Recent Items

Dirk Bezemer: Creating a Socially Useful Financial System

Posted on by

By Lambert Strether of Corrente.

Here’s more material from this iNet “Paradigm Lost” conference in Berlin (from which Yves has just returned). Hat tips to readers BT and JurisV for suggesting it.

Here’s the introduction:

The first thing we need to say to each other is what do we mean by socially useful… Now the first thing to notice about this is that conventional cutting-edge macro monetary theory here is of no help at all in determing what is a socially useful credit sector, and that’s for the simple reason that there is no credit sector in the cutting edge macro models today.

OK, this goes back a long way: Frank Hahn [sp?] in the 1960s wrote a paper on problems of proving the existence of money in the multi-market equilibrium economy, so money itself is not supposed to exist even. This has been laid out and explained in many publications since. And my point is not to bash macroeconomics as it is today, but my point is that we really need to look for other models and other ways of thinking if we want to get to an assessment of what is a socially useful credit system. Supporting these you might say science fiction models [ouch], financially speaking, because there is no finance in them, the models that central bankers use have no banks — just let that sink in — is fictional history….

The whole presentation is deadpan screamingly funny, besides providing some superb analytical and polemic tools. Don’t listen to NPR with your morning coffee; listen to this!

NOTE Readers, sorry I had to take this down for a bit; fifty lashes with a wet noodle for lambert, for overexcitedly pressing the Submit button too early.

Print Friendly
Twitter24DiggReddit0StumbleUpon0Facebook10LinkedIn4Google+4bufferEmail

49 comments

    1. Ya Sure

      Glad to hear China and Japan are not mercantilist anymore. No more worries competing with china.

      Sounds like economists everywhere can confuse the bejesus out of themselves with their macro data.

      I guess Germany got into olive growing and put Greece out of biz. Greece tried making BMWs and Lambos but ended up with a 3 wheeled yugo they couldn’t sell.

      He completely ignores trade issues between the EU and ROW. Taking the EU as a whole they would running a big trade deficit with the rest of the world. But German exports balanced it out.

      There are Mr. Coffee and Krupp coffee pots. Both are made in China. A bankrupted Greek olive farmer (?) probably got a Deutsche bank credit card to buy a Chinese made Krupp coffee pot. Maybe the economist should wonder :

      1) Does vendor financing (or from the country’s bank) cause some sort of problem?Like enable mercantilism?

      2) How much outsourcing to China is Germany doing and does that impact German employment somehow?

      3) Could an aging Germany be preparing itself by saving for retirement, therefore their consumption is less than stellar?

      4) Will Spain ever figure out how to export their housing boom? Should Germany care?

      This will take me a very long time to figure out for sure, so I won’t.

      But one more fun anecdote. I read Siemens opened up a corporate account direct with the ECB. This would be like if Jeffrey Immelt called up Bernanke and said, “Ben, my people have been reviewing our banking relationships and we have come to the conclusion that you are The Man we want on our team. We would like our own account where we can deposit about $5 billion in cash. We wish that you do not commingle it Jamie’s or LLoyd’s account. We sleep better that way. What do ya say, Ben old boy?”

  1. Gerard Pierce

    It’s possible that this lecture means something to professional economists – because of a shared set of values, i.e. a shared sense of what the words mean.

    To me it is mostly meaningless because there is no distinction between various kinds of debt. Debt to the Bank of Ali Baba is socially different from debt to a pension fund.

    Without that distinction (and several other important distinctions) it’s silly to talk about a socially useful financial system.

    Maybe the thesis could be re-stated as: we need less predatory debt.

    1. Mansoor H. Khan

      Gerard Pierce said:

      “we need less predatory debt.”

      Why do we need to create any debt in order to issue currency?

      Why not just give money away to all citizens (i.e., social credit Clifford H. Douglas style)

      – or at least spend it on socially useful purposes (i.e., universal healthcare, higher education for all those who qualify, infrastructure, etc) and keep spending (newly created currency) until supply and demand balance (i.e., no inflation or deflation).

