Basically, what the credit institution is saying when it makes a loan is that it believes that whatever it is lending for will increase the material wealth of society enough to justify creating new money. It's only when the bank is wrong (or lying) about this estimate that we have a problem, right?
Nope.
I think that it is the creation of credit to buy pre-existing assets (thereby typically inflating their price) that creates the "counterfeit" credit of which Jerome complains.
But the "counterfeit" credit certainly was asset-backed for the most part. It was just that it was created at such levels of interest, and on such terms, to such hopeless cases, that it was unrepayable.
Banks started lending to the asset, and not to the individual: it was bound to end in tears.
So, what you say is what a Good Bank should be saying, if I understand Jerome correctly. But it's profit Bad Banks are after, from the new credit created (less deposits yada yada) and of course just feel the width of the economic growth....
I see no need for secured credit in relation any assets once they have been developed. It's inefficient. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
However I twist and turn it, I really can't see why fractional reserve banking should be inherently problematic, so long as care is taken to put the bad banks (and the hedge funds and other wannabe banks) out of everybody else's misery before they counterfeit too much money.
If Alice knew Bob very well and trusted that his scheme was sound, they wouldn't have needed Charlie at all. But since Alice and Bob don't necessarily know each other very well, Charlie steps in to provide a guarantee of Alice's deferred income. And even if Alice and Bob did know each other very well, Alice might need to buy food from other people who don't know Bob (but who do know Charlie) before Bob repaid her.
Effectively, Charlie is saying "because I guarantee very, very many projects (all for a fee) and because my judgement of which projects to guarantee is good, I can make good your losses if Bob grabs the bottle caps and skips town."
I'm not sure what you think the problem is with that picture?
Of course, there's also a different scenario:
I'm not sure that I understand your proposal quite well enough to know precisely where it proposes to change story #2... But I do think that it's possible for the government to prevent story #2 from occurring (or rather, to prevent it from occurring too frequently), by exercising oversight of those who provide its guarantees. In other words, in my example #2, the government should have nationalised Emily's business and removed her as soon as Dexter's perpetual motion machine showed up on her balance sheet.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Effectively, Charlie is saying "because I guarantee very, very many projects (all for a fee) and because my judgement of which projects to guarantee is good, I can make good your losses if Bob grabs the bottle caps and skips town." I'm not sure what you think the problem is with that picture?
Because that's not what happens. What happens is that Satan says to Charlie ¨You know, people believe your promises. That's got to be worth bottle caps in itself. How about we start selling bets that you, me, or anyone is or isn't going to be able to pay back their bottle caps? We can also guarantee guarantees, almost ad infinitum, and create more bottle caps than anyone has ever seen.¨
Bob and Alice find meanwhile that Charlie's interest doesn't end with the bottle caps. In return for bottle caps he starts demanding that they run their businesses in a way that he likes. If he doesn't like what they're doing - and especially they're not making more bottle caps for him - he can threaten to close down their businesses.
Ordinary folk, to whom all of this is a mystery, start to find that they're working longer and longer hours for fewer and fewer bottle caps. They blame aliens and the phase of the moon for this, but eventually the system has a schizophrenic attack and collapses.
The point being that there's a difference between investment, which is defined by confidence and guarantess of reputation, and extortion, which is defined by financial cannibalism.
Most so-called equity funding, especially of the private kind, is really a form of legalised extortion. Businesses aren't funded as a social good, or even primarily as a good way to produce ball bearings or cement.
Instead they're forced to 'perform' for their owners and financiers like trained pets.
It's bear pit economics - literally. It's every bit as barbaric as badger baiting and dog fighting, but instead of being morally repugnant it's been made the centre of all serious economic activity.
when i'd watch the traders all yelling and gesticulating as if demented, and reflect that that was the pulsing heart of the 'economy', i'd feel physically sick watching them. your post perfectly explains my repulsion... ~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
I still don't see what the problem is with the picture? That it's unenforceable? Surely not for a nationalised (retail) banking sector.
So I think you're confusing hypothesis with reality. Your model looks good, but no real financial sector will ever be that clean. Even with a nationalised banking sector you'll still get turf wars and other power struggles between the interested parties, to the detriment of social productivity and effectiveness.
What's really needed is a mechanism which assesses trustworthiness realistically and also provides backstop support for projects, but isn't socially, politically or financially acquisitive - or at least is only as socially, politically and financially acquisitive as it's possible for an organisation to be.
Interesting challenge, that.
Once the advantages no longer exceed the disadvantages, the system should be dismantled in good order.
I don't think it's impossible to construct a working financial system on roughly the basis we had in the fifties and sixties... as long as one makes sure that the participants are convinced that the entire sector will be dismantled the minute it stops being a benefit to the real economy.
But I'm not convinced that the system back then is the best one to return to. Distributed financing, with strong regulation to prevent extortion and fraud but no central monopoly on finance seems like a more interesting idea.
There were still boom and bust cycles throughout the 50s and 60s. I'd be more interested in a system which was designed to be inherently stable and where growth is measured in the increase of innovative IP being created, with manufacturing taking second place. (After energy supply becomes sustainable.)
