Manic Depressive Fiddlers?
But Alan Greenspan was King of the financial universe in this era and he pooh-poohed White and the Minskyites into their “permabear” corner with dunce hats (and had Brooksley Born tarred and feathered and run out of town on a rail for daring to suggest that ‘free market’ shadow banking derivatives should be “regulated”). While the music is playing you’re supposed to keep dancing. And good ole Al was a-fiddlin’ hard throughout that period. Greenspan explicitly declined to “take away the (easy money) punch bowl” that ignited this debt-fueled bonfire of the sanities. I am sometimes inclined to believe that humans so enjoy the emotional and moral rollercoaster ride of our manic-depressive boom-bust monetary system that they choose this insane system ON PURPOSE.
Assets and Liabilities
Assets are mainly the promissory notes that private sector borrowers signed, plus the bonds that government Treasury Secretaries signed on the loans of interest bearing debt that we took out from the banking system. A loan whose borrower is paying interest is a “performing” loan, which makes it an “asset” to the bank that is COLLECTING the interest as its income. Principal repayments merely extinguish loan account balances on a bank balance sheet and do not provide any “income” to a bank. Only interest payments (and fees for services) provide income to banks.
Of course that same loan is a “liability” to the borrower, because he is on the hook until he pays the money BACK. The banking system is the monetary mirror image of the non-banking sectors (private sector economy and government). Our “liabilities” are the banking system’s “assets”. And our “assets” are the banking system’s “liabilities”.
Bank balance sheet Liabilities are mainly depositors’ bank account balances. The banks “owe” their depositors whatever amount of “money” they have as a bank account balance, which makes our bank account balances the banking system’s “liability”. Bank deposits are created as loans of bank account balances to borrowers, who spend the money into the economy and draw down their new bank account balance, but then the receivers of that money deposit the same money into THEIR bank account, where the money once again becomes a deposit in the banking system, though it often goes into a different bank.
When one bank has captured excessive deposits beyond what it needs to balance its balance sheet, the zero sum arithmetic of money means that some other bank will have less deposits than it needs, so banks lend these deposits to each other in the interbank market for small fees (the “overnight rate”), or they borrow the money short term from the Fed (typically through the “discount window”), so they can all keep their balance sheets balanced.
Clearinghouses of Accounting Notations
Modern central banks function as the “clearinghouses” where banks’ bank accounts (their reserve accounts) are credited and debited according to whether their customers are receiving payments from customers of other banks, or making payments to customers of other banks. This is the “payments system” which is the backbone of modern economic exchange. If payments are not being made and received, the economy stops shipping goods to buyers, and stops producing goods, and producers stop hiring the economy to produce goods. Financial seizure yields economic collapse.
Internationally, banks have a system of SWIFT codes that entitle them to access the global payments system. As an example of the power of this access, to squeeze Iran, Western powers have turned off Iran’s SWIFT codes, ostracizing Iran from making and receiving payments via the global banking system. The global payments system is the keystone of the global economy.
Faith and Credit
After Sept. 15, 2008 the global payments system was freezing up because banks didn’t trust that other banks had money to clear their payments. Or indeed, if other banks would still “exist” when the time came to get paid by them, given the oncoming collapse of the global banking system. If this had been allowed to continue there would have been global economic collapse because sellers weren’t getting paid so real economy goods weren’t flowing from sellers to buyers.
Central banks in the pre-securitization era were not so quick as today to provide cash and reserves against phantom assets such as loans that any competent analyst could see were clearly not going to be repaid. And bank regulators of the pre-bailout era looked with hard eyes on the profligate banker who had abused his power to create money. So regulators required bankers to pay for their loan losses out of, first, their current operating profits (if they still had “profits”), and second, out of any loan loss reserve funds they had set aside, and finally out of the “capital” that had been put up by the bank’s owners. Some banks failed and failed bankers paid the personal price.
Spenders and Hoarders
But due to the zero sum arithmetic structure of our bank credit-debt (and capital markets credit-debt) money system, after some time of operation the economy’s earners-savers end up having hoarded all the money and the economy’s spenders-borrowers end up owing that very same money to their banks as loan repayments. This typically takes decades, but it took only 16 years after our present Federal Reserve Bank money system began operating to get to 1929,, but the high speed of that failure was boosted by the enormous creation of new debt-money to fund WWI.
The savers could not have earned and saved UNLESS the debtors borrowed and spent, so it’s not a simple matter of discouraging “profligate” financial behavior. ‘Profligacy’ is the CAUSE of money being available in the economy to earn and save. But in our zero sum credit-debt system all of that money that is held as savings by “savers” is owed as loan repayments by “borrowers”, and unless savers spend the money back into the system the borrowers have no way of earning or otherwise getting back the money they spent in order to repay their loans.
Self-Sufficiency is No More
And virtually the entire modern world economy has been financialized. We are not nations of self-sufficient peasant farmers scratching our meager living directly from the Earth without need of “money”. The money economy has become all-embracing. So any viable solution to our “economic” problems is really a solution to the economic consequences of our zero sum money systems.
The 20th century is the history of the failures and the various growth funded and bailout funded rescues of the inevitable financial imbalances and seizures suffered by our zero sum credit-debt money system. When all else had failed in what Mehrling calls the “legacy” banking system, securitization and the whole capital markets “financial economy” offered a rocket boost ‘solution’ that accelerated our ascent to new heights of debt-money creation.
This papered over the problems of debt-money imbalances during the decades known as “The Great Moderation”. Meanwhile Minskyish instability was quietly but rapidly building up steam as banking system leverage and debt-savings imbalances were rising to the extreme height from which we began our plunge in 2008.