      The hard part will be dealing with peak fossil fuels (A) and allocation of global fossil fuels deposits (B):

      A. If peak fossil fuels is true then production capacity of goods and services in the economy will probably go down. This means some private spending will need to be taxed to reign in inflation at least until cold fusion (or something like that) is found to generate energy cheaply.

      B. Part B is even more difficult. How should global fossil fuels deposits be shared among humanity?

      One criticism of social credit (given newly created currency away to citizens without creating debt) is how to handle it in accounting (principles of double entry accounting are often to justify debt based currency issuance)?

      Think of the overall societal balance sheet as something like this:

      Asset (Cultural and Social Capital – Intangible Asset) =
      Currency Units (i.e., Dollars) outstanding — Equity Account

      Every time we give newly created money to citizens all we have to do is (assume we create $100 billion new dollars a month).

      Debit $100 Billion — Debit Cultural and Social Capital (Asset)

      Credit $100 Billion — Dollars Outstanding (Equity)

      For more see:

      http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html

      mansoor h. khan

      1. F. Beard

        One criticism of social credit (given newly created currency away to citizens without creating debt) is how to handle it in accounting (principles of double entry accounting are often to justify debt based currency issuance)? Mansoor H. Khan

        That reminds me of this:

        But when you give to the poor, do not let your left hand know what your right hand is doing, … Matthew 6:3 New American Standard Bible (NASB)

        So it appears that accounting is NOT always desirable. Oops! There goes that idol!

  2. dvr

    Excellent presentation, I’m glad to finally see (some people in) the economic sciences catch up with reality.

  3. Aquifer

    What to come away with – a)to expand the real economy, we have to shrink the financial sector b) you can only do that with regulation.

    Tnanx, Mr. B, gotta give you a lot of credit for your analysis – now we have some graphs and numbers needed to shore up what many have known for some time now ….

    Indeed, credit is as credit does – so let’s get on with the shrinking, lickety split …

    Couldn’t help chuckling – like the talking dogs in the Disney movie, who kept getting distracted by squirrels, the camera person couldn’t help him/herself from tearing away from the speaker early on to focus, and linger, on the georgeous blond in the audience, economy be damned ….

    1. F. Beard

      the camera person couldn’t help him/herself from tearing away from the speaker early on to focus, and linger, on the georgeous blond in the audience, economy be damned …. Aquifer

      That bugged me too! It nerded up the presentation.

  4. Middle Seaman

    Several economists said in 2009 that the financial sector size has to go from 40% of the economy to 4%. This presentation is excellent, clear, but not original.

    The financial cancer isn’t an economic or financial problem; it’s a political problem. It is also the correct evolutionary stage of capitalism. The next stage, hopefully, will be a socially contributing financial system. Sadly, it may be a return to feudalism.

    1. Ya Sure

      I remember reading an obscure Swedish economist in 2005 say that you shouldn’t let the financial sector get above 8% because then they just make trouble. That’s an exact quote. But then Sweden had there bank blowup – and nationalization the early ’90s, so they know what they speak of.

      But I’ll bet it says something similar on those clay bank ledgers, and money sticks probably had a warning label too. But you know how MMT is all original thought – just that’s it’s also based on 5000 years of fact we’ve all missed somehow.

      1. Mansoor H. Khan

        Ya Sure said:

        “just that’s it’s also based on 5000 years of fact we’ve all missed somehow.”

        We (humanity) have been duped by the global bankers. They have kept this simple truth hidden from us (at least during the last 100 years the bankers have made a great effort to obscure the true nature of modern money — paper and bank deposit money).

        mansoor h. khan

  5. diptherio

    How about a socially useful economic system? Yes, the financial system should be socially useful, but if it is embedded in a harmful economic system I don’t really see the point. When I was doing my undergrad I was always trying to get people to discuss the question of what we want an economic system to do. “What’s the economy for?” With few exceptions, no one wanted to talk about it. I guess most of them thought it was a silly question, but so long as we don’t answer it (after thinking about it and discussing it quite a bit) we won’t have much luck coming up with a new economic paradigm. Is an economic system that allows those with one resource (capital) to enrich themselves at the expense of those with another resource (labor) really one worth saving? As a laborer, I vote no.

    http://www.rockymt.org/?q=node/155

  6. john bougearel

    The Dirk Bezemer money shot: “Go Back to Bronze Age
    Economics”

    2nd money shot “austerity won’t work cuz gdp will shrink faster than the debt’

    1. Ya Sure

      Oops. Too late. The baby is here already.

