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Getting Economics to Acknowledge Rentier Finance

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The economics discipline has for the most part managed to ignore the 800 pound gorilla in the room: that of the role that the financial services industry has come to play. Astonishingly, even though the reengineering of the world economy along the lines preferred by mainstream economists resulted in a prosperity-wrecking global financial crisis and a soft coup by financiers, the discipline carries on methodologically as if nothing much had happened. And one of its huge blind spots is its refusal to acknowledge the role of banking and finance in modern commerce. Interest rates are simply an input into the preferred form of macro models, DSGE (dynamic stochastic equilibrium models). Economies are assumed to be self correcting, and to automagically “correct” to full employment. All shocks to the system are exogenous. In other words, boom-bust credit cycles are simply omitted because they are ideologically inconvenient and instability is too hard to model.

Various heterodox economists (as well as some empirically oriented economists that come out of the mainstream, most notably Andrew Haldane of the Bank of England and Claudio Borio and Piti Disyatat of the Bank of International Settlements) are making a concerted effort to represent the role of the finance in modern economies. A new paper by Michael Hudson (University of Missouri at Kansas City) and Dirk Bezemer (University of Groningen, Netherlands) makes an important contribution by looking at financial services from a Classical economics perspective. Classical economists took a decidedly dim view of what they saw as unproductive rent-seeking, with “rent” seen as the dead hand of the feudal aristocracy weighing on current production:

Rentiers are those who benefit from control over assets that the economy needs to function, and who, therefore, grow disproportionately rich as the economy develops. These proceeds are rents – revenues from ownership “without working, risking, or economizing”, as John Stuart Mill (1848) wrote of the landlords of his day, explaining that “they grow richer, as it were in their sleep”. Classical economics from Adam Smith onwards analysed rents, its effects, and policies towards rents, but the very concept is lost on today’s economics.

Just as landlords were the archetypal rentiers of their agricultural societies, so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies: finance controls the economy’s engine of growth, which is credit in all its forms. Economies obviously need banking services, insurance services, and real estate development and so, of course, not all of finance is “without working, risking, or economizing”. The problem today remains what it was in the 13th century: how to isolate what is socially necessary for ‘retail’ banking – processing payments by checks and credit cards, deciding how to relend savings and new credit under normal (non-speculative) conditions – from extortionate charges such as 29% interest on credit cards, penalty fees and other charges in excess of what is socially necessary cost-value.

Hudson and Bezemer argue that the failure to distinguish between productive activity versus rent seeking distorts and overstates the accounting for national output:

Creating a more realistic model of today’s financialized economies to trace this phenomenon requires a breakdown of the national income and product accounts (NIPA) to see the economy as a set of distinct sectors interacting with each other. These accounts juxtapose the private and public sectors as far as current spending, saving and taxation is concerned. But the implication is that government budget deficits inflate the private-sector economy as a whole. However, a budget deficit that takes the form of transfer payments to banks, as in the case of the post-September 2008 bank bailout, the Federal Reserve’s $2 trillion in cash-for-trash financial swaps and the $700 billion QE2 credit creation by the Federal Reserve to lend to banks at 0.25% interest in 2011, has a different effect from deficits that reflect social spending programs, Social Security and Medicare, public infrastructure investment or the purchase of other goods and services. The effect of transfer payments to the financial sector – as well as the $5.3 trillion increase in US Treasury debt from taking Fannie Mae and Freddie Mac onto the public balance sheet – is to support asset prices (above all those of the banking system), not inflate commodity prices and wages. Similarly, the 2009 ‘quantitative easing’ policy in Britain confused loans used in the real economy (which were stagnating or falling throughout the experiment) with boosting bank balances with the Bank of England which quadrupled over 2009 (Graph 3). Bezemer and Gardiner (2010) show that neither bank loans nor spending nor GDP increased noticeably
during or after the exercise, but there was a curious stock market rally during 2009.

The authors describe how much the financial sector has grown relative to the productive economy. Financial sector total financial assets (as in the asset side of bank balance sheets and off balance sheet vehicles) was one times US GDP in the early 1950s and is roughly 4.5 times GDP now. Financial sector earnings were 10% of total corporate profits in the 1950s and 1950s and rose to 40% in the early 2000s. Yet despite the sorry record, in terms of falling growth rates, stagnant average worker wages, and increasingly frequent and severe financial crises, orthodox economists look favorably upon financial “deepening,” meaning the proliferation of financial products and services (aka “innovation”). To put it more simply, the rentiers have the firm backing of mainstream economists, despite the evidenced of its destructiveness:

Just as debt deflation diverts income to pay interest and other financial charges – often at the cost of paying so much corporate cash flow that assets must be sold off to pay creditors – so the phenomenon leads to stripping the natural environment. The so-called ‘debt-resource-hypothesis’ suggests that high indebtedness leads to increased natural resource exploitation as well as more unsustainable patterns of resource use (Neumayer 2012, pp. 127-141)…

Demographically, the effect of debt deflation is emigration and other negative effects. For example, after Latvian property prices soared as Swedish bank branches fueled the real estate bubble, living standards plunged. Families had to take on a lifetime of debt in order to gain the housing that was bequeathed to the country debt-free when the Soviet Union broke up in 1991. When Latvia’s government imposed neoliberal austerity policies in 2009-10, wage levels plunged by 30 percent in the public sector, and private-sector wages followed the decline (Sommers et al 2010). Emigration and capital flight accelerated: the Economist (2010) reported that an estimated 30,000 Latvians were leaving every year, on a 2.2m population. In debt-strapped Iceland, the census reported in 2011 that 8% of the population had emigrated (mainly to Norway).

