Thus you need to define the border, and to make damn sure that it cannot be breached. In the long run, we're all dead. John Maynard Keynes
The repeal of Glass-Steagall, initiated in 1980 and completed in 1999 has given us the savings and loans crisis and the subprime crisis, both with a lag of about 8 years. Regulation works. It worked for 50 years. But, as John K. Galbraith said in the foreword of the 1975 edition of his 1954 classic The Great Crash 1929,In the wake of the 1929 crash, and with a view to preventing another runaway boom and the associated abuse, the Congress passed some tolerably astringent legislation including the Securities Exchange Act of 1934. It was not, at the time, especially necessary. Markets and financial adventure were then and for a long while after restrained not by the S.E.C. but by the memory of what happened to so many in 1929. By the sixties this memory had dimmed. Almost everything described in this book had reappeared, sometimes in only a slightly different guise. Instead of the investment trusts there were now the mutual funds. Matching Blue Ridge and Shenandoah in general scope and financial peril were the International Investment Trust and the Fund of Funds. Matching and possibly surpassing the vaulting imagination of Harrison Williams and Waddill Catchings, of Central States Electric and Goldman, Sachs was that of Edward Cowett and Bernard Cornfield, the miracle men of I.O.S. The admiration for skill in deployment of corporate capital that was once lavished on Samuel Insull and Howard Hopson settled now on the men who were parlaying smaller firms into big conglomerates. There were glamour stocks in both periods; in both periods glamour was a substitute for substance. Scholars and politicians lent their names and blessings to the new promotions as had their counterparts forty years before. In the sixties as in the twenties men intended by nature for mentally undemanding toil became rich for a while. It was only that the market was going up. Some things in 1970 were worse. Wall Street houses were markedly more incompetent in their management than in the twenties and expanded much more recklessly. The consequences when the collapse came were far more troublesome than in 1929. ... Yet the lesson is evident. The story of the boom and crash of 1929 is worth telling for its own sake. Great drama joined in those months with luminous insanity. But there is a more sobre purpose. As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity or others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the S.E.C. and, on the record, is far more effective.It's been another 40 years...
In the wake of the 1929 crash, and with a view to preventing another runaway boom and the associated abuse, the Congress passed some tolerably astringent legislation including the Securities Exchange Act of 1934. It was not, at the time, especially necessary. Markets and financial adventure were then and for a long while after restrained not by the S.E.C. but by the memory of what happened to so many in 1929. By the sixties this memory had dimmed. Almost everything described in this book had reappeared, sometimes in only a slightly different guise. Instead of the investment trusts there were now the mutual funds. Matching Blue Ridge and Shenandoah in general scope and financial peril were the International Investment Trust and the Fund of Funds. Matching and possibly surpassing the vaulting imagination of Harrison Williams and Waddill Catchings, of Central States Electric and Goldman, Sachs was that of Edward Cowett and Bernard Cornfield, the miracle men of I.O.S. The admiration for skill in deployment of corporate capital that was once lavished on Samuel Insull and Howard Hopson settled now on the men who were parlaying smaller firms into big conglomerates. There were glamour stocks in both periods; in both periods glamour was a substitute for substance. Scholars and politicians lent their names and blessings to the new promotions as had their counterparts forty years before. In the sixties as in the twenties men intended by nature for mentally undemanding toil became rich for a while. It was only that the market was going up. Some things in 1970 were worse. Wall Street houses were markedly more incompetent in their management than in the twenties and expanded much more recklessly. The consequences when the collapse came were far more troublesome than in 1929. ... Yet the lesson is evident. The story of the boom and crash of 1929 is worth telling for its own sake. Great drama joined in those months with luminous insanity. But there is a more sobre purpose. As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity or others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the S.E.C. and, on the record, is far more effective.
By the sixties this memory had dimmed. Almost everything described in this book had reappeared, sometimes in only a slightly different guise. Instead of the investment trusts there were now the mutual funds. Matching Blue Ridge and Shenandoah in general scope and financial peril were the International Investment Trust and the Fund of Funds. Matching and possibly surpassing the vaulting imagination of Harrison Williams and Waddill Catchings, of Central States Electric and Goldman, Sachs was that of Edward Cowett and Bernard Cornfield, the miracle men of I.O.S. The admiration for skill in deployment of corporate capital that was once lavished on Samuel Insull and Howard Hopson settled now on the men who were parlaying smaller firms into big conglomerates. There were glamour stocks in both periods; in both periods glamour was a substitute for substance. Scholars and politicians lent their names and blessings to the new promotions as had their counterparts forty years before. In the sixties as in the twenties men intended by nature for mentally undemanding toil became rich for a while. It was only that the market was going up. Some things in 1970 were worse. Wall Street houses were markedly more incompetent in their management than in the twenties and expanded much more recklessly. The consequences when the collapse came were far more troublesome than in 1929.
