Die Neue Zeit
30th June 2010, 03:31
Financial National-Democratization
“Even the Financial Times now warns in its editorials that it may not be possible to avoid much longer the issue of really taking the whole banking system into public ownership, given its current dysfunctionality. Indeed, there has long been a strong case for turning the banks into a public utility, given that they can't exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort.” (Leo Panitch)
It is interesting to note the market-socialist David Schweickart referred to and approved of the same editorial alluded to by Leo Panitch, one by Willem Buiter, a professor of European political economy at the London School of Economics and the former head of the European Bank of Reconstruction and Development. In The end of American capitalism as we knew it, Buiter wrote:
Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses?
If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.
Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money.
That suggests that either deposit-banking licenses should be periodically auctioned off competitively or that deposit-taking banks should be in public ownership to ensure that the taxpayer gets the rents as well as the risks. The argument that financial intermediation cannot be entrusted to the private sector can now be extended to include the new, transactions-oriented, capital-markets-based forms of financial capitalism.
It should be noted that “bank runs on a subset of the banks in the system” vs. “generalized run on the banks” refers to fractional reserve banking; banks keep only a fraction of deposits in highly liquid reserves, lend out the rest, and all the while are legally obligated to redeem all deposits upon customer demand. For all the rhetoric by Milton Friedman, the rest of the Chicago School, the Austrian School further to their right, and other right-wing economists on fractional reserve banking as the main culprit behind debt bubbles, they miss the point: under the present financial system, the amount of public control over M0, M1, M2, and the entire money supply generally is almost non-existent. A national-democratized financial monopoly beyond even the limitations of the former Gosbank SSSR (USSR State Bank), along with the extension of this public monopoly on money supply control into the general provision of commercial and consumer credit, is the only way towards achieving at least substantive public control over the money supply. It is also the only way to make substantive inroads against the massive behemoth of derivatives trading.
In early 2009, political economist Paulo L dos Santos went further in addressing the appropriate purchase prices based on the market capitalization of these financial institutions, particularly those in trouble:
There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks – or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.
Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves – after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.
State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.
These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality. Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.
Many have tried to contrast the role of financial capital with that of the older industrial capital, usually by resorting to some form of ethics. Keynes himself openly distinguished between the “entrepreneur” and the “capitalist” (financiers, short-sellers of shares and similar speculators in derivatives and currency exchange, etc.), but the market-socialist David Schweickart made the most obvious point in his book Against Capitalism about the system inherently joining the two:
It is true that some capitalists innovate, reorganize, and manage, but it is also true that many do not. This fact, if not its ethical implications, is acknowledged by most economists; it is reflected, for example, in the standard distinction between interest and profit. Profit is the residual accruing to the entrepreneurial after wage, rental, and interest accounts have been paid.
The basic problem for one trying to justify capitalism (noncomparatively) is precisely this category: interest, a return that requires neither risk nor entrepreneurial activity on the part of the recipient.
Time preference need not enter into the explanation of the capitalist's behavior any more than the entrepreneur's. If Marx and Weber are right, the motivational structure for the paradigmatic capitalist is accumulation, not consumption. Moneymaking becomes an end in itself. The capitalist qua capitalist invests now not to have more to consume later but to have more to invest later. As Marx puts it, "Accumulate, accumulate. That is Moses and the prophets."
One last aspect of financial national-democratization should be touched upon, and indeed it is about an ethical position as much as it is about the numerical difference between assets and liabilities: equity. In several pre-industrial societies, there were taboos against charging interest on loans or – to use an older word – usury. There were also equitable rules on secured loans. For example, Exodus 22:25-27, Deuteronomy 23:20-21, and rabbinical literature prohibit the charging of interest to Israelites (except when a life is in danger) as well as the using for loan security items needed by the poor among them to survive (garments needed by the poor among them to survive cold nights or flour-making millstones, but other items are implied as well) – quite a contrast to the Catholic-imposed privilege of charging usury enjoyed by medieval Jewish usurers but for the convenient purpose of anti-Semitic scapegoating later on, and certainly a contrast to the financial practices of modern Israeli society! Meanwhile, the anti-usury Islamic finance has a Sumerian precedent which could be applied today, free of pork and alcohol limitations and applied especially towards venture (read: vulture) capital activities: agreements between the de facto creditor and the de facto debtor whereby the latter would manage the new business venture and the former would invest in the business venture, assuming typical business risk to income stability but deriving income in the form of profits. To revisit what Santos discussed above, a national-democratized financial monopoly should be more than capable of absorbing, say, the higher risk to income stability posed by small cooperatives or small-business proprietorships as it effectively nationalizes those debtors’ operations in the financing agreements – only to effectively re-privatize them as equitable profits (and not interest) due the monopoly reduce that monopoly’s ownership positions.
REFERENCES
From the global crisis to Canada’s crisis by Leo Panitch [http://www.theglobeandmail.com/servlet/story/RTGAM.20081203.wcopanitch04/BNStory/specialComment/]
The end of American capitalism as we knew it by Willem Buiter [http://blogs.ft.com/maverecon/2008/09/the-end-of-american-capitalism-as-we-knew-it/#more-300]
Bank expropriation is rational, but neither socialist nor sufficient by Paulo L dos Santos [http://political-finance.blogspot.com/2009/01/bank-expropriation-is-rational-but.html]
Against Capitalism by David Schweickart [http://books.google.com/books?id=A_0afomkjQYC&printsec=frontcover&source=gbs_summary_r&cad=0]
“Even the Financial Times now warns in its editorials that it may not be possible to avoid much longer the issue of really taking the whole banking system into public ownership, given its current dysfunctionality. Indeed, there has long been a strong case for turning the banks into a public utility, given that they can't exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort.” (Leo Panitch)
It is interesting to note the market-socialist David Schweickart referred to and approved of the same editorial alluded to by Leo Panitch, one by Willem Buiter, a professor of European political economy at the London School of Economics and the former head of the European Bank of Reconstruction and Development. In The end of American capitalism as we knew it, Buiter wrote:
Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses?