The irony of Hudson’s and Bezemer’s need to look back to the early days of economics is that a view that was widely shared then was the importance of usury ceilings. Why? If bankers were free to seek out the highest yielding loans, they would. And the people who would pay the most would not be businessmen but rich gamblers. So the fact that unconstrained banking would wind up promoting speculation rather than investment was seen as obvious centuries ago, yet supposedly more sophisticated modern economists seem to prefer to truck with Dr. Pangloss and tell us that the system they’ve helped create is both inevitable and virtuous, when neither is true.

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85 comments

  1. scott

    That’s where the productivity gains of the PC and internet revolutions went, and why real wages are smaller than in the early 1970′s. The productivity gains were siphoned off to support the nonproductive FIRE economy and the 30 million people it employs.

  2. Dan Kervick

    Perhaps the issue with the economics profession is that a large proportion of them have made their reputations as experts on the workings of the finance industry. They don’t understand labor, or industrial production, or business culture, or trade, or households, or pricing behavior, or infrastructure, or public finance. All they know is money and securities in their many manifestations, and the closed circle of Wall Street. If the financial sector were to shrink in size, the expertise of these professionals would shrink in importance.

    The rate of growth of their bank accounts might shrink as well, since a lot of them are paid by the financial industry for their services.

    1. rps

      “They don’t understand labor, or industrial production,etc….”

      Oh they understand. It’s that they Don’t Care because they get their tithings from their patrons.

      Economics is a religion and the academic economists sitting in their ivory towers are the high priests

      1. Calgacus

        No, Dan is right. If only the economists were only cynical, corrupt high priests who knew the score, but just preached in order to fleece the masses.

        Maybe there are a few, but the real problem, the power of their kool-aid is that they’ve drunk it themselves. They believe their own lies. Due to modern means of material & intellectual production, which they understand not at all, they have produced the most colossal edifice of nonsense that the world has ever seen. And have acquired billions of willing and unwilling votaries worshipping at their Tower of Babel.

    2. El Snarko

      This aspect remains a problem of regulation and politics. A solution will be in sight when congress people do not retire, but resign to reenter productive work, and work thay had no hand in regulating at that!

      As bad as the financial sector has become (speaking of a former owner of a 29% card) I see no advantage to society of allowing roads and water system to become subject to these identical pressures. Foundationless wealth is extortion. I mean you could ration police and fire responses and auction them….then sell futures on the earnings and insure that…then derivatives on that risk to finance metering water coolers…only half the homes on a street could be connected to the grid at any one instant all traded through India…it never ends.

  3. Stephen Zielinski

    Ignore global warming — check.
    Ignore global poverty — check.
    Ignore resource depletion — check.
    Ignore species destruction — check.
    Ignore crimes against humanity — check.
    Ignore finance capital — check.

  4. F. Beard

    The problem today remains what it was in the 13th century: how to isolate what is socially necessary for ‘retail’ banking – processing payments by checks Hudson and Bezemer

    Yes, risk-free money and storage services are essential to a healthy economy. So why do we trust the banks with these critical functions? Shouldn’t the monetary sovereign provide these services for its fiat? Who else possibly can unless the the monetary sovereign guarantees them? And if the monetary sovereign does guarantee them then isn’t that a government subsidy? But don’t government subsidies distort the market? And isn’t the market currently distorted in favor of the banks?

    and credit cards, Hudson and Bezemer

    No! Credit creation is a form of money creation and is actually a form of counterfeiting when done in a government enforced monopoly money supply.

    deciding how to relend savings Hudson and Bezemer

    Yes. Banks should be alowed to broker honest (100% reserve) loans.

    and new credit under normal (non-speculative) conditions Hudson and Bezemer

    If banks were totally private businesses, their ability to extend credit would be very limited because without government deposit insurance and a legal tender lender of last resort, few would trust them enough to keep money with them and if they did they would be aware of the risk and demand high interest to compensate.

  5. Dan Lynch

    Marriner Eccles testimony to Congress in 1933:

    “There is plenty of money today to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefore, necessary for the Government to print more. This maldistribution of our money supply is the result of the relationship between debtor and creditor sections – just the same as the realtion between this as a creditor nation and another nation as a debtor nation – and the development of our industries into vast systems concentrated in the larger centers. During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits in payment of interest, debts, insurance and dividends as well as in the transfer of balances by the larger corporations normally carried throughout the country.

    The maladjustment referred to must be corrected before there can be the necessary velocity of money. I see no way of correcting this situation except through Government action.”

    http://londonbanker.blogspot.com/2011/09/testimony-of-marriner-eccles-to.html

    1. Chauncey Gardiner

      Thanks, Dan. Eccles was absolutely right, and We the People of North America and Western Europe find ourselves in a very similar situation today. IMO the distribution and velocity of money are as critical to our well being as are the definition and creation of money.

      We are largely victims of those who control the monetary system and have both engineered and created the debt-based money and the closed loops of its distribution. One such closed loop that is key has been the retention of $1.5 trillion, including much of the so called “QE money” in the banks’ reserve accounts at the Federal Reserve Bank under the guise of “sterilization”. The huge sum begs the question of why the corporate media are now again pounding the drums that “more QE is needed”? (I am passing without comment the question as to what extent the primary dealers have used the balance of QE to manipulate the financial markets?)

      I suspect the failure to distribute “money” will be effectively used in the next phase of engineered looting to further transfer private savings and selected publicly owned assets at the federal, state and local levels into the hands of a few. This will be done under the guise that “Austerity is necessary”, as is presently occurring in Europe, and the pretense that our government is unable to create and broadly distribute money.

      1. EconCCX

        >>One such closed loop that is key has been the retention of $1.5 trillion, including much of the so called “QE money” in the banks’ reserve accounts at the Federal Reserve Bank under the guise of “sterilization”.<<

        Sorry, but…where else did anyone anticipate these reserve balances would be maintained? And for what purpose?

        1. Chauncey Gardiner

          >>Sorry, but…where else did anyone anticipate these reserve balances would be maintained? And for what purpose<<

          Since the Fed's reserve requirements are minimal now according to press reports I have read, I am unable to answer your first question, nor is the purpose why such large reserves being maintained patently apparent to me. Hence, my question why the Fed is again contemplating further QE?

