Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Continuing the discussion from the previous post, “Closing the gap between rich and poor: Eliminate all local taxes,” how about the elimination of all private banking?
What if the federal government took over all banking functions and eliminated private banks? What would be the advantages and disadvantages?
No bank ever would become insolvent. There would be no “runs” on banks by depositors. Savings would be 100% protected. Clearly, an advantage.
The lack of a profit motive would eliminate “credit default swaps” and other strange investment derivative beasts that helped lead to the Great Recession. Advantage.
The lack of a profit motive also would eliminate the temptation to lend to credit-poor borrowers. Advantage.
The absence of outrageous, multi-million dollar salaries would translate into less expensive banking services, plus services offered in “bank deserts,” where the poor are required to use expensive, neighborhood check-cashing services. Advantage.
There would be no need for reserves and for the massive bureaucracy needed to track reserves, nor for the massive compliance bureaucracies, nor for FDIC insurance. Advantage in efficiency.
No need for Fannie Mae or Freddie Mac. Advantage.
There would be no need for the Fed or for the likes of Greenspan and Bernanke. Advantage.
Bankers would hate the idea. Huge advantage.
Frankly, I’m having trouble thinking of disadvantages. O.K., I can think of one disadvantage. Government workers have the reputation of being without imagination or the willingness to take risks. Since lending always entails risk, and lending against new ideas involves even more risk, might federally owned banks choke off innovation or on the other hand, be subject to political pressure to grant bad loans?
I’m sure that would be the objection from those who believe the private sector can do no wrong and the government can do no right. But there are non-bank people in the private sector, known as “venture capitalists” who could provide investment capital.
Perhaps the question about socialized banking boils down to whether you feel banking should be considered just another profit-making business or a public service. Unless convinced otherwise, I suspect the negatives of privately-owned banks outweigh the positives.
What do you feel?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Take a look at China for a real-time example of what you are talking about. I think the idea is good in theory but in practice you tend to end up with a lot of wasteful politically motivated projects like empty cities and high speed rails that no one uses. Having the private sector decide what to invest in seems superior to me though compensation for the activity is egregious and it has its own problems like TBTF and principal/agent etc.
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Taking China as an example is a great argument for nationalized banking. Their economy is run infinitely better and less corruptly than the USA’s, which is why China will in a few decades return to its usual position as the world’s biggest, most dominant economy.
When resources & labor are not full employed, efficiency is inefficient. Waste is productive. Generously taking the critique at face value, at the least what China ends up with is spare cities, spare rail lines that might be useful someday and the ability to build cities and rail. The USA system ends up with welfare for rich banksters & the ability to provide more money to banksters. I know which one I’d choose.
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Why would there be political pressure on a publicly owned bank? In private banks, can shareholders apply pressure on the management to give themselves special lending privileges?
Favoritism can occur under private or public ownership, unless there are rules and regulations to prevent it. Why would it be any different?
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Nate,
I agree with having the private sector decide on investments.
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Nice bit of lateral thinking, Roger.
Re the one disadvantage you can think of, i.e. that “federally owned banks might choke off innovation”, even that is a weak objection to nationalising banks. Reason is that it’s not really true to say that venture capitalists “could provide investment capital” – my guess is they ALREADY DO provide most of the capital for small high tech start ups.
In contrast to SMALL start ups, there are large corporations doing innovative stuff, but here, banks can get their hands on collateral, and a nationalised bank would do likewise.
Second, your ideas mesh nicely with the idea that fractional reserve banking be abolished. I.e. the right of private banks to create money should be abolished. Several of the giants of Western civilisation have argued for this, e.g. Milton Friedman, Abraham Lincoln, Thomas Jefferson, etc.
Fractional reserve can be abolished while retaining private banks, but if private banks go, then by definition, fractional reserve goes.
Re F.Beard’s comments, I cannot see why he disagrees with you. As FB rightly says, credit steals purchasing power from everyone else. If there is less credit for non-credit worthy borrowers, then there is less “stealing”.