...
Yet the lesson is evident. The story of the boom and crash of 1929 is worth telling for its own sake. Great drama joined in those months with luminous insanity. But there is a more sobre purpose. As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity or others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the S.E.C. and, on the record, is far more effective.
Avoiding future disasters means allocating blame acurately; and most of it lies with bad policy, not with greedy bankers.
Jerome
Thus you need to define the border, and to make damn sure that it cannot be breached.
As best as I can tell, we are nowhere near to even considering effective reform of either component. Nor do I think either reform is highly likely to emerge in the next year. The best hope for an effective solution might be the sort of transformative organizations proposed by Chris Cook, which would only have a chance if strongly backed by a coalition of the Chinese and resource exporting nations. Even given that backing, without campaign finance reform, forcing such bitter medicine on the financial sector, at least in the USA, will be beyond the ability of the political sector. The whole situation will almost certainly get much worse, but this is more likely to produce smoke and dust than to provide any clarity that could lead to resolve. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
The EconomistAvoiding future disasters means allocating blame acurately; and most of it lies with bad policy, not with greedy bankers.But ...
The greedy bankers did subprime lending, securitization, credit default swaps, off-balance-sheet items and contingent liabilities all by themselves, with the intent to do an end-run around the regulators.
So it was not "bad policy" that caused the crisis, though there were quite a few policy-makers who were apologists for deregulation or "industry self-regulation". And if the problem was self-regulation, it was the bankers that failed to self-regulate anyway. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
It is their natural tendency to use their wealth to skew all aspects of national policy to their favor, along with the actual actions that brought disaster that I am descrying. We won't prevent a repeat or a continuation of the current problems until we take steps to curb the influence. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Trillions in public cash have been handed out to the financial industry. At least some of those trillions have been handed out with no oversight at all.
Which part of 'The Senate and Congress are a wholly owned subdsidiary of Wall St' isn't clear yet?
And don't ask who owns Wall St. That's not a question with a popular answer.
But the collapse and discrediting of Wall Street and the losses of its owners could in fact allow progress to be made on one or two hitherto intractable geopolitical problems.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
separate completely and hermetically regulated utility banking from the unregulated gambling/"investment" kind
Is utility banking everything but M&A's, alphabet soup securities and legalised tax evasion, which are investment banking? Or what? Peak oil is not an energy crisis. It is a liquid fuel crisis.
I'd actually like to see gambling and speculation eliminated completely. If stupid rich people want to gamble, they can go to a casino.
The markets should be reserved for investment in the real economy, not in multiply leveraged risk-engined machineries of financial self destruction.
Projects and ideas will always have enough risk to make basic investment interesting enough for the talent which currently wastes its time trying to pull profit out of noise to be doing something useful with its time.
Finance has been a double tragedy - not only is it an epic fail financially, but it has also sucked the life out of engineering and research, which are always more likely to create stable and reality based prosperity.
Certainly not.
So what does this mean, in practice? Limits on leverage maybe? But will that then fall in the investment or utility banking sector? Peak oil is not an energy crisis. It is a liquid fuel crisis.
The secondary market (trading existing securities) is speculation. This is so because trading stocks or bonds has no impact on the capitalization of the underlying companies/treasuries; buying securities in the primary market does expand the working capital of the issuer.
The secondary market exists to provide liquidity so investors have a way out of their investments. Without a liquid secondary market, it would be much harder to convince people to lock their money in the primary market.
There is a long quotation by Keynes in The General Theory about this, ending with his famous When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
I diaried the long quotation here. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
And that's it. In the long run, we're all dead. John Maynard Keynes
I don't see the logic in that.
And in your model, what is the role of the investment banks? What do they do? Peak oil is not an energy crisis. It is a liquid fuel crisis.
Unsecured credit allows the circulation of goods and services, and the creation of productive assets with a value in use (productive Capital). Where unsecured credit creates productive assets it ceases to circulate, and must be replaced by more credit to keep the wheels of the economy turning. This process gives rise to a continuous flow of dynamic value.
It also explains why the National Debt - that piece of accounting insanity - can never be paid off.