          Perhaps one clue is that the Fed is reportedly paying interest to the banks on the reserves; thus, another subsidy.

          Perhaps another clue lies in the composition of the Fed's reported assets.

          However, like much of what goes on the at the Fed and among its dealers, these are merely clues as to what is really occurring inside an opaque institution and monetary system.

          If you work at or on behalf of the Fed or one of its primary dealers, if you know, or even if you THINK you know, I would love to hear your response. I would very much like to be absolutely wrong about any or all of this.

          1. Bert_S

            I don’t really “know” anything, except that they would never let me near an opaque institution. But if listening to The Bernanke is worth anything, I connect the dots like this:

            1) The B believes in the “wealth effect” – from stocks appreciating, not so much real estate.

            2) The B wants to flatten the yield curve – quantity and/or velocity of money is just a side effect in his mind. Or I’m sure he would like it, but if it ain’t happenning a flatter and lower yield curve has gotta make it so, someday.

            The market reaction to QE has been higher stock prices and lower and flatter yield curve. Mission accomplished…sort of.

            Now you have to keep the magic alive and dangle more QE out there like the carrot that keeps the mule moving forward.

            Just my take on it. Could be all wet, of course.

          2. EconCCX

            >>if you know, or even if you THINK you know, I would love to hear your response.<<

            Sure. Here's my best understanding of what's going on.

            A low reserve requirement should have no bearing on aggregate reserve balances. Reserves are Central Bank Money. That's the money banks ultimately use to clear accounts with one another. If we have a bank loan or deposit account, we have that much Commercial Bank Money, which is a guaranteed IOU from our bank. Unless we're a financial institution or the US Government, we don't have an account with any Federal Reserve Bank. Only if we're transacting in green pieces of paper, Federal Reserve Notes, do we hold any Central Bank Money.

            So, we all write checks and EFTs all over the world in Commercial Bank Money, our own deposit accounts. At some point the bank-to-bank transfers are squared off against each other. They're reciprocally cleared via the clearing house. Some remaining balances are held on account with other commercial banks. And finally the NET is cleared via Central Bank Money, i.e. Reserves. That's how fractional reserve banking is possible; only the small net amount clears via Reserves.

            Those Reserves thus move among institutions and Government entities holding accounts at the Federal Reserve. The aggregate amounts don't substantially change (disregarding charges) no matter the loan activity or leverage. Aggregate Reserve balances change because because the FRB and account holders purchase or sells assets, or because people or institutions hold varying amounts of physical cash.

            So a high aggregate Reserve balance, to my understanding, offers no indication of how much spending or lending is taking place. But I may be wrong and will gladly stand corrected if someone has an authoritative cite.

          3. Chauncey Gardiner

            Thank you for your response, EconCCX. Cite: http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9

            Having some difficulty conceptually with your statement that aggregate Reserve Balances with Federal Reserve Banks “don’t substantially change (disregarding charges) no matter the loan activity or leverage”… “So a high aggregate Reserve balance, to my understanding, offers no indication of how much spending or lending is taking place.”

            Reserve Balances with Federal Reserve Banks:

            9/5/2012: 1,528,382 million
            9/3/2008: 3,831 million

            Golly, must just be business as usual. :)

          4. EconCCX

            >>Reserve Balances with Federal Reserve Banks:
            9/5/2012: 1,528,382 million
            9/3/2008: 3,831 million<< @Chauncey Gardiner

            These values are not in dispute. But I think you're interpreting them as indicating that financial institutions are "sitting on" excess reserves. When they actually indicate that almost every time a bank lends or spends, somebody puts those proceeds into, yes, a bank. Same one or another one. Reserves thereby move laterally if at all, with some exceptions already enumerated: Treasury operations, open market operations, entities holding cash. (I'd be curious to know in what form Chinese banks, for example, hold US dollars.)

            The point of keeping reserves at such a high level? The Fed Governors' desire not to have banks made insolvent by their insolvent counterparties. as happened in 2008.

        2. Rob

          Considering knowing anything about the federal reserve seems difficult,since they lack any straight answers…..I wonder too how that 16 Trillion,they came up with to allow banks and other large institutions to “hold” on their books comes into play….the numbers they concede are paltry,compared ton16 trillion dollars they let out to pad companies books….people bicker over an eight hundred billion dollar tarp fund,and bailouts in the millions ,or even a few billions…..but what was shown by Bernie sanders efforts to get fed accountability,where does that fit into what may eventually called the truth?I don’t care what bernanke says he believes in….16 TRILLION dollars…..how is that for casting a bubble,that doesn’t really exist.What do we know of fed operations?

    2. MyLessThanPrimeBeef

      Thanks, Dan Lynch.

      We have enough money.

      It is in the wrong place.

      Need to also focus on the distribution of money.

        1. MyLessThanPrimeBeef

          You’re welcome and thank you too.

          More people should know about the mal-distribution of money.

  6. Capo Regime

    If economics is as averred in Econned essentially a useful idiot savant put at the service of the financial elite why would it be expected to be cognizant of a reality which a.) works against it core assumptions and b.) exposes their sponsors.

    What is fascinating about economists (especially american ones) is a sort of aspergers view of the world (not a slam at Aspys) where the map is more important than the landscape. They remind me of the tale of a guy out west who was so dependent on his GPS that he ignored his real location and he and his family almost froze to death. Relying on models rather than reality will surely lead us to the same circumstance. Its interesting that psychologists are more and more going into modelling of behavior and not coincidentally at greater service to corporate marketing and government.