However I don’t think FB has quite got to the heart of what is wrong with private sector money creation. What’s wrong is first that seignorage costs the “money printer” nothing, thus if a money printer can find a credit worthy borrower, it will pay the printer to lend money at ridiculously low interest rates (as FB implied). That constitutes theft from those involved in non money printing based saving and lending. Second, fractional reserve, i.e. private sector seignorage is pro-cyclical: private banks lend like idiots in a boom, and then call in debts in a recession.
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P < P + I
http://thdrussell.blogspot.com/2011/03/p-pi.html
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Thanks. Am excellent example of false logic. It’s been around for decades, and people still fall for it.
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As the author of the article I’d like to here what about its content is false.
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Basically, your thesis fails to take into account government spending.
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Until government spending is not yoked to debt, until government is ‘free’ enough, that is, operates in a financial environment conducive to interest free money creation, the article is logically accurate. The equation holds.
Furthermore, if one adopts the MMT position, that government spending be attached to bonds and other debt instruments only as it chooses, but that the private sector money creation of the commercial banks can continue to be along the lines of interest-bearing debt, the equation P < P+I still holds, since interest is still driving money supply growth. Steve Keen's "The Roving Cavaliers of Credit" demonstrates how commercial bank lending leads government injections of "high powered money" into commercial bank reserves. The commercial banks are in the driving seat, not government. There's an online book called "The Ecology of Money" which looks into this quite well.
I have expanded on the article you reject in this post (and elsewhere):
http://thdrussell.blogspot.com/2011/09/money-debt-reserves-money-and-debt-ii.html
It is quite long, but analyses (I believe debunks) the MMT position that only "high powered money" is 'real' money, and that credit money "nets to zero".
Whether we like it or not, the dynamic generated by P < P+I is one of perpetual growth. It will bedevil us until we establish a money system happy both with growth (when such makes sense) and with de-growth (when such makes sense). Being systemically addicted to perpetual growth is suicidal.
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Well if we scrapped the ‘to big to fail’ mentality, virtually every bank in the western world would end up under state control, which would be more honest than the welfare dependent bludgers we have now.
I think about the only thing wrong with a state owned system is that it would become too bureaucratic, and stifling towards small business.
I also think that given sufficient regulation, private banks can operate just fine as well, so it’s hard to say what is better as I think you can find evidence of either operating satisfactorily. The only caveat is what I say above, only the customers & depositors of a private bank should receive government protection, not the bank business itself.
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What about ending limited liability for banks?
Change the law, and make shareholders and bank management responsible for losses. Their personal assets would be on the line in case of bankruptcy. This would provide a powerful incentive for preventing risky behavior on their part.
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“The lack of a profit motive also would eliminate the temptation to lend to credit-poor borrowers. Advantage.”
Disagree. Look at Fannie/Freddie.
“Advantage in efficiency.”
Efficiency in govt arena? Come on.
A disadvantage is what a few people don’t like about MMT – once govt starts spending money, they spend it inefficiently, and corruptly. Maybe initially this proposal would be different, but not for long.
I like the proposal from MMT’ers about separating S&L from speculative investment.
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” . . . once govt starts spending money, they spend it inefficiently, and corruptly”
As opposed to big business which proved it is efficient and honest? The advantage of federal spending is that even the most inefficient spending benefits the economy, by adding money to the economy.
By the way, Fannie and Freddie, being only quasi-government, not real government, had a profit motive.
Rodger Malcolm Mitchell
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True, big business can spend inefficiently and corruptly. But then, they’ll go out of business (assuming not propped up by govt). Govt doesn’t go out of business.
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It is a false choice between banks that operate like the Corleone Family and banks that operate like the Post Office. There are many private businesses that do operate efficiently and honorably. Mostly small businesses, like community banks.
Maybe you can come up with a similar example of a government agency. Or not.