If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.
Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money.
That suggests that either deposit-banking licenses should be periodically auctioned off competitively or that deposit-taking banks should be in public ownership to ensure that the taxpayer gets the rents as well as the risks. The argument that financial intermediation cannot be entrusted to the private sector can now be extended to include the new, transactions-oriented, capital-markets-based forms of financial capitalism.
It should be noted that “bank runs on a subset of the banks in the system” vs. “generalized run on the banks” refers to fractional reserve banking; banks keep only a fraction of deposits in highly liquid reserves, lend out the rest, and all the while are legally obligated to redeem all deposits upon customer demand. For all the rhetoric by Milton Friedman, the rest of the Chicago School, the Austrian School further to their right, and other right-wing economists on fractional reserve banking as the main culprit behind debt bubbles, they miss the point: under the present financial system, the amount of public control over M0, M1, M2, and the entire money supply generally is almost non-existent. A national-democratized financial monopoly beyond even the limitations of the former Gosbank SSSR (USSR State Bank), along with the extension of this public monopoly on money supply control into the general provision of commercial and consumer credit, is the only way towards achieving at least substantive public control over the money supply. It is also the only way to make substantive inroads against the massive behemoth of derivatives trading.
In early 2009, political economist Paulo L dos Santos went further in addressing the appropriate purchase prices based on the market capitalization of these financial institutions, particularly those in trouble:
There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks – or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.
Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves – after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.
State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.
These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality. Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.
Many have tried to contrast the role of financial capital with that of the older industrial capital, usually by resorting to some form of ethics. Keynes himself openly distinguished between the “entrepreneur” and the “capitalist” (financiers, short-sellers of shares and similar speculators in derivatives and currency exchange, etc.), but the market-socialist David Schweickart made the most obvious point in his book Against Capitalism about the system inherently joining the two:
It is true that some capitalists innovate, reorganize, and manage, but it is also true that many do not. This fact, if not its ethical implications, is acknowledged by most economists; it is reflected, for example, in the standard distinction between interest and profit. Profit is the residual accruing to the entrepreneurial after wage, rental, and interest accounts have been paid.
The basic problem for one trying to justify capitalism (noncomparatively) is precisely this category: interest, a return that requires neither risk nor entrepreneurial activity on the part of the recipient.
Time preference need not enter into the explanation of the capitalist's behavior any more than the entrepreneur's. If Marx and Weber are right, the motivational structure for the paradigmatic capitalist is accumulation, not consumption. Moneymaking becomes an end in itself. The capitalist qua capitalist invests now not to have more to consume later but to have more to invest later. As Marx puts it, "Accumulate, accumulate. That is Moses and the prophets."
One last aspect of financial national-democratization should be touched upon, and indeed it is about an ethical position as much as it is about the numerical difference between assets and liabilities: equity. In several pre-industrial societies, there were taboos against charging interest on loans or – to use an older word – usury. There were also equitable rules on secured loans. For example, Exodus 22:25-27, Deuteronomy 23:20-21, and rabbinical literature prohibit the charging of interest to Israelites (except when a life is in danger) as well as the using for loan security items needed by the poor among them to survive (garments needed by the poor among them to survive cold nights or flour-making millstones, but other items are implied as well) – quite a contrast to the Catholic-imposed privilege of charging usury enjoyed by medieval Jewish usurers but for the convenient purpose of anti-Semitic scapegoating later on, and certainly a contrast to the financial practices of modern Israeli society! Meanwhile, the anti-usury Islamic finance has a Sumerian precedent which could be applied today, free of pork and alcohol limitations and applied especially towards venture (read: vulture) capital activities: agreements between the de facto creditor and the de facto debtor whereby the latter would manage the new business venture and the former would invest in the business venture, assuming typical business risk to income stability but deriving income in the form of profits. To revisit what Santos discussed above, a national-democratized financial monopoly should be more than capable of absorbing, say, the higher risk to income stability posed by small cooperatives or small-business proprietorships as it effectively nationalizes those debtors’ operations in the financing agreements – only to effectively re-privatize them as equitable profits (and not interest) due the monopoly reduce that monopoly’s ownership positions.
REFERENCES
From the global crisis to Canada’s crisis by Leo Panitch [http://www.theglobeandmail.com/servlet/story/RTGAM.20081203.wcopanitch04/BNStory/specialComment/]
The end of American capitalism as we knew it by Willem Buiter [http://blogs.ft.com/maverecon/2008/09/the-end-of-american-capitalism-as-we-knew-it/#more-300]
Bank expropriation is rational, but neither socialist nor sufficient by Paulo L dos Santos [http://political-finance.blogspot.com/2009/01/bank-expropriation-is-rational-but.html]
Against Capitalism by David Schweickart [http://books.google.com/books?id=A_0afomkjQYC&printsec=frontcover&source=gbs_summary_r&cad=0]