the global financial system. . . I would defend what we’ve done and I think that the job we did has helped make the financial system itself more stable, and therefore less likely to cause a rapidly-developing crisis of the sort that developed in 2007-8.
That is the good news, but I think we’ve made almost no progress at all in dealing with the fundamental drivers of economies that are too reliant on debt. We have not dealt with the fundamental fragilities that arise from inequality, from the bias of the lending system towards real estate, and from global imbalances. I think we are still stuck in a post-crisis malaise — you see it less in the U.S. but you can clearly see it in Europe or Japan. Even in the U.S., the pace of job creation has picked up, but employment rates are still well below what they were in 2007. Real wages have not gone up. The capitalist system is not delivering those decade-after-decade increases it promised. We’re not where we should be in terms of our national economies. We don’t know how to get out of this malaise and I think we now have to consider more radical policies. . .
I call that hysteresis. Thanks Lambert.
If the self proclaimed smartest people in the room don’t know, they are totally useless.
Think radical? Steeply progressive income taxation above $100,000 per year. That will bite the plutocrat’s ball garglers too.
“and the fact that credit is primarily created to fund the purchase of urban real estate and land, which is somewhat fixed in supply”
Henry George, never heard of him. Silvio Gesell, “Soft core” monetary crank.
Henry George ran over these issues a century and a half ago and now someone is writing about getting radical and he is not mentioned.
Gesell wrote about breaking the zero bound on money in the range of 12% per year. Irving Fisher, who Milton Friedman and Jeffry Tobin called America’s greatest economist, wrote an entire book about Gesell’s proposals and stamp scrip is not mentioned as a vehicle to capture “rent on money” for the general public. Radical has a different meaning for me.
As if on cue, David Stockman offers stats and a story to support the claims that land needs a whole new examination by economists:
http://davidstockmanscontracorner.com/the-stench-of-freddie-mac-is-back-5-billion-in-crony-capitalist-thievery/
How democracy has been hi-jacked by the financiers (UK based).
Back in 1964 Harold Wilson discovered there is a power that sits above democracy.
From Harold Wilson’s memoirs:
“The Governor of the Bank of England became a frequent visitor. . . we had to listen night after night to demands that there should be immediate cuts in Government expenditure.. . Not for the first time, I said we had now reached the situation where a newly elected government with a mandate from the people was being told, nor so much by the Governor of the Bank of England but by international speculators, that the policies on which we had fought the election could not be implemented.”
The rich have traditionally had a democracy that worked for them, when only they could vote and only they sat in Parliament and they used this power to line their pockets.
They came up with the Enclosures Acts to take away the Common Land of the people, leaving landless peasants who could no longer provide for themselves.
They now were in need of wages and ripe for exploitation in the factories and on the farms of the wealthy.
Men, women and children were made to work to keep the land and factory owners in the lap of luxury while they were housed in slums with just enough to keep them alive.
As Leo Tolstoy commented at the time:
“Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal – that there is no human relation between master and slave.”
Today we see privatisation programs to remove everything that was once free, like healthcare.
Reductions in welfare and benefits to push people into exploitative jobs.
The idea that “you are free to spend your money as you choose”
No money, no freedom.
Money is freedom.
The people of this country are being exploited again as they have been so many times in the past and the rich have found a way to usurp democracy when everyone can vote by providing choices that are no choice, you can only vote to make the rich richer and the poor poorer.
Labour – Milder austerity that will go on longer, no raising of taxes for the wealthy
Conservative – Harsher austerity that will fix the problems sooner, no raising taxes for the wealthy
We have had higher equality in the past (1960s/1970s) and it needed much higher taxes on the wealthy to tackle the underlying trickle up of Capitalism:
a) Those with excess capital invest it and collect interest, dividends and rent.
b) Those with insufficient capital borrow money and pay interest and rent.
Raising taxes on the wealthy is not an option democracy is offering.
Would the EU be any better?
Look at what they have recently done to Greece, Ireland, Spain, Italy and Portugal
The Euro was designed to take away the power of democracy.