  7. Susan the other

    In the NYRB review of Stiglitz’ The Price of Inequality he is referenced as saying the market is broken and it is because government has interfered in the normal balance of it. I don’t like this explanation. Because government has tried to make it work. Nevermind conflicts of interest. I really do think that it is time for confession: If the system or the free market or any market was capable of working it would work. Ergo? Things weren’t screwed up by government, they were never resolved in the first place. And there is good analysis that says it is the rentier class that is doing the most harm. Lately that harm has grown exponentially – aided and abetted by government – in one more attempt to fix things. The craziest thing is, now all we can do to keep the system from imploding is set it up to explode. We do not have the proper social tools. We have to change politics and government to come up with a way out. Write new laws. Funny how similar this is to the Euro crisis.

    1. Jim

      Susan, what if there is no consensus as to what the “new laws” should be? What if come January 2013 the US again has divided government?

      At that point, would you favor Bernanke assuming a Draghi-like role, declaring that the system is about to implode and that he will “save the US” by drafting and imposing fiscal policy from the Fed, as the “grave” national emergency affords him?

      1. Susan the other

        Well I don’t see Draghi doing that much dictating yet. I think he and Merkel have joined forces to supply money as generously as possible. There aren’t any details on why Greece is now back in Germany’s good graces, but I think it has nothing to do with Greek austerity and much to do with China. Let’s hope China stays glued together. And Legarde has just said she thinks Spain and Italy have”done enough.” Bernanke could be given a better mandate, certainly. Or congress could coordinate. Does congress even have an employment committee? How Bernanke thinks he is going to go all out to fix unemployment (today on Bloomberg) is beyond me. He can’t do anything except keep the current system flush with cash which goes straight to the stock market. What we need is the equivalent of a nationwide mobilization of jobs. That might make a fiscal difference in a year or two.

  8. EconCCX

    I hope MMT’ers will note how this analysis renders their solutions laughable. Issue 16T of new reserves in coin form and that money is quickly deposited into commercial banks to do its work of…bidding up the prices, and thus the rents, of bottleneck resources. “ZOMG, Zimbabwe!!” mocks Lambert.

    The true solution is a medium of exchange that is service-backed and service-denominated, like bridge tolls or train tokens. The issuer can issue as many as they’d like, use them to pay salaries and contracts…just long as the issuer honors them forever at the bridge or train, and recipients can re-sell them in competition with the issuer. The result: debt-free money, of certain value, founded in reciprocity and utility rather than scarcity and predation.

    1. F. Beard

      and that money is quickly deposited into commercial banks to do its work of…bidding up the prices, and thus the rents, of bottleneck resources. EconCCX

      A 100% reserve requirement for deposits would eliminate that. Then bank deposits would have to be 100% liquid at all times; banks would not be allowed to play with (embezzle) their reserves.

      The non-bank private sector might try to speculate but without access to credit (a form of counterfeiting) their ability to drive up prices would be limited.

    2. Calgacus

      I hope MMT’ers will note how this analysis renders their solutions laughable. Issue 16T of new reserves in coin form and that money is quickly deposited into commercial banks to do its work of bidding up the prices, and thus the rents, of bottleneck resources. “ZOMG, Zimbabwe!!” mocks Lambert.
      Wray’s written some critical pieces recently about this sort of speculative bidding. Of course banking has to be regulated. The Big Coin is just a trick to get / allow the US government to spend more, to practice functional finance, Keynesian stimulus when necessary, which is the real recommendation. Of course banking regulation is necessary. One route, Bill Mitchell’s preference, with a lot going for it, is just nationalize all the banks. No commodity, real estate speculation if Uncle Sam sez no.
      The particular MMT recommendation is to engage in this functional finance Keynesian spending the way Keynes would have – spending for public purpose, targetted at the people who want/need money, i.e. the people who don’t have any, i.e. the unemployed.

      The true solution is a medium of exchange that is service-backed and service-denominated, like bridge tolls or train tokens. The issuer can issue as many as they’d like, use them to pay salaries and contracts…just long as the issuer honors them forever at the bridge or train, and recipients can re-sell them in competition with the issuer. But that is what we have already! What we have always had. The whole point of going to fiat money is to discover we have been talking prose all this time. Your proposals are exactly explicit MMT proposals. All MMT, all really great science does is to help us really understand what we already know, to philosophically reabsorb things which are so simple they repel the mind.

      The “service-denominated” is just what you must do to get the token, the money. Gubmint spending. And MMT just says – labor standard – Job Guarantee. One hour of work is worth one dollar, which will have a strong buffer-stocky currency-stabilizing anti-inflationary effect of making one dollar worth one hour of work.

      OK we’d have to redenominate our currency – :-) – should have done a JG in the mid-50s. But all societies are run by a half-assed JG, or they wouldn’t work. The klepto-plutocrats just want to make our economy even more half-assed, so they can lord it over their grovelling new slaves.

      The “service-backed” is just the service the government provides you when you pay it something. The biggest service is “not putting you in jail” in return for “allowing you to engage in taxed activity & paying taxes”. Or you are buying a legal right to engage in said activity with your taxes. E.g. Property taxes can / should be seen as a rent payment to the government. So we get Mosler’s Hut Tax. Or when the government builds a bridge to the Moon (think big) – the passage costs a whole buck.
      The result: debt-free money, of certain value, founded in reciprocity and utility rather than scarcity and predation. This is not debt-free money, which is a contradiction in terms. Money & debt & all economies, by their nature are founded in reciprocity, for aims the reciprocal exchangers jointly and severally decide to be useful. The scarcity used to be natural, but now it & the predation are just due, like all evils, to ignorance.

      ****
      There’s no keeping up here. By the time I pick up on a thread, the rug has usually come and gone. Welcome to the club! Thought I was the only member of the Owl of Minerva Flies at Dusk society here.

