Hence my remark at the beginning that we don't really need stock markets!
Indeed. Stocks are just capitalised income streams and have nothing to do with "capital." Here is an example:
A finnish bank NORDEA has in it's accounts real "capital," plant and equipment worth of 350 million euros. Their annual profit is however 3 500 million euros. So, their return on capital is 1000%. They paid dividends to the stock owners 19% of the result = 665 million. A 200% yield on capital. Real money, without any effort or participation in the "production process."
The fixed assets and equipment are pretty much de minimis in comparison. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Most of the 'productive' capital in a bank is 'human' capital - ie the people..
The idea that stock owners "own" labour does not make sense. The price of labour is defined by the labour market. If their "capital" is labour, the picture is similar: the labour costs for NORDEA are 2 500 euros. So "Return on Labour" is 140%.
And stockholders do indeed "own" the organisation (and brand and power), in the sense that if they decide to do so, they can - legally and without any great social stigma - murder it in its sleep. This entitles them to a cut of the added value that the organisation (resp. brand or power) produces which is above and beyond the added value that the members of the organisation could produce on their own.
And since the added value created by the organisation, brand and power is, in a bank, substantial, the shareholders' apparent return on capital is substantial.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
If they have low wages, relative to "added value," that just means there is an oversupply of labour.
There is no lack of labour, return on capital is 1000% and a country of 5 million has just 4 banks? Of course, the reason for these profits is clear:
Banking is a government created monopoly. Free lunch to stock owners.
In many cases, this doesn't matter, because in many cases money is not the limiting factor of production. But it is when dealing with the financial system, and its interaction with the rest of the economy.
Banks on the other hand have a very small equity, because ther assets are essentially the same thing as there liabilities. That is, they don't lend their own money to people but instead lend money from some people and re-lend it to other, taking a cut as payment for the service.
Because of this, they only need equity as a reserve against credit losses. This creates a phantom view of immense yield on equity, bu as banks are traded at huge multiples of equity, banks are not more profitable than other companies when you look at stuff like p/e and dividend, which is what actually matters to investors. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Banks on the other hand have a very small equity, because ther assets are essentially the same thing as there liabilities.
"Assets" are their "products" like in any other business. Products are produced by land, labour and capital like in any other business. Why would anybody invest capital to anything else than banking when the yield there is 1000%?
Of course you could always start a new bank and compete with the current crop, but then you must be better that the other banks, or you won't get any customers, and if you lower your margins, you won't make any money. Peak oil is not an energy crisis. It is a liquid fuel crisis.
"Assets" [in a bank] are their "products" like in any other business. Products are produced by land, labour and capital like in any other business.
Not so. The (main) economic function of a bank is that it reduces the spread between what the buyer pays and what the seller receives by acting as a clearing house.
If you buy something on credit, the price you see is the full discounted value of the cash flow that you commit to paying the seller. But the price that the seller gets is only the discounted cash flow minus the credit risk that you represent. The bank is, in a functioning monetary system, a smaller credit risk to the seller than you are (because banks don't usually go bust in a well-governed monetary system). And you are a smaller credit risk to the bank than you are to the seller (because you are only a credit risk to the clearing house on your net position, whereas to the seller, you are a credit risk on your gross position).
In principle, the function of clearing house has nothing to do with land, labour and (real) capital - it is a purely monetary construct. In the real world, functioning as a clearing house requires, obviously, organisation, which in turn requires land, labour and capital - but organisation is poorly represented in double-entry bookkeeping.
The bank backs that guarantee with a proprietary pool of capital at a level specified by the BIS.
The Credit Crunch came about because banks outsourced that guarantee (aka credit risk) to investors:
(a) Totally - through securitisation;
(b) Temporarily - through credit default swaps (CDS), which are essentially time limited guarantees;
(c) Partially - through credit insurance by the likes of Ambac; and
(d) toxic cocktails of the above, such as CDOs and CDO squared.
Since these 'shadow bank' investors have withdrawn from the market, and the level of leverage which banks may build on their own capital is also resricted, it follows that the pyramid of credit, and hence the asset prices inflated by that credit, is now drastically reduced for decades to come, if not permanently.
The net 'interest' margin between the interest a bank charges to borrowers and that which it pays to depositors must cover operating costs and default costs, with any surplus being available for distribution to shareholders.
To the extent that operating costs relate to land and labour then they are distinctly 'real world'. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
they don't lend their own money to people but instead lend money from some people and re-lend it to other, taking a cut as payment for the service.
Actually, they lend the money into creation, up to a limit set, in theory, by their reserve requirements.
In fact the restriction is not related to reserve requirements, because the Interbank market enables these reserve requirments to be bypassed. What restriction there is on credit creation is that based upon BIS 'Basel' capital requirements which restricts the size of the pyramid of credit which may be built upon a given amount of capital. Aka 'leverage'.
The wilder elements of the Austerian tendency of economics are therefore barking up the wrong tree, because 'fractional reserve banking' has long been a canard.
What even well informed people miss is that banks create credit and new deposits not only when they lend at interest but also when they spend on:
(a) staff, management, suppliers and other costs;
(b) acquisition of assets, such as property or T-Bills;
(c) dividends to shareholders.
What is going on with QE is that the Fed and BoE are creating credit and thereby manufacturing new money which is being spent on financial assets.
This simply replaces one financial asset in the system (interest-bearing bonds) with another (zero interest bills). For this money to get out into the system and cause retail price inflation will actually require lending (to the over-indebted and essentially insolvent 90% of the population)or spending (fiscal action). "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
For this money to get out into the system and cause retail price inflation will actually require lending (to the over-indebted and essentially insolvent 90% of the population)or spending (fiscal action).
Spending the same amount of money on renewable energy, charging infrastructure for electric vehicles and upgraded, electrified rail systems would be highly stimulative, as it is capital spending. Revise policies to bring as much domestic manufacturing as possible back to the USA as is possible, as quickly as possible, and such spending could fuel a boom. Steve Keen has a dynamic simulation of a three sector economy with a government sector, a banking sector and a business sector which he used to demonstrate that the same amount of spending directed to the private sector was much more stimulative than when directed to the banking system.
But we know the problems getting to the point where we can do something sensible. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