And since when does a profit motive motivate one to lend to credit-poor borrowers (by which I understand to mean those who are unlikely to pay back the loan)? I would think the opposite. Did the banksters, ultimately, profit from that behavior (they’re not done paying for it yet)? Some loan officers, mortgage brokers, and bank executives profited personally, for sure, but that was because of inappropriate incentives, not because they thought it was good business. If it were their own money, would they have made those loans? Even under threat from Barney Frank?
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Lots of fake arguments, here. “Many,” “mostly” vs some unknown straw man. You want an efficient government agency? How about Social Security?
“And since when does a profit motive motivate one to lend to credit-poor borrowers. . . “ Hah, this is too easy. It’s the foundation of the debt crisis. The answer is: When there is no risk of default, i.e. when you can sell your debt to Fannie and Freddie, pocket the vig, and wash your hands of the whole thing.
Those risk free profits were enormous, while the scam lasted.
Interestingly, the whole thing relied on continuously increasing real estate prices, which had been the rule for generations. When real estate stopped going up, people were unable to refinance to pay their mortgages.
Why did real estate stop going up, after so many years. I can make the case this happened because of a huge reduction in federal deficit growth.
John, I think you are coming a bit late to the party, and should begin by studying these two links, then work your way from there.
https://rodgermmitchell.wordpress.com/2009/09/07/introduction/
and
https://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/
Rodger Malcolm Mitchell
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I have read both of those, no arguments with monetary sovereignty.
Social Security. I just did a quick google search, hoping to find a number for social security fraud. I remember a frighteningly large number of billions of dollars. The search found two recent news articles on the first page of people pleading guilty, one guy collecting while in prison, and a woman collecting disability while working. Try again?
“no risk of default, i.e. when you can sell your debt to Fannie and Freddie, pocket the vig, and wash your hands of the whole thing.”
Tell that to the banks being sued by Fanny and Freddie for fraudulently selling them bad loans. “No risk”, indeed. Hopefully some of them will go to jail for it, and the banksters in general will be forced to disgorge their ill-gotten gains and suffer the losses for their poor business decisions.
“Why did real estate stop going up, after so many years. I can make the case this happened because of a huge reduction in federal deficit growth”
No doubt you can. It would take more time than I am willing to invest, but I think I could make the case that it was because we built more houses than there were people who could afford to live in them. The better question would be “why did real estate keep going up so long after it was in an obvious bubble?” or “What prompted the banks to lend so much money to people who obviously couldn’t pay it back?”
Probably the government could run the banking system as well as it does anything else, which is not very well, generally. My preference is for government to stick to things that only it can do, and let the private sector do the things that it can do. But that’s politics, not economics.
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Toby,
There is so much wrong; where shall I begin? Perhaps the key sentence in your article was:
The phrase, “. . . the interest owed on that debt is not (debt). . . “ is false. All money is debt.
The phrase, ” . . . sucks wealth to money lenders . . . “ is false. First, you confuse “wealth” with money — two completely different concepts.
Second, if you mean to say, “sucks money to money lenders,” I do not see that effect. The U.S. is 235 years old. There would seem to have been plenty of time for all of the money to be “sucked” to the money lenders. Yet, after 235 years, it was the money lenders who ran out of money and had to be bailed out by the government.
And how many banks went under? It was in the hundreds, and the biggest may yet to go. Pretty weak “suck,” isn’t it?
Finally, your line, ” . . . until the entire money supply is debt owed minus the interest” fails to recognize that all forms of money are debt. Every measure of money — M1, M2, M3, L, and Debt Outstanding Domestic Nonfinancial Sectors all are debt measures. There is no form of money that is not debt.
I’m afraid you allowed the simple arithmetic of your formula to blind you to the realities of the world. And the reality is this: Banks (money lenders) are businesses. Some are profitable; some are not. They spend money, hire employees, pay bills, pay taxes and borrow as well as lend. They distribute dollars all over the world, as do all businesses.