  9. Throwback

    For those new to Bezemer’s work–here is his June 09 paper:
    NO ONE SAW THIS COMING

    PDF]
    0 3 5 $
    Adobe PDF
    Bezemer, Dirk J Groningen University 16. June 2009 Online at http://mpra.ub.uni-muenchen.de/15892/ MPRA Paper No. 15892, posted 16. June 2009 / 14:58
    mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

  10. EconCCX

    A 100% reserve requirement for deposits would eliminate that. Then bank deposits would have to be 100% liquid at all times; banks would not be allowed to play with (embezzle) their reserves.

    Agreed, but unless you institute it all over the world, you have other societies able to create billion-dollar production facilities with capital costing a trace of what it would under a 100% reserve regime. Fractional reserve money issue is a way of subsidizing capital formation, with a knotty problem: that it also subsidizes asset speculation, Ponzi borrowing, forfeiture and enclosure.

    1. F. Beard

      Agreed, but unless you institute it all over the world, you have other societies able to create billion-dollar production facilities with capital costing a trace of what it would under a 100% reserve regime. EconCCX

      Common stock as private money allows all the money creation necessary for capital concentration for economies of scale but in an ethical, democratic (at least per share), decentralized fashion.

      1. EconCCX

        Common stock as private money allows all the money creation necessary for capital concentration for economies of scale but in an ethical, democratic (at least per share), decentralized fashion.

        FBeard, I’m entirely in favor of alternate, competing forms of liquidity. But equally confident that folks will feel much more comfortable buying and selling their pizza slices for 1.2 subway rides, forever guaranteed, rather than for 0.06 shares of Amalgamated Widgets, whatever they’re worth this minute and next, and with all the shareholder overhead such ownership and transfer entail.

        The Bible must have some thoughts about “owning” an enterprise without accepting individual liability for its activities?

          1. EconCCX

            >>Exodus 21:28-36 FBeard

            Ouch. That ox gores in both directions at once. But limited liability shareholding gives us the fruits of ownership without any risk to our other assets. Like frac banking, it subsidizes capital formation, and also fraud, cost-shifting and negligence. The institutions neatly parallel; the corporate form enabled owners to walk away from a bank run.

            So would you really propose to build that irresponsible tendency into our money system, despite the warning from Exodus?

            Anyway, I was challenging MMT’ers. Your well-stated and though-provoking proposals are not representative of MMT, which supports a ZERO reserve in the name of liquidity, and which considers commercial bank money to be a zero net financial asset rather than a counterfeit.

          2. F. Beard

            Well, common stock holders are liable in a sense; the value of their shares could go to zero if the company is fined heavily enough or loses a big law suit.

            As for the directors and managers of the company, I don’t see why they should have any personal immunity.

          3. F. Beard

            and which considers commercial bank money to be a zero net financial asset rather than a counterfeit. EconCCX

            Yep. People sure know how to abuse balance sheets. One could add unicorns to both sides of a balance sheet and it would still balance. Ergo, unicorns exist!

          4. LeonovaBalletRusse

            F.Beard, a radical solution indeed, and just.

            Is the .01% “Top Out Of Sight” DNA the “owner” –or is BIS the “owner” — with the Federal Regime and its livestock the “oxen”? We the 99% are the gored.

          5. EconCCX

            >>BTW, I was wondering just last night where you were off to. Spooky eh?<< @F. Beard

            If that was to EconCCX, thanks for noticing my sporadic participation. There's no keeping up here. By the time I pick up on a thread, the rug has usually come and gone.

  11. jal

    In our modern society, we need to re-define who are the “Rentiers”.

    “Rentiers are … – revenues from ownership “without working, risking, or economizing”

    “Just as landlords were the archetypal rentiers of their agricultural societies, so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies”

    “Hudson and Bezemer argue that the failure to distinguish between productive activity versus rent seeking distorts and overstates the accounting for national output”

    In previous societies, the “military” did eventually earn its keep by conquering wealth and production capacity from others. Therefore, they were not “Rentiers”.
    This is not the case in our modern society.

    Continuing, there are other unrecognized “Rentiers” receiving income from gov.

    Pensioners, welfare, etc. (you can add your favorite )

    The problem shows up when the capacity of the society cannot support the “rentiers” from its economic activities and the problem gets hidden by accounting trickery.

    1. F. Beard

      Continuing, there are other unrecognized “Rentiers” receiving income from gov.

      Pensioners, welfare, etc. (you can add your favorite ) jal

      There’s a huge difference between welfare for the poor and welfare for the rich. And those who attack the former to preserve the latter are contemptible.

      But let’s eliminate welfare for the rich and I’d bet that the need for welfare for the poor would subside.

      1. LeonovaBalletRusse

        F. Beard, they won’t even leave the “gleanings” their greed is so great, their self-righteousness so contemptible. Please quote Chapter and Verse. Thank you.

        1. F. Beard

          ‘Now when you reap the harvest of your land, you shall not reap to the very corners of your field, nor shall you gather the gleanings of your harvest. Nor shall you glean your vineyard, nor shall you gather the fallen fruit of your vineyard; you shall leave them for the needy and for the stranger. I am the Lord your God. Leviticus 19:9-10 New American Standard Bible (NASB)

          ‘When you reap the harvest of your land, moreover, you shall not reap to the very corners of your field nor gather the gleaning of your harvest; you are to leave them for the needy and the alien. I am the LORD your God.’” Leviticus 23:22 New American Standard Bible (NASB)

          The above is by no means the only provision for the poor though I am not an expert. Perhaps the OT explains why the Jews are so liberal wrt social welfare?

    2. JEHR

      Your definitions are all out of whack. Rentiers don’t get their money from the government, they get it from “fixed unearned amounts, such as rent or bond interest.” The welfare recipient isn’t receiving rent because he does not have any bonds or interest income. He is poor or maybe just unemployed. The pensioner contributes to his pension money while he is working and uses it when he retires.