“The putative “father of the Euro”, economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: “the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system” “Killing the Host” by Michael Hudson
Backed up by:
“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
Democracy has been usurped there too.
This is a hidden quote from the right wing hero, Adam Smith, who recognised the dignity of labour and the idleness of the rich.
Most classical economists differentiated between earned and unearned wealth.
Adam Smith:
“The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Bankers and landlords should be taxed for Government spending, earned wealth should be kept or at least used to supplement the rentier taxes.
Income tax only started one hundred years ago on a permanent basis, before that the landlords and rentiers were taxed.
All rentier activity is detrimental to the productive parts of the economy, siphoning off prospective purchasing power to those that like to sit on their behinds.
If we were still able to recognise the difference between earned and unearned wealth we might realise that encouraging rising prices of stuff that exists already is not very productive, e.g housing booms.
Same houses, higher prices, higher mortgages and rents, less purchasing power.
As the rentier economy booms, rents and interest repayments on debt escalate and purchasing power goes down leading to the current debt, deflation.
Current ideas are a careful selection of old ideas that benefit the wealthy at the expense of the poor. The ideas do stand up to scrutiny as they are not lies, it is just the hidden ideas are necessary to get the full picture as Adam Smith’s quote above shows.
The Leisure Class in this country has always spent much time and effort in getting the poor to work as hard as possible to keep them in luxury and leisure.
Nothing has changed.
The UK’s aristocracy has seen social systems come and go, but they all provide a life of luxury and leisure and with someone else doing all the work.
Feudalism – exploit the masses through land ownership
Capitalism – exploit the masses through wealth (Capital)
The system itself provides for the idle rich and always has done from the first civilisations right up to the 21st Century.
There is always a Leisure Class at the top.
“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” – Napoleon Bonaparte, Emperor of France, 1815
“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” The Rothschild brothers of London writing to associates in New York, 1863.
He is talking about the trickle up of Capitalism:
a) Those with excess capital invest it and collect interest, dividends and rent.
b) Those with insufficient capital borrow money and pay interest and rent.
“The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” – Abraham Lincoln
Lincoln was assassinated. Kennedy had the same idea, he was assassinated.
“The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization.” Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination.
Prophetic words from Bismark, who seems to have predicted the Neo-Liberal ideology emanating from the US.
We don’t have that problem. Our government is NOT dependent upon bankers for money. It creates its own dough. For example, the US federal government created $69.8 trillion in fiscal year 2015.
The US federal government does.
And meaningless for the last 82 years.
You want radical? End lobbying, punishable by death. Government issue the currency.
Forbid lawmakers and families from investing in the stock market for the year before election, during office and one year after. Punishible by no less than ten years in jail.
I only see two ways this happens. Military coup or external force nukes us and rebuildinh incorporates these things.
I appreciate the economic discussions, it does provide an opportunity for learning. I dont want to be overly critical of those attempting reform. However if we want a decent society for at least a couple generations what I said is sadly, the onky way I see it happening.
Vice Blowback
The Silicon Valley Project is like trying to control the universe from our solar system. It’s a great project for a 10 or 12 year old, but that’s it. Not everyone in Silicon Valley is so stupid as to take it seriously, and not everyone in San Francisco is so stupid as to take Silicon Valley seriously. Do you really think that in 70 years no one has been able to figure out how to find a submarine or counter nuclear MAD?
The problem is always to find a needle in a haystack, or its inverse. If you as individual were capable of distributing money effectively, effectively discounting majority peer pressure, what do you suppose the majority would do? Government is like a 6-year-old bully in a sandbox in some ghetto, assuming that it is life. In a world of extortion, is the shortest distance between A and B a straight line?
Do you really think that the pathway from lead to gold is a straight line, or that your biochemistry professor really knows anything about biochemistry, because he can categorize and summarize outcomes? Do you really think that Trump doesn’t know that poll results are a function of media, good or bad? Why isn’t Trump talking about corruption in real estate, and why isn’t Carson talking about corruption in healthcare? And why does Rubio want to belong to the establishment so badly, leaving Clinton to stroll through the wreckage unscathed?
