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My point is partly that finance is supposedly about risk analysis in the same way that job interviews are about finding the best person.

Economics is politics, money and accounting are about power, and banking is part of political planning about who has the power to get things done. How's that?

The conceptual metaphor "money is a thing" (specifically, a gold coin) is particularly damaging in this setting. Politically, fiat money and expansionary fiscal policy means "if you have a worthy project you won't have to stay idle", whereas hard money means "you can only do what I tell you to".

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 06:24:17 AM EST
[ Parent ]
I'd prefer:

Economics is politics, money and accounting are about power, and banking is part of political planning about who has the power to get things done.

The conceptual metaphor "money is a thing" (specifically, a gold coin) is particularly damaging in this setting. Politically, fiat money and expansionary fiscal policy means "if you have a worthy project you won't have to stay idle", whereas hard money means "you can only do what I tell you to".

Or what I allow you to - because the ability to block constructive and useful effort is as much a part of the syndrome as the ability to sponsor it.

This is what I was implying earlier about business plans. For example in energy, some forms of energy get subsidies, while others - especially renewables - are considered inherently unserious, and don't. Therefore finance models for renewables have to be more precise, the risk analysis has to be absolutely cast-iron, and so on. While other modes - like nuclear - get a pass.

And all this because the financial industry has a bias against certain kinds of activity, and a bias towards other kinds of activity.

The rationalisations that support these arbitrary decisions use the rhetoric of risk analysis and the rest. But the reality is that the industry simply likes certain kinds of activity more than it likes other kinds, for reasons that are either irrational or sociopathically self-interested.

So while Jake thinks banks aren't so bad akshually, I think banking in its current form is an epic disaster on the scale of the Black Death or a major natural catastrophe.

For two reasons:

The first is that perfectly reasonable - and welcome - kinds of activity are vetoed in favour of other activities that are stupid and self-destructive. The industry's record of failure on this is absolutely reliable.

The other is that instead of preventing and minimising risk, banks actually create it - in obvious ways through asset inflation that destabilises productive economies, through speculation, and by vetoing efforts towards stable and productive activity.

So you have the paradox - or the Big Lie - of an industry which claims to be engaged in strategic risk management for everyone's benefit, but which is actually the primary creator of risk and social insolvency.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 05:51:02 PM EST
[ Parent ]
For example in energy, some forms of energy get subsidies, while others - especially renewables - are considered inherently unserious, and don't. Therefore finance models for renewables have to be more precise, the risk analysis has to be absolutely cast-iron, and so on. While other modes - like nuclear - get a pass.

But the problem here is surely that risk analysis that is not absolutely cast-iron gets a pass, not that people are actually doing their jobs when assessing wind farm finance?

What I want to do is force banks to either (a) demand equally cast-iron risk assessment from other sorts of projects, or (b) go play with their own money. Option (b) is, of course, only of rhetorical interest, to counter claims that I want to nationalise credit creation, since banks utterly abhor the though of playing with their own money instead of the central bank's.

So while Jake thinks banks aren't so bad akshually, I think banking in its current form is an epic disaster on the scale of the Black Death or a major natural catastrophe.

The black death killed off a double-digit percentage of the European population. Unless the banksters manage to trigger a sufficiently bad depression that it results in a serious shooting war (a possibility that I am a lot less sanguine about dismissing than I was a year ago), they will not rack up that sort of body count, however damaging their activities may otherwise be.

The first is that perfectly reasonable - and welcome - kinds of activity are vetoed in favour of other activities that are stupid and self-destructive. The industry's record of failure on this is absolutely reliable.

Cock-ups happen. Some of those cock-ups are even intentional. Others will be systemic. The solution to that problem is to create checks and balances - reduce the power of bankers and increase the power of parliamentary, civil service and civil society organisations. It is not to abolish the institution that makes cock-ups. If we did that with any consistency, we would soon run out of social institutions.

So you have the paradox - or the Big Lie - of an industry which claims to be engaged in strategic risk management for everyone's benefit, but which is actually the primary creator of risk and social insolvency.

The point of having banks is not to reduce risk. The point is to increase it in a reasonably controlled manner. Because a society without banks runs too few risks, and therefore misses out on benefits it could have obtained.

The key term here is in a reasonably controlled manner. The problem currently is that there is too little control of the risk, and that is the problem that I am addressing.

It is not the only problem with banking as it is currently practised. Among the more prosaic problems are endemic fraud and rampant racketeering. But dealing with those are outside my area of expertise.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 13th, 2011 at 06:58:15 PM EST
[ Parent ]
But the problem here is surely that risk analysis that is not absolutely cast-iron gets a pass, not that people are actually doing their jobs when assessing wind farm finance?

No, the problem is that rhetoric - in the form of a thing called "risk analysis" - is being used to implement strategy without public discussion or democratic oversight.

Put simply, banking subverts democracies and leads democracies away from stability (and sanity.)

There is no good real-world reason why we don't already have a culture that uses renewables for energy. Absolutely none.

The fact that we're still desperately fighting a battle that shouldn't even have been started forty years ago, when the obvious rational choice was a move to renewables, proves just how distorted the decision-making process has become.