      Better blame the Keynesians because they don’t put debt in their models…they just always scream SIMULUS…. SIMULUS…CHEAP MONEY..CHEAP MONEY…WE NEED MORE DEMAND!!!!, which I guess must be something different than debt.

      Someone will figure out this problem someday…I hope.

    2. MyLessThanPrimeBeef

      If one goes really fast, one might just bypass the Bronze Age and head straight back to Neanderthal Economics.

      As for GDP shrinking faster than debt, the sad thing is it might just work because fast shrinking GDP might lead to no debt at all when it’s default time.

      1. Ya Sure

        And then that will unclog the wheels of commerce and we can all get jobs then. I can hardly wait! No more boring sitting around in my old age. I love economists.
        I love Big Brother.

  7. F. Beard

    “Socially useful” credit?

    How about none? If the “private” sector issues it then credit is akin to counterfeiting. If the public sector issues it, then how can favoritism be avoided? Example: Are men more “credit-worthy” on average than women because they have higher incomes?

    1. Mansoor H. Khan

      F. Beard said:

      “How about none?”

      Maybe. If there was great demand for government issued currency (issued at whichever level, federal, state, local, etc) then the government would have to do put into circulation somehow.

      What do you recommend? One way it can enter circulation is via social credit. Another way is government spending?

      mansoor h. khan

      1. F. Beard

        I don’t call money spent into circulation “credit” since it does not necessarily have to be repaid, much less be repaid with usury.

        Social credit or a Minimum Income sound good along with generous infrastructure spending.

        And if genuine private currencies were allowed for private debts only then Federal spending could be what the market would bear since if the Federal government overspent relative to taxation then taxes would be easier to pay in real terms.

  8. BT

    Some commenters think that we can have money without debt. This might be an attractive idea on the surface, but it is not actually possible. Why? Because even if you stared with a government-issued debt-free money system, then credit/debt relation would just evolve spontaneously because society *needs* these relations to have borrowing and investment. Credit/debt are even older than gold/silver coins as forms of money.

    Without borrowing and investment, there is only ‘saving up’ for things, which is extremely inefficient. There is a reason why Western Europe came to dominate the world (and why China is coming up fast) and one major contributor is a well functioning bank credit system that fosters real investment (not speculation!).

    The virtue of double-entry accounting is that it ensures that there is an equal amount of money (credit) and debt. This prevents the systematic creation of debt-slaves.

    With a single-entry accounting system, the amount of debt could easily increase over and above the amount of money in circulation.

    Finally, we can still generate some effectively debt-free money in our system. This is simply the combination of government borrowing and spending (bond issue and creation of deposits in the account of the recipient of government spending) and central bank bond purchases (swapping the bond for reserves). The net effect is expansion of a bank’s balance sheet (more deposits on the liability side and more reserves on the asset side) and of the central bank’s balance sheet (more reserves on the liability side and more bonds on the asset side). The central bank refunds any interest payments to the treasury, so there is no real debt burden. That is all slightly convoluted to prevent the abuse of this power by a tyrannical government. But right now this combination is what western economies need.

    1. F. Beard

      Without borrowing and investment, there is only ‘saving up’ for things, which is extremely inefficient. BT

      Wrong. Common stock as a private money form allows immediate consolidation of real capital for economies of scale without borrowing. Since the recipients of the common stock money become IMMEDIATE co-owners of the common stock company then there is no debt.

      And to avoid the necessity of using a “foreign” currency (except fiat for taxes), the common stock company could accept its common stock back for the goods and services it produces.