It’s long past time to move on, but the majority is locked into a divide and conquer psychology of its own creation, leaving war, self-destruction, as its only option. The morons at EC are telling Portugal that it cannot leave or it will be subjected to demographic, financial and physical war, and Portugal’s response is communism? That should work out well, like what happened in France, a collapsing ponzi, as if the French haven’t seen that before, and the US is just going to step out and wait until they divide and conquer each other, like no one has seen that before?
Virtual reality is no more reality than the nation/state, except for the adolescents playing the game, and the critters have run out of geography, sandboxes to steal. Those oil tankers aren’t stacking up by accident. The problem isn’t the number of people on this planet; the problem is the stupid infrastructure, Florida sending orange juice to California and vice versa, to jack up the price of real estate and make room for all the middlemen, to do nothing and record the activity as productivity, and then respond to the stupid outcomes with a healthcare ponzi.
The only people dumb enough to move to the global city are those that think an aggregate ponzi is better than a local ponzi, because recognition takes longer, wasting more of their time. And the few moving back to the countryside, with inflation in tow, to be fleeced by the same ponzi operators that never left, wonder why the locals, subject to that inflation, will not accept them. While the ponzi economists collect data, to make the process more efficient.
The Fed, along with all its central bank followers, ran out in front of the parade and is trapped, because the demographic ponzi has hit the wall, as all viruses do. Those leaks in the dam are kids jumping the gap, while the army of automatons hits the wall, and this is just the beginning. The majority is collecting a check to nothing productive, to consume in compliance, some to watch TV on the Internet, and most pretending to work programming the show.
I am not writing to influence anyone, or to be known as a writer, but rather from the perspective of a husband and father who has had his children kidnapped and his wife brought before tribunal, in an effort to force him to build the weapons, to program the empire’s schedule, because it doesn’t have any more kids waiting in line to tell Steve Jobs what needs to be done next. And those punctuation marks represent time durations, the physics of operation. But thank you for the thoughtful response.
Yes, I can build better weapons than the weapons builders the communists have, but I prefer to design propulsion, and let the kids decide where they want to go. Yes, I do know what is wrong with the sunk cost equipment, but I’m not going to waste my time fixing it. Nor am I going to waste my time arguing with feminists in a California court, handed down by chauvinist predecessors, so they can produce the same skit, over and over and over again, to pay the rent on their BMWs and McMansions, smugly driving by the poverty of their creation.
Funny, how Putin knows just how far to go. Keep your powder dry, while all else are losing their heads.
So, assuming that you are not a kid that has bypassed the system all together and are reaching escape velocity, what you see is that the problems you created in the past are getting closer and majority peer pressure is growing in front of you. Naturally, the easiest thing to do is enter with momentum, and an exit already built, before you decelerate to zero. Both ‘problems’ are a function of allowing the majority to see your path, creating a vice.
If you get a job at $15 going to $65, you don’t care what the median price of a house is, so long as you can get accommodation at less than 25%, and the act of doing so will right the boat. The old-timers that haven’t already vacated space for you are either waiting for you to show up or only know corruption, strangling the economy as make-work for themselves. Life is about showing up when you are expected, with an unexpected solution.
Greed is its own worst enemy, not something you fix.
As other commenters have opined, this is not radical thinking.
More truly radical–David E. Martin’s implementations of Integral Accounting for the last 20 years. Now that’s radical. See trailers of his documentary Future Dreaming, or his talk to REAL15 (Australian Real Estate conference), or a 2011 radio interview on Tipping Point that mentions some concrete examples.
It’s possible to do things radically differently, now. We don’t have to wait for institutions or governments to change.
Seeing examples set by others is helpful. It shows it’s both possible and practical if we’re willing to think differently.
We need ordinary citizens to understand how the monetary system works. That’s where the problem lies.
That’s not the underlying source of the problem. They way we think about money–and don’t think about other things and don’t honor non-financial realities–is the problem.