      1. LeonovaBalletRusse

        JEHR, wrong: “Congressional Rents” called “earmarks” in the past, now “Bills” for “donor enrichment” as the “quid” for the “quo” — EXPONENTIAL GAIN moreover: the “donation” is but a fraction of the PROFIT DERIVED from the “donation” is as exponential as is the “profit” derived from a MERS “mortgage” “derivized to the nth. The MC gains, the “donor” gains much more, and the public loses 100%.

    3. patricia

      jal wrote: “In previous societies, the “military” did eventually earn its keep by conquering wealth and production capacity from others…not the case in our…” Now “war plunder” is given to corporations via resource grabbing, and providing absolute freedom to buy/build/run factories/infrastructures. Now we make the citizens pay the military to provide these things for the corporations.

      Libertarians have holes in their understanding of group and society. They miss the value of group cooperation in both society and corporation. Thus they do not understand the nature of power or the legitimate needs of the vulnerable.

      1. Mark P.

        [1] Military Keynseianism is a surplus recycling mechanism of long standing in the US. See, forex, Yanis Varoufakis’s analysis of this.

        Surplus recycling mechanisms are vital, even if they’re done in this cockemamie style. The current European experience indicates what happens if they don’t exist.

        [2] What pays for the US military is primarily not citizens, but seigniorage that the U.S. extracts from having the global reserve currency .e.g. China and Russia and others are paying for the US military that hems them in.

        See, forex, Michael Hudson’s analysis of this.

      2. Wahrheit

        I have heard it said for a long time that Libertarians know the cost of everything and the value of nothing. I came to understand that and left the party many years ago.

  12. Tao Jonesing

    “Economics” is more properly called “political economy” and should be viewed as rentier propaganda more than anything else.

    Under classical political economy, rents were recognized and disparaged. When Henry George successfully showed that the economic depressions of the industrial age were caused by rent-seeking behavior, the rentiers created neoclassical political economy and “disappeared” rents from political economy. When Keynes successfully showed that rent-seeking behavior can be controlled and eventually euthanized by preventing rent-seekers from benefiting from deflation, the rentiers created neoliberal political economy (what most people call neoclassical these days, e.g., Milton Friedman and the Chicago School combined with the Booth School of Business, etc.) to disappear labor. Officially, there is only capital these days, but when you dig into how the firm is valued, you’ll realize that there is actually only rents. Our entire economy is driven by bets about the future.

  13. TC

    Three words: follow the money. I’ll bet if you do, the source of the ecnomics profession’s blindness will be discovered.

  14. Tom

    The great sore spot in our modern commercial life is found on the speculative side. Under present laws, which foster and encourage speculation, business life is largely a gamble, and to “get something for nothing” is too often considered the keynote to “success”. The great fortunes of today are nearly all speculative fortunes; and the ambitious young man just starting out in life thinks far less of producing or rendering service than he does of “putting it over” on the other fellow. This may seem a broad statement to some: but thirty years of business life in the heart of American commercial activity convinces me that it is absolutely true.
    If, however, the speculative incentive in modern commercial life were eliminated, and no man could become rich or successful unless he gave “value received” and rendered service for service, then indeed a profound change would have been brought in our whole commercial system, and it would be a change which no honest man would regret.- John Moody, Wall Street Publisher, and President of Moody’s Investors’ Service. Dated 1924

  15. Jessica

    We are in an economic crisis, but also a social crisis.
    The social crisis is why, lo these many years since the Lehman Brothers departed this Earth, there has not yet even begun any discussion of solutions in any social group that could have the power to implement them any time in the foreseeable future. Only under the conditions of intense and deliberate (although often semi-conscious) information pollution that is perhaps the most obvious symptom of the social crisis could the notion that mainstream Economics has any intellectual value whatsoever be even discussable.

    Articles such as this always leave me conflicted. I am glad that someone is willing to take this on, but it has far too much of “how many angels can dance on the head of a pin” to it. (Republicans: 3.01; Democrats: 2.99)

  16. Mike

    Can anyone suggest a decent history of finance that covers (roughly) the last 30 or 40 years? Just picked up a copy of “The Long Twentieth Century” by Giovanni Arrighi, which covers oh something like the last five or six hundred years and is way too dense for me. Something a bit more accessible would be nice.

    1. Another Gordon

      Not exactly what you are asking for but two books I found useful and relatively readable were:

      1) How Rich Countries Got Rich … and Why Poor COuntries Stay Poor by Erik Reinert. It covers what the tile says with quite a lot of history involved.

      2) Cornered: the New Monopoly Capitalism & the Economics of Destruction by Barry Lynn.

      1. Mike

        ordered the lynn book, thanks for the suggestion. generally just looking to read more about the shift from manufacturing to finance in the us, how that happened, what it means, blah blah blah.

    2. Rob

      A book that doesn’t cover the last 30-40years,but covers the century before that,is Carroll Quigley’s”Tradgedy and Hope,a history of the world in our time”It came out in the sixties.It covers the structure of the west,and the families and people of importance.these structures are what the world has cruised on since then…any modern work really has to have the word “con” in it.everything is just a shuffling of the deck,and not an actual creation of anything….except bubbles and busts and scandals……
      …to seem rather than to be…..
      Historians would argue that the recent times are too close to write a definitive history .too many people are still alive and would be offended by actual portrayals of their conduct.especially coupled with facts as to what happened because of their policies…..the powers that were for the last 40 years had the whole world…and they screwed it up,while gorging themselves on the fat of the babies.

    3. Mel

      John Kenneth Galbraith’s _The Affluent Society_ and _The New Industrial State_ do a nice bit of analysis of economic and industrial development since the ’60s or so. I haven’t chased down the third of the threefer: _Economics and the Public Purpose_. He details a bifurcation of the industrial economy into a “Planning” economy — strongly aggregating, vertically integrated, dedicated to supporting mammoth investments by minimizing risk through forward planning and market control — and a “Market” economy where investment stayed relatively limited because market power was not there to be wielded, and enterprises were chained to the whims of their customers.