      1. Chris Cook

        @FBeard

        Well, you’re actually talking about (say) $1.00 shares OF common stock, and I hope you’re not thinking of turning the USA into that essentially sociopathic beast known as a joint stock corporation?

        We need to look again at what stock actually was.

        There were two forms of Stock, in the form of half of a wooden accounting token known as a tally stick.

        One was simply a receipt or memorandum tally issued against value received. The other was a record of an obligation or IOU issued against value received, or undated credit,

        For hundreds of years – until sovereign credit began to be privatised through purchases of government stock by the (then private) Bank of England in 1694 – it was the principal means by which our sovereigns financed expenditure and funded investment.

        https://blogs.ucl.ac.uk/resilience/2012/01/09/a-stock-answer/

        The very phrase ‘rate of return’ derives from the rate at which stock could be returned to the issuer – typically the sovereign’s Exchequer.

        The reality of stock as public credit has been air-brushed from economic history as an Inconvenient Truth which completely destroys the basis of the conventional economic narrative.

        So I agree with your underlying point, which is that currency may be issued free of a dated debt obligation.

        But I have to say that there is nothing whatever equitable about the shareholder ‘equity’ proposed as a replacement, and in my view we should go further ‘back to the future’ for a solution through updated versions of stock based directly on the use value of productive assets.

        1. F. Beard

          But I have to say that there is nothing whatever equitable about the shareholder ‘equity’ proposed as a replacement, Chris Cook

          Why not?

          1) No usury is required with common stock as money.
          2) New money issue is under the control of all existing money holders since they can vote their money (shares).
          3) No fractional reserves are required since common stock is normally unredeemable.
          4) All price inflation is born by the money issuers because all money recipients become co-owners the moment they accept the new money. This is an important moral consideration.
          5) Without fractional reserves or even lending, then deflation is not a serious threat.
          6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease.

          and in my view we should go further ‘back to the future’ for a solution through updated versions of stock based directly on the use value of productive assets. Chris Cook

          Well, ultimately the value of a particularly common stock money would be the goods and services of the issuing company that it could be exchanged for.

          I don’t deny that revisions to corporate law maybe necessary though.

    2. F. Beard

      That is all slightly convoluted to prevent the abuse of this power by a tyrannical government. BT

      It is designed this way to give banks and the rich a risk-free return at everyone else’s expense.

      The way to prevent monetary abuse by government is to ensure that its fiat is ONLY de jure and de facto legal tender for government debts and not private ones. This is in accord with Matthew 22:16-22 (“Render to Caesar…”). Of course, fiat could be voluntarily used for private debts and likely would be unless government over-issued relative to taxation.

    3. F. Beard

      The virtue of double-entry accounting is that it ensures that there is an equal amount of money (credit) and debt. This prevents the systematic creation of debt-slaves. BT

      Not true because the “loans” create the principal but not the interest thus requiring ever increasing debt in aggregate to avoid unavoidable defaults.

      1. BT

        Interest is just fee for service. Just like paying for a hamburger. Your argument is saying: debt only creates the principle, so where does the money to buy hamburgers come from?

        Debt creates the stock of credit. Interest payments are a flow of circulating credit – just like all other transactions.

        1. F. Beard

          Interest payments are a flow of circulating credit – just like all other transactions. BT

          No, because much of the interest is lent for additional interest.

          1. BT

            Interest is never re-lent. It goes to pay bank costs – salaries, rental of premises, dividends to shareholders.

          2. F. Beard

            It [interest] goes to pay bank costs – salaries, rental of premises, dividends to shareholders. BT

            And what is to prevent those receiving that interest from loaning out some of it for interest?

            There is no need to defend the current system. We can have all the benefits of capitalism without banking. The solution is the use of common stock as money.

    4. F. Beard

      The central bank refunds any interest payments to the treasury, so there is no real debt burden. BT

      Unless those bonds are sold by the Fed to 3rd parties. Also, since US debt is not directly sold to the Fed, private interests are allowed to “front run” Treasury debt sales meant for the Fed.

      The system is fascist; it is government privilege for the rich.