What the main post describes is only the thinnest, outermost deceptive veil of the real problems. It is dangerous in that it implies–as do you–that understanding this will solve something. It won’t.
The good news: the kinds of changes needed can be made even without any understanding of the current money system. Doing an integral accounting audit doesn’t require that particular knowledge. This system has been used with communities in Papua New Guinea, for example, as well as more “advanced” first-world societies.
“Doing an integral accounting audit” of what? And don’t tell me the Federal Reserve because that is done every year.
“We need more radical policies so that we don’t just repeat the debt-fueled booms all over again and do another blow-up in 2025 or 2035.”
This quote alone raises serious serious questions about the author’s credibility.
On the contrary. This guy understands how things really works.
Really? And yet he is blind to the fact that we are currently at the breaking point of yet another “debt-fueld boom”? 2025 or 2035? He “understands how things really works”, yet believes that there won’t be a significant crisis for another ten or twenty years?
Please.
No, he doesn’t understand how things work except at a superficial level. He is deeply coopted by the mindset of the existing system and doesn’t realize it.
Bank loans money to construction company to build houses; Bank loans money to people to buy the houses; bank funds both production and consumption.
This is the form of economy we have wandered in to where banks are both producers and consumers using fictitious capital created out of nothing.
Banks loan/create credit money. Banks don’t create new interest-free money the way the government does. Only the federal government can add new money into the system. Banks extend credit.
Every loan (liability) is backed by an asset. Everything at the banking level nets to zero.
RBHoughton has a good point and points out that most bank new credit creation is going into asset appreciation.
This is real money just not productively used money.
Mission Oriented Finance is looking for ways to finance the real economy which can be a combination of public and private funding.
“16. Toward Reform Of Commercial Banking: Simple, Safe, And Small”
@financial matters, from Banks are not intermediaries of loanable funds – and why this matters. http://bankunderground.co.uk/2015/06/30/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters/ (It’s a little wonky but it’s Bank of England people nattering amongst themselves.)
P.S. Thanks for heads-up on The Levy Institute paper. Hadn’t seen it.
This is only true in the most limited, non-functional way of conventional analysis.
For a more thorough discussion about assets, from a general and then a business/SEC perspective, I recommend these two short papers:
1. Putting It All Together
2. Comments on disclosure effectiveness
Implicit in the author’s and your and others comments is the false notion that the only way to rid an economy of excess/dangerous inflation is through increasing the cost of money and thereby greatly increasing corporate profits. In fact there is a better, easier and much more equitable way to rid an economy of excess/dangerous inflation and that is through government taxation. Unlike higher interest rates, if inflation becomes a problem, taxation can be aimed at those corporate owners who are sucking up all the ‘excess’ money through higher ‘rents’ and interest payments. The higher interest rates major impact is not on inflation because the only way interest rates become a factor is when a buyer has committed to a purchase and either does not have the full purchase price or chooses to borrow and not use one’s own funds. Needs always exist and therefore purchases will always exist, cost of borrowing is not a deciding factor – the monthly payment vs monthly available income is the deciding factor of ‘affordability’ of borrowing to acquire assets. Affordability only becomes a factor of purchasing assets when demand causes price inflation, or when financial ‘rents’ are increased (higher interest rates) and can be defeated when excess income money is taxed out of the economy and is subsequently destroyed by governments NOT crediting their accounts with the extra tax revenue generated. Sovereign governments can always create money and spend it debt free into the economy to make up for a lack of private investment in labour; thereby employing individuals not employed in private businesses and increasing employment and consumer demand. Should this cause dangerous inflation, governments can re balance the inflated economy through targeted taxation. Perhaps a sales tax, a land transfer tax, an income tax, etc.. It is never necessary to ‘fight inflation’ by transferring excess money into the accounts of wealthy corporate owners through higher interest rates and it is never necessary for sovereign governments to tax or borrow to spend and employ citizens.
Coming into this late and all…
But it’s interesting that Turner points to urban life as the concentrated forces of capitalism and inequality. David Simon did a good interview with the Times expressing the same idea, of the City as the core of where the good battle has to be fought,