The black death killed off a double-digit percentage of the European population. Unless the banksters manage to trigger a sufficiently bad depression that it results in a serious shooting war (a possibility that I am a lot less sanguine about dismissing than I was a year ago), they will not rack up that sort of body count, however damaging their activities may otherwise be.

They already have. Not in Europe - but have you seen the state of Africa recently?

Of course we assume it couldn't happen here, because we're privileged and special.

We aren't. We're disposable. Ask Greece or the poor in the US.

This is a critical point. We have to broaden our experience to take an honest look at what's happening. Just because it's not happening to us personally doesn't mean what's happened to others is trivial.

The point of having banks is not to reduce risk. The point is to increase it in a reasonably controlled manner.

What risk do you mean, exactly? What physical bad consequences result if a bank backs a "risky" project that is deemed to be a failure by current accounting standards? (Assuming that a project fails for reasons other than banker whim in the first place.)

Not economic consequences - physical and social consequences.

When you can prove to me that the physical and social consequences of a failed "risky" enterprise are reliably worse and more damaging than the (largely imaginary) economic consequences, then I will believe that banks have a useful role to play.

Until then, banks are a problem - possibly the problem - and not a solution.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 13th, 2011 at 07:47:42 PM EST
[ Parent ]
There is no good real-world reason why we don't already have a culture that uses renewables for energy. Absolutely none.

Well, no, but what does that have to do with banks?

I can name the politician who killed US wind dead. I can name the politicians who killed the Danish offshore sector. They didn't need any help to do that.

Wind is crucially dependent on market structure. And the banksters don't decide that - the politicians do. Now, it may be that those politicians have been bought and paid for by the banksters, which means that you need to stop the banksters from buying politicians.

They already have. Not in Europe - but have you seen the state of Africa recently?

I am perfectly aware that there is a civil war in Libya. But I don't see how the banksters have much of anything to do with that.

What risk do you mean, exactly? What physical bad consequences result if a bank backs a "risky" project that is deemed to be a failure by current accounting standards?

People lose their homes.

People lose their incomes, which in our current institutional framework means that they will have to rely on charity and hand-outs to get food.

You get gas-fired power plants used for baseload, because of a failure to price in the systemic cost associated with increased gas reliance, and the systemic risk of monocropping your source of electricity.

When you can prove to me that the physical and social consequences of a failed "risky" enterprise are reliably worse and more damaging than the (largely imaginary) economic consequences, then I will believe that banks have a useful role to play.

But... you have more risky enterprises with banks than without. So that's an ass-backwards sort of demand to make.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 14th, 2011 at 04:29:13 AM EST
[ Parent ]
Well, no, but what does that have to do with banks?

If banks were capable of intelligent reality-based strategic management, they would have been fighting the other corner, surely?

I am perfectly aware that there is a civil war in Libya. But I don't see how the banksters have much of anything to do with that.

In that case you might want to become more perfectly aware of the rest of Africa too.

People lose their homes. [...]

Er - you do realise that the only reason all of your examples have been happening for the last few years is because of the state of the banking industry?

I was looking for examples of what happens when banks aren't in the way. You provided a list of failures that have been created by banking.

This is rather odd, and worrying.

To repeat - I am talking about social transactions which are not financialised, and not primarily for profit or the generation of the abstract feudal debt management system known as "interest."

It might be useful at this point to think about what that might involve.

But... you have more risky enterprises with banks than without.

No, you don't. This is exactly the point of the argument. You have more risk and instability when banks are pretending to manage the economy - because in reality, the banks have very little interest in decreasing risk, and they can make more short-term profit when risk increases.

Banks can deny certain kinds of business models if they happen not to suit them - but the proper definition of "suit" is not "too risky", it is "not obviously profitable enough."

But these rules are only for the little people, not for the banks themselves. If risk explodes - as it always seems to - the stranglehold the banks have on government means they can always steal public cash.

The whole financial industry is predicated on the (accurate) assumption that it is possible to profit hugely from risk.

This is not a good basis on which to expect much useful risk limitation to happen - as reality bears out, repeatedly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat May 14th, 2011 at 11:57:29 AM EST
[ Parent ]
In that case you might want to become more perfectly aware of the rest of Africa too.

Unless you believe Africa begins somewhere north of Greece, I don't see where you're coming from here.

I was looking for examples of what happens when banks aren't in the way. You provided a list of failures that have been created by banking.

Well when banks are not in the way, you don't get electricity in the first place. Nevermind gas-fired baseload.

Yes, the government can take over the strategic planning role currently fulfilled by the banks. The government can also monitor the banks to make sure they do their job. You have not provided any argument for why one of these solutions is universally superior to the other.

To repeat - I am talking about social transactions which are not financialised, and not primarily for profit

Since most European economies have been money-based since before they were industrialised, you may have a hard time finding any significant volume of industrial production that has ever taken place outside the monetary system.

You have more risk and instability when banks are pretending to manage the economy

A moment ago you were arguing that risk really wasn't so bad, so we didn't want to prevent it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 14th, 2011 at 03:11:54 PM EST
[ Parent ]

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