  9. psychohistorian

    Dirk Bezemer does a great job of debunking the historical tying of credit to the owners of capital rather than government.

    Credit needs to be a utility supplied, administered and controlled by government, not the inherited owners of capital. Any “profits” from the provision of the utility, beyond that necessary to cover costs, should go towards the public commons; unlike today where the profits from all this immoral debt is to accrue to the historic inherited owners of capital (including their banks).

    It was nice to hear him say the words “bloated financial sector” and his arguments against austerity and QEn and for rule of law, IMO, screamed out to let the banks fail and that all those holders of all the current inflated paper debt can learn to live like the rest of the world’s citizens.

  10. psychohistorian

    I want to know if there was anyone at this conference with a button saying:

    BUDDY, CAN YOU PARADIGM?

  11. chris_gee

    Despite an interest I lasted for only 12 minutes of this so must have missed the funny parts.
    Surely to God someone making a presentation can skip a monotone and present points in such a way that they have an impact and can be grasped in their essentials quite quickly. In other words make a distinction between the guts and the filler.
    A camera person who could use a zoom function to actually show the slide content may have helped.

    1. Lambert Strether Post author

      That was the “deadpan” part, the monotone. I guess I was concentrating on the content and not the delivery or the camerawork. We all have our own definition of “guts,” I suppose.

    2. Ya Sure

      You didn’t miss much. The very last sentence of the presentation – which I took to be the conclusion of sorts – was that there needs to bank regulation.

      So at that point I took notes and wrote that down on a sticky note for future reference.

    3. JTFaraday

      “present points in such a way that they have an impact and can be grasped in their essentials quite quickly. In other words make a distinction between the guts and the filler.”

      I agree completely. I was so excited to read the philosopher Charles Taylor’s monumental “A Secular Age”– and I still think the content would be of interest to me– but his writing so drives me nuts that I just can’t.

      The guy can’t outline an argument to save his life, piles on details on top of details, while continually making argumentatively pointless little digressions.

      And when I say monumental, I mean the thing is a cinder block. Anything that long can only be a series of nested arguments, preferably nested historical arguments. (Although he is only lowly philosopher so I suppose I’ll have to give him half a pass on that).

      But no. No editorial sense whatsoever.

      There are people who will tell you that is no particular skill. But they are wrong.

  12. polistra

    I’ve just realized that academic economists 120 years ago were actively exploring a more humane view of economics. Some of these views turned into practice, leading us out of the Gilded Age and into the Golden Age when an ordinary man could support an ordinary family.

    One such economist was George Gunton.

    You can read or download his 1891 Principles of Social Economics:

    http://books.google.com/books?id=ZBGH8BVdRc4C&dq=social%20economics%20Gunton&pg=PP1#v=onepage&q=social%20economics%20Gunton&f=false

    In the PDF go to page 205 for his views on the importance of the capital sector….

  13. joebhed

    So far, Bezemer’s is the highlight of the discussion.

    Although the entire panel seemed to be framed on this “Socially Useful Financial System” topic, we would have been better served had he seized the day and topic-ed on creating the “socially-useful monetary system’, because then the foundation of national sovereignty would be driving the rationale of the discussion.

    For the Money System Common.

    The good news is that it has already been proposed.

    http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf

    Thanks.

  14. rotter

    a “socially useful credit system” would exist solely for the purpose of creating more equal wealth distribution and providing for the needs of the many and not the greed of the few. It could have no other socially useful function. thats why there are “no models”

  15. Crazy Horse

    What is it about being an “economist” that requires the practitioner to build models that ignore the obvious characteristics of the real world? And I’m not referring to the macro-economic models that Bezmer correctly labels science fiction—.

    In Bezmer’s socially useful economic system the “good” is defined as that which furthers expansion of GDP. Real economic activity is reflected in the growth of productive capacity and technological advance. A socially useful financial sector exists as a service industry to support real economic expansion and thus remains limited in size.