      You can see the development into the present situation where the Planning economy has become the Financial economy as it sloughs off all the risks involved with physical activity, and concerns itself only with formal manipulations and deals. That is now Wall St. The Market economy has been whittled down to the outfits left on Main St.

  17. Avg John

    And wall street owns and effectively controls the tv and the main street media, which in turn has captured and dumbed down the collective mind of America. And this ignorance has allowed multi-nationals to control and arbitrage away the demand for labor and tax responsibity, as well as buy the political processes of this country as well as countries across the globe. All aided and abetted by the federal reserve and Washington politicians.

    And the most sickening part is they have accomplished this with institutional money, both private and government t pension money, as well as free money from the bernank. Effectively, hanging us with our own rope.

    Unchecked economies of scale may reduce cost in the short term and huge margins may accrue to a few shareholders, but in the long run they devaste a country’s economy. Multi-nationals are our country’s worst enemy. Eliminate them and you will eliminate a great deal of poverty and war in the world.

    1. F. Beard

      Economies of scale are fine if they are “shared.” That’s why the use of common stock as private money should be encouraged.

  18. JGordon

    Economics is a religion with math. Economists generally don’t even have the most basic concept of the scientific method, and that’s it’s why it’s easy to understand how they can be unphased by little things like the fact that their models are little more than ideological trash that bears only a cursory resemblance to reality.

  19. Hugh

    Economists are paid not to understand rentier finance, as well as debt, wealth inequality, fiat money, the role and impact of government on the economy, and, of course, kleptocracy. They make their careers out of trivializing these or airbrushing them out of economics entirely.

    Economists aren’t stupid. They are dishonest. It is a class thing. They belong to our elites and our elites serve the rich who are looting us. The purpose of economics is not to explain or describe the economy. It is to distract the rubes and give intellectual cover to the looters.

    Our elites promote two wildly contradictory narratives. The first is that only they know how the world works: its economy, politics, trade, wars, and international relations and only they can make decisions about these things. And because of this, they, and the rich, are worth every penny they get, and billions and trillions more.

    The second is that no one could have foreseen all of the financial hoaxes, frauds, and disasters of the last 40 years. The phantom trillions of the Social Security surpluses, the S&L fiasco, the multiple failures of supply side economics from trickledown to the current “job creators” meme, the dot com bubble, financial deregulation, deregulation in general, CDS and derivatives, the housing bubble, the commodities bubble, the stock market bubble, MERS, the housing bust, the meltdown, the bailouts, healthcare, the mandate, and the ACA. And that’s just the US and finance. There are also the trashing of the Constitution, habeas corpus, the Bill of Rights, the Congressional power to declare war, the farce of elections starting with Bush v. Gore and ending in the current non-choice between Obama and Romney. And let us not forget the wars: Iraq, Afghanistan, the war on terror, Libya, the drone wars, and the saber rattling with Iran.

    Nor is all this confined just to the US. Look at rest of the world: Europe, Japan, China, etc. And we see different but equally ridiculous and blatantly obvious elite manufactured disasters.

    So our elites tell us they know everything, certainly far more than we do so STFU. On the other, they leave nothing but a long litany of massive screw ups and thefts in their wake.

    When will we understand that our elites, including economists, are not “well meaning but mistaken”? They are willing, even eager, participants in our looting. How then are they not anything other than criminals themselves? Why should we look upon or treat them as anything different?

    1. Doug Terpstra

      “Economists aren’t stupid. They are dishonest.”

      How true. The cognitive dissonance is mind-blowing. They studiously and conspicuously ignore the herd of elephants s_itting in the living room: the gargantuan corporate welfare state — the global war economy of a garrison-empire that spends more than half of the people’s budget on mass-murder and terrorism (its own) — and the free-money Criminal Reserve cartel that actively promotes gambling (buys all members’ bad bets), legalized loan-sharking, fee extraction and the direct purchase of regulators, legislators and laws via campaign bribery (If you don’t like it, buy your own legislator; it’s a free market.)

      Veal-pen economists can’t move much in their well-padded crates, but there’s no need to: the milk-nipple is always full and within reach. And anyway there’s little reason to turn around; someone else always cleans up in back.

      Case in point: pontificating on the “differences” in duopoly presidential candidates, Robert Reich wrote yesterday that “Mitt Romney’s claim that the economy is in a stall and Obama’s policies haven’t worked,” is only valid because, “congressional Republicans have never even given Obama a chance to try his approach. They’ve blocked everything he’s tried to do – including his proposed Jobs Act that would help state and local governments replace many of the teachers, police officers, social workers, and fire fighters they’ve had to let go over the last several years.”

      Before long, there will be a major shortage of rope, trees, and lampposts.

  20. readerOfTeaLeaves

    Economists who fail to account for the role of credit creation and the growth of the FIRE section strike me as approximately as Dark Ages as physicians unaware of the fact that plaque builds up in arteries, thereby causing heart disease.

    The creation of plaque, like the creation of debt, is an ongoing process; fairly quiet. But it chokes off the lifeblood in both cases.

    For heaven’s sake, medicine has come to understand the heart, blood flows, heart disease, and the processes involved in plaque formation that coat the linings, and choke off the oxygen, from the larger system. One would hope that economists would be at least as curious about economic systems as physicians are about circulatory systems.

    As it is, the Hudson piece reads like a cardiologist trying to persuade other economists that there exists and organ called ‘the heart’, and that it is important to identify the processes involved in arteriosclerosis.
    Meanwhile, the other economists (the Mishkins and Hubbards, et al), seem to be decrying Hudson’s views, arguing that the occasional bout of stomach upset has nothing to do with heart disease. Oy.

    What Hudson is saying seems so bloody obvious that it’s deeply alarming to consider that he even has to point out the problems that stem from the failure of economists and economic models to distinguish between money spent on real goods and services, as distinct from money spent on debt.