C H Douglas - an engineer by background - had an interesting analysis which was a core part of his Social Credit movement - which went the same way as Henry George's Single Tax, being discredited and airbrushed from history
The A plus B Theorem of Social Credit
My analysis is that secured credit is qualitatively different from unsecured credit in its effects. It is a claim over a productive asset with a value in use. In particular, land which backs more than 60% of credit created today. The creation of secured credit to acquire existing productive assets is likely to cause asset price inflation and often, a Bubble.
Secured credit does not circulate. It is static. It cannot cause inflation of prices other than the prices of existing assets it is used to acquire. Having said that, further credit secured on the productive asset (Equity Release) could perhaps cause retail price inflation. Discuss.
It is a form of Investment, which I consider as a claim over a productive asset purchased for the revenue stream. ie the investor is looking for income, or an increase in the value of capitalised future income which he may sell for income.
Speculation, on the other hand, is buying - not for income - but to sell on at a profit. So is trading, but the former is held to be undesirable, and the latter an essential component of global trade.
The other form of Investment - with which secured credit is in conflict, is the claim of equity ownership, particularly the financial claims incorporated in shares in the legal person/protocol known as a Corporation.
It follows that there are two different types of banking.
Firstly; that relating to the creation and clearing of credit. This in turn distuinguishes two separate disciplines.
(a) credit used for circulation ("time to pay" or working capital); and
(b) credit used to create a productive asset (development credit).
The former requires analysis of the ability of an individual or enterprise (a group of individuals) to repay debt used for working capital; the accounting and clearing of debt obligations; and the handling of debt defaults.
The latter (Jeromes's discipline) requires consideration of the use value of the productive asset once complete, the likelihood that it will be developed on time and within budget. And so on.
Secondly, investment banking relates to the use of secured credit as investment in an existing productive asset through a process of appraisal of the ability of:
(a) the productive asset to create sufficient value in exchange to meet the financial obligations imposed upon it; and
(b) the capability of the user/owner of the asset to meet those financial obligations.
The recent property bubble was essentially caused by essentially lending to the property, and forgetting the person, because secured credit is a hybrid.
But Jerome's discipline - which is the extremely necessary one of financing productive assets - is essentially a hybrid. The development risks attaching to the creation of a productive asset, are very different to those of the long term financing of that same asset once complete.
I believe that there is no longer a need for credit intermediaries, which is just as well, because the capital necessary to rebuild the collapsing system, while it exists in the hands of investors (albeit dwindling) will not be deployed, and governments cannot replace it without the consent of their global creditors.
I believe the emergence of
Peer to Peer Finance
will solve the problem, and in so doing reinvent banking into two disciplines distinguishing between Credit = Time to Pay and Investment.
Banking as credit intermediation will gradually (or more likely, rapidly) become obsolete. Banking as service provision will replace it.
The entire edifice of economics is based upon an assumption that money is necessarily credit, whereas the truth is that credit is implicit within a monetary relationship, but need not - indeed should not, because interest creates instability - be monetised. Moreover. conventional economics does not make the necessary - IMHO - qualitative distinction between unsecured credit, which may be static or dynamic, and secured credit, which is static, and is unlikely to cause retail price inflation.
In other words conventional economics is entirely unfounded on the real world and is, in technical terms, complete bollocks. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I can follow the traces of what you are saying, and some of the implications...but some graphics would certainly help. As much as I can appreciate the conclusions, I have never been able to completely grok all the steps that get you there.
I don't mean to imply that I am your target audience, but I've always been able to take an IQ test that put me in the top few percent (being the test makers target market helps) and can probably find other criteria which might imply that you have to be more clear for your target audience, who may be less clever than even me. Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
I suppose credit cards are also utility banking - that and a whole class of "revolving credit" lines to both individuals and corporations including simple overdraft allowances on current accounts. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Utility banking is the payments system, taking deposits, and making loans to corporations
I'm thinking long-term credit, whether mortgages, long-term consumer loans or project finance, is not part of the "payment clearing system and revolving credit" infrastructure banking and so is not actually "utility banking" even if it needs to be backed by regulatory capital. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
So I guess what we should be asking is "if this service crashes and burns, and it takes - say - two years to rebuild it, will society survive the transition?" For payment clearing, the answer is clearly "no." For building factories, the answer is clearly "yes. It won't be pleasant, but we'll survive." So project finance goes outside our airlock.
(Although I'm all in favour of building walls between project finance, insurance, real estate and so on and so forth. But they aren't absolutely need-to-have must-be-bailed-out-in-the-event-of-catastrophe parts of the banking system, so I can live with the compartmentalisation being less than completely airtight.)
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