Their ability to accumulate dollars (or wealth, for that matter) is more a function of laws than of your formula. Change the laws in one direction, and indeed the banks could own the world. Change the laws in a different direction, and there would be no banks at all. Your formula does not take laws, which repeatedly change, into consideration.
Rodger Malcolm Mitchell
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I think we are talking past each other. I always say all money is debt. I’m looking at the consequences and implications of that situation, and possible ways out (should there be any). And I certainly do not confuse wealth with money. The slogan I use at my blog is “demote money, promote wealth.” You are interpreting one article in isolation without taking my full position into account. Also, elsewhere I repeatedly state that banks are profit-seeking businesses, just as I have asserted that all money is always and only debt.
I disagree with you on this though (and by the way it is not my formula, just one I saw elsewhere and ran with): “Their ability to accumulate dollars (or wealth, for that matter) is more a function of laws than of your formula.” The laws enable and permit the formula to operate. The formula merely describes a dynamic, a dynamic allowed a legal space to function by various state measures.
As to the last 235 years (or longer) there have been plenty of monetary and financial crises in that time, as well as mini-swings from gold money to credit money, including ‘redistributions’ of wealth. The road has been halting and bumpy (history always is) but the trajectory and dynamic are clear. I see commercial banks as businesses (supported by laws of the state) enabling the ongoing transfer of wealth (or money) from the poor to the owners of money. Owners of banks (and other businesses) are owners of money, money that must grow perpetually, a requirement which forces perpetual economic growth on society generally. Money (as we have it) is a controller of societal and cultural perceptions and definitions of wealth, or a means to sufficient power over and control of society generally (though not totally and in every detail of course), and that is power indeed.
As to ‘sucking power,’ consider this factoid: some 20 years ago a Mr. Klatten (poor boy) married a Ms Quant (very rich girl). Mr Klatten earned at that time 4,600 DM monthly, before tax. Rich Girl earned from interest over 650,000 DM daily (Bild, 27/7/1990). That’s a lot of cheddar. Interest does not create money, it transfers it. Only the central bank, in this system, ‘creates’ money, but if Keen (and others are right) in response to, and to keep up with, commercial bank credit money creation, which is driven by usury, the banks’ mechanism for making profits.
The work of Bernd Senf (from whom I have the above info on Klatten and Quant) and others analyses the dynamic of usury and finds it to be a very effective ‘suck’ indeed. The analogy of usury as a kind of money vacuum cleaner I actually borrowed from Senf (a German Professor of Economics).
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This is a misquote/misreading:
“The phrase, “. . . the interest owed on that debt is not (debt). . . “ is false. All money is debt.”
The meaning of that sentence is that the interest owed on the debt is not created along with the debt, that is is not available in the existing money supply. It was not an assertion that there is non-debt money somewhere that will pay for the interest owed.
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‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
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Great post, Rodger!! It had never occurred to me. Actually, in a few European countries, like, say, Holland, you used to be able to set up a checking account and do your banking at the Post Office, of all places… Maybe, we should try that here–maybe it would “save” our “failing” Postal Service…
Wow!! The financial meltdown a few years back would have been a great time for the President to say, “No more private banks!” What a missed opportunity…
Oh, wait a minute, didn’t Rep. Kucinich actually try to get a bill thru Congress a coupla years back along the lines you’re suggesting?? Or maybe it was just to severely curtail private banking…
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Toby,
Nothing wrong with the equation. It’s your interpretation that’s wrong. You didn’t address the caveats I expressed, but merely restated your original beliefs.
Look around you: Do the banks own all the money? Has there been financial suicide due to excess money?
When reality differs from hypothesis, it’s not the reality that must change.
Rodger Malcolm Mitchell
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“The commercial banks are in the driving seat, not government.”
– Which is why your fully corrupted politicians have made the devil’s bargain to legalize bribes in exchange for racket protection, which makes MS & MMT no more of a “reality” than any other monetary reform discussions. Citizens are now permanently referred to as “consumers”.
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FBeard: Then where is the debt? I see none.