  21. Rob

    The financial services industry has the role of a parasite to what is really the worlds economy…..in some part the natural system needs parasites.they have a use,like those of decay …the parasites have evolved within the framework of all organisms….but financially speaking,we have a parasite that is in the process of killing the host…
    On the basic side,there are natural needs and uses for financial services,emotional,rational,logistical reasons,actual services…..historically important and useful.
    If there is a renter economy,it seems to me that this system is what lets us use our own money.they have the golden goose,that creates money out of nothing…then they let the financial services industry come up with anything and everything they can concoct to let mankind USE that thing they call money.If the reform of the money creation system just applies to the creation of money,and not to all forms of investment,save that the banks and all other actors on the stage are held to 100 percent reserves….then there are no other pressures on runaway anything.it doesn’t denote price rises( allowing the creation of additional money in the system be tagged to something real like population growth)
    if any entity want to use their own money for any endeavor,good…the top of our system is connected to using money they created,be it large institutions using fractional reserve standards and over leveraging everything,or just creating derivatives and betting on things they don’t own,or doing any number of things that don’t even pass the sniff test as to a rational practice…our economy is being dragged down by all these games,of the connected….
    The real economy is that which exists,and population is growing and people still want things and people still need things and everything wears out and needs to be replaced,and people do for others what they cannot do for themselves…..after the original sin of money creation,all of these things would be as they are…..so with reasonable taxation,trade rules,and regulations,the economy could work.capitalism is fine…. It is the lunacy that is supported by a segment that makes so much money for doing nothing….sure they make CDF and CDOs and concoct ratios that show their value…. But really they are nothing.
    How skewed the GDP numbers are considering financial services contracts are considered part of our “production”.when they don’t actually produce anything…..we ought to stop renting our money.we ought to make our own
    money,since it is our gov’t that is what gives it it’s surety..Dennis Kucinich’s bill HR2990 the “NEED”act.Is there for us to move forward…not MMT,but better.

  22. Nathan

    One dubious point:
    “So the fact that unconstrained banking would wind up promoting speculation rather than investment was seen as obvious centuries ago

    Of course, rather, bankers hate risk, while they love the money which can sometimes be gained by taking it on — one shouldn’t confuse the two! There may be some gamblers among them, but it seems more plausible that by betting on, say, some bundle of debts which include nonsense 29% interest charges to unqualified borrowers and such, it is because they know that at least a portion of the downside, if that is the way to express it, will be shouldered by the government, the taxpayer, and so on.

    1. Nathan

      Or perhaps I should have said, in response to my own and other’s thoughts, is it wise to try to reduce economic opinions and prognostications to psychology? Can I or anyone truly and accurately describe the mindset of some a hypothetical economic agent out there? If so, we had better be careful — maybe stick to trivialities, even! Perhaps the only safe thing to say is that folks who have a degree of power or agency will, er, at least, can, use that power for their own interest, regardless of the detriment to others. So, you know, we should fear granting our fellows too much power, whatever that may be. I suppose my point is… I am not altogether what folks’ ideas are about where to go from Sept. 12th 11:32 pm in the social and economic world. I sense that if I could nudge anyone away from granting others too much power, that would be beneficial.

      So, if the rentier class is a problem of sorts, a dead weight maybe, if that is what I am hearing from the classical voices, what do you do about it? If they are making money based on their assets, upon the assertion of and repose in private property and excess material means relative to personal abilities, if they are too powerful in that sense, then, might it take another more awkwardly large power to knock them down? Wouldn’t it have to involve a restriction of the right of private agency in the disposal of private property? Maybe not, just posing the questions.

      And… Thanks for doing what you do!

  23. tiebie66

    I was hoping to see an MMTer respond to EconCCX’s challenge. But no luck – perhaps the answer is extant and too obvious?
    Looks like MMT needs to consider more sectors (e.g. sub-sectors within the private and public sectors) and analyze sector balances across such an augmented array of sectors. The policy objective would be to maximize the ‘entropy’ of funds across sectors. No?

  24. psychohistorian

    I want to add my $.02 and then go back to the comments.

    Thanks for the posting, Yves.

    I see the bankers and finance as the front for the real Rentier folk that I call the global inherited rich. We have a private banking system which the global inherited rich own and after all the economic prognosticators are said and done it is the global inherited rich that decide what technologies go forward, which are held back, which countries are invested in, for what global strategic reasons, etc.

    I think we should talk about changing the inheritance rules to limit the ongoing accumulation and control of capital….and everything else.

    1. Nathanael

      You need to read Veblen.

      A big deal among the rich is sabotaging each other, driving each other out of the halls of power. Inheritence is a big deal, but it’s not the crucial element: the crucial element is kleptocracy, i.e. he who steals the most rules, and is allowed to keep it. So people from middle-class backgrounds can easily become plutocrats *if they are immoral and criminal enough*.

  25. gerold k.b. weber

    Good post pointing us to a great paper, which makes the convincing case that models of the economy should be enriched with the rentier sectors as a precondition to dissect what has gone wrong. Nobody explains the main inherent defect of the capitalist system and credit bubbles better than Michael Hudson (here together with Dirk Bezemer): profits – such as ‘unearned’ rent income – not recycled within the real economy, but used to inflate asset prices and debt enslave people, businesses and governments.

    Future income of debtors is increasingly preassigned to interest payments and repayment of principle. Demand for real consumption and capital goods decreases, as creditors use their rent income less for spending in the real economy.

    However, I am not fully convinced of Michael Hudson’s famous tautological dictum “Debts that can’t be paid, won’t be”. The system seems to have multiple options of adjustment. Government debt might be rolled over endlessly or become monetized. For bad banks debt-to-equity conversions might become a model. Another common adjustment is to keep the credit relation between private creditor and debtor in place, with decreased or even negative interest rate.

    More considerations on probable future handling of debt would be interesting. This should take into account variations in type of debt and collateral, as well as the economic sectors to which creditors and debtors belong.

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