    This paradigm rests upon three fictions that fail to even qualify as science fiction:

    1- The key flaw in Bezmer’s theorizing is the failure to understand the simple mathematics of exponential growth. If growth is reflected in the increase of physical goods or population, within a time frame of a few hundred years the entire surface of the earth would be covered a meter deep with them. It matters little whether the rate of growth is 3% like most economists and politicians would propose as a policy goal or even 1%— the end result is the same.

    All economic systems that promote exponential growth in a finite world are socially dysfunctional and unsustainable.

    2- Any economic theorizing that fails to incorporate the concept of natural capital into its theory of development and value is fatally flawed. In industrial civilization, energy is the fundamental measure of wealth: not fiat currency,gold,credit expansion or number of second homes. The finite nature of fossil fuel energy is the key determinant of the fate of industrial civilization and the population bubble that it supports. EROI will stand long after fiat currency collapses.

    3- And finally Bezmer fails to acknowledge the role of political power and the competitive imperative of capitalism. The evolution of the financial sector into casino capitalism, vulture capitalism, the bank of the .01 %, —whatever you choose to call its current form— is no accident. The fall of Lehman Bros. and the further consolidation of power in the hands of Goldman and JPM simply reflects the capitalist imperative of the powerful to eat the weaker. The outright purchase of the Democratic and Republican flavors of the political circus is simply a cost of doing business by creating a regulatory system that makes theft legal and prosecution unthinkable.

    Any economic theory that is in fact socially useful must acknowledge that the earth is round rather that flat with infinite horizons as economic pseudo-science assumes.

    1. Aquifer

      Good post – the fact that he used increasing GDP as an endpoint for a “system” pretty much undermined what would otherwise be useful points …

      As some PSA’s by eco groups have pointed out “everytime another person is diagnosed with cancer, the GDP rises ….”

      GDP as a marker of “progress” is not only crazy given the hodgepodge that goes into it, but downright perverse. Time to resurrect, expand and expound upon the ecological economics of Herman Daly wherein the economy is rightly considered a subset of the environment whose limits are the ultimate arbiters and not the upside down version represented by GDP …..

  16. ABM

    Great piece. (And indeed also very funny in a cool way.)

    I think most of the points of critique, like Bezemer’s use of GDP as a measurement of social usefulness, are valid in themselves, these are issues to think about, but they miss what Bezemer is trying to do here: He can not outline an entirely different economic system within the 25 minutes he got for this presentation, and he didn’t even try. What he tried, as I think, may be even more useful in a tactical sense: instead of suggesting an entirely different model of economics, which could be easily dismissed as radical fringe, he is arguing mostly within the framework of currently dominating models, and he shows how utterly they fail. Helping to erode these models from within may be the most effective approach at this point in time—later, something entirely new may be build on the rubble of the current, delusive mainstream theory.

  17. Lafayette

    WANTON CAPITALISM

    What a silly name for project, the product of some Leftist notion that financial systems are even capable of being Socially Useful as an imperative.

    Such is not their remit. At best, they must “do no harm”. And that’s the hard part in terms of regulatory oversight.

    Or the lack of it during the years leading up to the SubPrime Mess when American governmental regulatory oversight agencies fell asleep at the wheel. What followed were the Credit Mechanism Seizure of the fall of 2008 and the subsequent Great Recession of 2009 (from which we are yet to see the light at the end of the tunnel).

    Markets need regulations. Why? Because just like highways need speed limits since “speed kills”. The Holy Grail is regulatory deftness, that is, enough to make financial services useful to the general public without clobbering innocent clients with predatory pricing and eventual real-estate foreclosure.

    Behind the lack of active (in their face) regulatory oversight, with proper fail-safe practices, was simply Human Greed. Spawned by the tumbling down of Total Income (marginal and capital gains) taxation levels of the Reagan Administration to such ridiculously low proportions as to actually promote both Wall Street and Main Street greed. The opening of this Pandora’s Box of Ills prepared the ground for Wanton Capitalism to rear its ugly head.

    And thus the concern nowadays for a Socially Useful Financial System. The devil is in the details and the details are the stuff of regulatory oversight agencies.

    They were not doing their job in the US. And the world came to suffer for that negligence.

Comments are closed.