You’ve been trained not to see something which is there, too gigantic to see. The money IS the debt. Money can’t be “backed by debt” (going the same way). Dollars can’t be backed by bonds. The idea is insane. It’s like saying one dollar bills are backed by fives.
Try to understand what “Money is Debt” means. Look at a dictionary under “Debt”. I did, when relearning economics. Fiat money, all money is debt. It’s not a dogma, but a definition, a universally true observation. What you have to realize is that in modern garbage-economics and finance, the word “debt” is used in a bizarre, incoherent, undefined & undefinable jargon way. (“Money” also) Because the media & most academia is a giant echo chamber of insane raving, everybody’s brain has been corrupted into using a bizarre non-definition.
The right definition is the dictionary definition of “debt”, not the mainstream econ non-definition & inconsistent misusage. Everybody knows what “debt” means. Understanding MMT/MS/Chartalist/true Keynesian/Creditary/Institutional monetary economics just boils down to understanding money as debt, as defined by the dictionary, just consciously understanding what everybody already knows, and reasoning carefully and consistently from that starting point. Mainstream econ is much, much less scientific & logical & consistent than everybody’s common knowledge that one picks up just by living in a monetary economy.
You owN the (fiat) money that the government just paid you as a soldier. The money in your pocket signifies a debt that the government owEs you. Because the government is a Big Cheese, people like to have the government owe them something, so money is desirable and tradeable.
You are thinking of money like a rock. Money is not a rock. Money is a string. Fiat money is a string that you can pull on, moving the federal government. Tax debts, things you owe, mortgages, prices you need to pay are string pulling you. Money in your pocket, things owed to you, bank accounts, prices you set are strings that you can pull.
Do you think that a letter from the IRS is not, does not signify a debt? I hope not. Then how can one NOT think a tax refund check is a debt, going the other way? And what is the difference between a tax refund check and a dollar bill, a Treasury bond, a Social Security check, a coin? Nothing at all.
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Calgacus,
You are correct, of course. The fact that all money is debt is fundamental to economics.
Arguing with people who refuse to believe it is like arguing with creationists about evolution. No fact convinces them.
This blog is devoted to the science of economics. If someone is willing to learn or to teach, fine. But I no longer will try to argue with flat-earthers.
Rodger Malcolm Mitchell
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Well, I have a strong quixotic streak. I think a lot of these people are serious and want to learn. I was very interested to learn that your own work started from “money is debt” long ago. But the hardest thing to get across is to get people to think simply, to write simply, to try to grasp what is “so simple it repels the mind”. One reason I like your work a lot is that you recognize and strive toward this goal more than most of even the good guys. Simple, trivial does not mean easy, obvious.
Often, indeed usually it is the reverse; the complicated, difficult theory with lots of “hard math” is what one starts out with. Then after a lot of work you arrive at a simple, trivial theory that is sooo easy – once you see it, once you understand it. Once you make the right, slippery, deceptively simple definitions. This is especially true in “hard math” itself. That is something that has been forgotten across a whole range of disciplines (including mathematics) in the last few decades, even though great drives toward unifying simplicity were characteristic of the decades before that.
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NOTICE: A few people mentioned their comments have not seen print. I no longer publish arguments that:
1. [Any group] lived in Palestine first
2. Homeopathy works
3. Evolution is just a theory no better than creationism
4. Money is not debt
5. The earth is flat
People arguing for these ideas offer long, convoluted, untenable points, using non-standard definitions and historical misstatements. For those people, there probably are blogs where kindred spirits can be found.
Rodger Malcolm Mitchell
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Comparing evolution to debt is not valid.
Debt = credit = money is without doubt. Its an easily provable fact. Evolution is a theory that is still being developed and understood.
It is not a good comparison at all. Its put debt = money in a category it does not belong.
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I would not like to see all banks run by the Govt sector. Maybe at the very most up to 50% but no more and preferable less.
Govt has enough power as it is without running all the banks as well. And even though people blame the banks for the current problem it really rests with the Govt not the banks. So why give Govts even more power when they can not even handle what they have got at present.
