Quantitative Easing for the Economy
So far the ‘solutions’ have involved bailing out our failed banking systems by regulatory forbearance and various central bank “quantitative easing” money creation schemes to reliquify and recapitalize our grossly insolvent banking systems. But the kind of solution that we really need, the only kind of solution that has an arithmetic chance of actually “working”, will include what Steve Keen calls “quantitative easing for the economy”.
Governments, or their central banks, must create money and give it to “the economy” (not to their banking systems), where debtors can get their hands on it in order to repay their debts. When debtors are making their loan payments they are in effect “bailing out” the banking system to which the debtors owe their otherwise unattainable loan repayment money. “Savers” have all the money, and savers won’t spend it. So without the action described the repayment money is “unattainable” to spenders/debtors.
So QE for the economy gives you double the bang for your bailout buck: you bail out the economy and the banking system at the same time. SOME form of large scale debt reduction program like this is an arithmetic necessity, if we are going to intelligently resolve our current crisis and prevent (not merely forestall, again, with additional new debt) the oncoming financial-cum-economic collapse.
All Gain, No Risk
Private banking, like any other private business, involves investing capital in the hope of increasing the amount of money (profiting) but at the risk of losing it all. In our current era of bailout capitalism, bankers only ever “profit”, never “lose” their money. This is a problem. The hope of personal profit and the credible threat of real PERSONAL loss is the factor that ultimately “regulates” the behavior of the individual human beings who are the decision makers and actors in a truly “capitalist” economy.
CEOs and other managers who are employees of giant financial and industrial corporations, and who never have to lose or pay back out of their personal salaries and bonuses to compensate for any of the losses suffered by the company they are managing, are NOT operating under the influence of capitalist “market discipline”. They are rather functioning like government “bureaucrats” who are never held personally financially liable for their bad luck and mistakes (yes, “luck” counts, whether it goes for or against you). Shareholders and taxpayers suffer all the costs, while the “managers” walk away with all the money. This is an extreme unresolved problem of moral hazard in our modern corporatist world, private and public sector both.
Criminogenic Environment
As Bill Black (celebrated “Sheriff” who brought thousands of successful charges against crooked players in the S & L scam) puts it, our present state of deregulated finance does not merely incentivize accounting control fraud but actively encourages and virtually guarantees it. Deregulation creates a “criminogenic environment”, in which financial crime pays off big time, and criminal behavior drives non-criminal players out of the market in a modern day application of Gresham’s Law.
So ultimately, if the rules of our banking systems are enforced, when a bank’s loans are delinquent (payments are not being made on schedule) and the bank’s A (the book value of its loan portfolio) systematically exceeds the real or current market value that those assets will fetch when they are foreclosed and converted to cash (“liquidated”), regulators will compel the bank to apply its own money, its K, against the loan losses. “Loan losses” is the difference between the book value of the collateral asset (the current outstanding balance of the money the bank lent out against that asset) and the realized value of the asset (the sale price).
Predatory Strip Mining
In a properly designed and regulated banking system banks and bankers have to personally pay for their losses. This prevents them from benefiting from short term greedy behavior. For the same reasons that an Irving Fisher or CH Douglas technocratic solution is not enough (the fact that mere mortals cannot see and/or don’t care about the future macro consequences of their actions and because humans actually do succumb to the extreme temptation that comes with the power to create and allocate money), an unregulated banking system is doomed to the kind of predatory strip mining and collapse that we saw in 2008 at the end of the RE bubble.
No Market Forces
The personal incomes and fortunes of corporate managers are insulated against “market discipline”, so these managers’ behavior is not constrained by “market forces”. Successful constraints will have to be legislative and regulatory. The financial economy, the capital markets money system, is pretty much designed to elude the reach of any constraining legislation and government regulation. The managers suck all of the “real” money out of this system (just as they are doing in the “real” banking system) as their personal incomes, leaving the companies as hollow shells doomed to implosion.
Conclusion: Fix the Incentives Structure
We NEED bankers creating money and managing our economies’ financial credit. The functioning of our modern economies depends on it. But the price of benefiting rather than suffering from this power to create and allocate money is the same as the price of freedom: “eternal vigilance”. It is crucial that we get our financial and corporate incentives structure right, to motivate behavior that is long term macro stabilizing, or at least not positively destabilizing as it is now.
It is probably possible to engineer some stability back into our money systems. But we will never achieve that salvationary goal if we continue to pretend that “market forces” can successfully perform the necessary financial regulatory and oversight functions. And we can never succeed until we acknowledge and rectify the macro consequences of our zero sum credit-debt money systems.
Related Articles
Analysis and Opinion Articles by Derryl Hermanutz
Analysis and Opinion artilces by William K. Black
Analysis and Opinion articles by Michael Hudson
Analysis articles by Steve Keen
What economists need to know about the modern money creation process by Manmohan Singh and Peter Stella
The Alchemy of Securitization by John Lounsbury