Govt today has all the real power. They could easily reduce the power of the banks by running higher deficits. Or regulating them as required. They have not done so and the banks have benefited from this credit scarcity
Education is the key with money and banking esp regarding the importance of debt. Along with making sure that too much power is never given to one group. Whether the Govt or private sector.
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“No bank ever would become insolvent. There would be no “runs” on banks by depositors. Savings would be 100% protected. Clearly, an advantage.
The lack of a profit motive also would eliminate the temptation to lend to credit-poor borrowers. Advantage.”
Surely these are big disadvantages. Banks should help to ensure resources are allocated efficiently. If banks can not loss money. Or become insolvent. Its obvious where this could lead. Losses can help to clean out incompetent managers. Or provide an incentive to run banks efficiently. Without a profit incentive surely it is much more likely banks will lend to credit poor borrowers
And really its easy to protect savers today even with private ownership. The Govt can easily step in when required.
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Sure enough, there is a forum for those who believe the earth is flat… 🙂 http://www.theflatearthsociety.org/forum/index.php
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“Since money is created as debt, yet the interest owed on that debt is not,”
It’s ambiguous, I grant you, but I understood.
“Since money is created as debt, yet the interest owed on that debt is not created”
Not
“Since money is created as debt, yet the interest owed on that debt is not money”
It’s a widely known (not sure what to call it – fact? assertion?). When the loan is taken out, a deposit (money) equal to the principal is created. That’s an accounting identity. Also created is an obligation to pay the interest, but no money is created for the interest to be paid with. It’s up to the borrower to create wealth, and thus the ability to repay the debt with interest.
Pretty easy, really. You’re a smart guy, and I’m sure you’ve heard it before. Hard to believe you didn’t understand. I know you disagree with the theory, but you do understand it, right?
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Sorry, this is in the wrong place. I meant it in response to
“When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’”
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Gee, John, it’s way beyond me, maybe you can explain it better.
But before you do, you probably should read the next lines of the response, which was, “Second, if you mean to say, “sucks money to money lenders,” I do not see that effect. The U.S. is 235 years old. There would seem to have been plenty of time for all of the money to be “sucked” to the money lenders. Yet, after 235 years, it was the money lenders who ran out of money and had to be bailed out by the government.”
So what is your point, John? That after 235 years, people now are running out of money because all of the money has gone to lenders as interest? Please educate me, but do use short words, for my benefit.
Rodger Malcolm Mitchell
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Is “disingenuous” too long a word?
I’m not saying I agree with him rather than you on the sucking part. (But you knew that, didn’t you?)
I’m saying that you pretended to misunderstand what he said, and then argued against what you said he said, when in fact you agree with what he said.
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John, you are getting desperate. An agency that spends hundreds of billions every year, and you found two people who cheated it? Gimme a break. What large organization could pass the “John test”? Anyway, it was not Social Security that cheated; it was people applying for Social Security that cheated — a completely different situation.
Also, they didn’t think they would be sued, and there was good reason for this belief. S&P rated them AAA.
If you can make your case with data, rather than intuition, do it. I make my case all over this blog — with data.
And yes, the old “private sector does it better” myth — widely believe and unproven.
Rodger Malcolm Mitchell
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They’re not the only two. Cheating is rampant. I thought the type of case I would find is a spouse continuing to cash the checks after the death of the recipient, which I think may be more common than the inmate scams, which are also popular.
I think Obama’s proposal is to save $0.5T by eliminating waste and fraud in Medicare, no?
Rated AAA? By agencies that were paid by the issuers of the toxic paper? Can you say “conflict of interest?”
Maybe it is a case against bigness rather than against government, although I think both come into play. Small towns probably don’t have the same sort of fraud problems that the Federal government has, nor do small businesses have people like the Solyndra executives to worry about.
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Yet another reason for socialized banking:
Rodger Malcolm Mitchell
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The beat goes on:
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