Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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I have suggested that private banking in the United States should end, and all banking operations should be taken over by the federal government. I recognize that may be anathema to those who believe the government is too big and too powerful, and that private control always is better than public control.
Yes, “socialism” has become a popular pejorative. Yet, many aspects of our life are controlled by the federal and local governments, and we are better served for this control: The military. Road, bridge and dam building. Food and drug inspection. The courts.
Private ownership can be better, but not always. Sometimes public ownership provides better service.
I live near Chicago. The previous mayor sold Chicago’s parking meters and an important toll road to private industry. Parking costs and tolls immediately rose stratospherically, with zero improvement in service. The new meters are harder to use, and the road still needs work. Clearly, the people of Chicago were not well served by the transition from public to private ownership.
The private sector works on the profit motive, which often does not provide protections or service to the public.
Read the following excerpts, and see what you think about public ownership of the banking industry.
Global Economic Intersection:
Dallas Fed: Break Up the TBTF
March 30th, 2012The Federal Reserve Bank of Dallas and its president Richard Fisher are generally known as conservative, hard money proponents. Often conservative economic thinkers are strong laissez-faire proponents. That is why the 2011 annual report of the Dallas Fed, released this month, has been such a surprise. A focal point of the report is very interventionist, calling for direct government action to force the break-up of the nation’s largest banks, the so-called TBTF (too big to fail) institutions.
The focus of the report is an essay by Harvey Rosenblum, Executive Vice President and Director of Research. Key points by Rosenblum include:
[Dodd-Frank] may not prevent the biggest financial institutions from taking excessive risk or growing ever bigger.
TBTF institutions were at the center of the financial crisis and the sluggish recovery that followed. If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy.
When competition declines, incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.
The term TBTF disguised the fact that commercial banks holding roughly one-third of the assets in the banking system did essentially fail, surviving only with extraordinary government assistance.
A bailout is a failure, just with a different label.
The machinery of monetary policy hasn’t worked well in the current recovery. The primary reason: TBTF financial institutions. Many of the biggest banks have sputtered, their balance sheets still clogged with toxic assets accumulated in the boom years.
TBTF undermines equal treatment, reinforcing the perception of a system tilted in favor of the rich and powerful.
… virtually nobody has been punished or held accountable for their roles in the financial crisis.
… zero interest rates are taxing savers to pay for the recapitalization of the TBTF banks whose dire problems brought about the calamity that created the original need for the zero interest rate policy.A financial system composed of more banks—numerous enough to ensure competition but none of them big enough to put the overall economy in jeopardy—will give the United States a better chance of navigating through future financial potholes, restoring our nation’s faith in market capitalism.
Taking apart the big banks isn’t costless. But it is the least costly alternative, and it trumps the status quo.
The road to prosperity requires recapitalizing the financial system as quickly as possible. Achieving an economy relatively free from financial crises requires us to have the fortitude to break up the giant banks.
Moving back to the Dallas Fed President’s letter, Fisher has not suddenly sprung this position of forced break-up of the largest banks out of thin air. He has been speaking out on that subject, as documented by Bloomberg last November:
“I believe that too-big-to-fail banks are too-dangerous-to-permit,” Fisher said in the text of remarks given in New York today. “Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
The reason to break up the TBTF banks is simple: They cannot be trusted to work in the best interests of the public. Breaking them up presumably would make them easier to control (regulate), and less likely to do damage.
Why can’t banks be trusted? Their motive is profits, not service to the public. Their misdeeds have caused the recession, damage to the economy and the growing gap between those people with high income (1%) and the rest (99%). Congressional conservatives will not supervise the bank’s insatiable thirst for profits, which motivates all bank activities. Damage control by the federal government has become an increasing need.
All bank problems boil down to the profit motive. Rather than breaking up the TBTF banks into smaller, (hopefully) more controllable pieces, we should eliminate their fundamental problem, the profit motive. And, what better way to eliminate the profit motive, than to put banks under total government control, i.e. ownership?
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. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports
#MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
I don’t know about the food and drug administration. There are alot of drugs that are recalled. I don’t know about the quality of our meets.
As for the courts, the U.S. has the most prisoners of any industrialized nation. I don’t know if all of these people deserve to be there. I don’t have alot of faith in the criminal justice system anymore.
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In the end, all similar issues return to balance between personal and group initiative. Our progress follows optimization of [private + public] initiative, never either in isolation. There are tolerance limits for that balance, with capitalism and fascism at the two extremes. Striking a productive balance is what organized systems do. It’s what Ben Franklin advised, back at the original Constitutional Assembly. A successful balance can always be found by interacting widely enough & soon enough to achieve collaborative, open-source initiative.
http://www.cositech.net/
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see this too
What every American needs to know about the Federal Reserve System
http://fabiusmaximus.wordpress.com/2012/03/31/37021/
For specific policy options, begin with these . Then expand.
There are SO MANY options not being explored!
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Good article.
One small caveat. The author said, “. . . bail out the banks at taxpayer expense. . . ” He is wrong, of course. In a Monetarily Sovereign government, taxpayers do not pay for government spending.
Otherwise, an informative, well-reasoned piece.
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Imagine what our world could be like had the profit motive not misdirected us in so many industries. The profit motive is truly a ‘conflict of interest’ in the banking industry, as you point out very well. It’s also impeding the true goal of the health care industry, which should be health care. Would a health care industry focused on finding cures rather than increasing profit have provided more cures and fewer palliative products? Would a food industry that is focused on good nutrition and good flavor as opposed to shelf life and appearance have provided better overall quality of life for citizens?
I used to assume that progress in technology, and in the human condition overall, would follow a path beneficial to all, according to what I learned about ‘free enterprise’ and ‘free markets’, with healthy competition and such. Now that I’m learning to be less naive, I can see that we have an opportunity to change. It is quite a challenge!
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explorer,
Right. The profit motive is quite powerful — one of the most powerful of all incentives. But like all powerful sources of energy, it can be misdirected.
The failure of communism shows how the lack of a profit motive slows progress in many areas. Altruism, conscientiousness and obedience often do not make up for lack of self-consideration and the profit motive.
In my opinion, the banking industry will provide better, more honest services and products without the profit motive. Contrast that with the auto and electronics industries, which are driven to improvement by the profit motive.
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Yes, the profit motive propels progress when it is aligned with the true purpose of any given industry. The auto industry has given us innovation in many areas because of what sells. But we could also say that advances in auto safety, and fuel efficiency have come more slowly because the profit motive tends to trump all other purpose.
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Federal control of banking would be a major mistake. You would instantly have poor service and the process would become a political pawn with the govt. picking winners and loosers. With no profit incentive would become poor underwriting standards. An example of a poorly run government activity is the US postal service.
I am continually amazed at your stance for government control of activities that private industry can do more efficiently. The poor parking meter story is the result of no competition.
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Mark, if you think that “private industry” can do banking & finance “more efficiently” than government, you simply do not understand what banking and money are. It ain’t your fault – this complete lack of understanding has become nearly universal. Rodger & the MMTers are an antidote to the sea of nonsense which infuses almost all academic economics since the 70s. History since then shows deregulated “private” finance become fantastically less efficient than the quasi government-controlled banking of say 1933-1973, causing colossal losses of world GDP.
It is self-contradictory, like saying that “private industry” can govern, enforce laws, put people in jail, execute them, “more efficiently” than the government. Once the private sector starts governing etc, it ain’t the private sector no more. Once the private sector starts banking, it ain’t the private sector no more.
Money and banking are by definition macroeconomic functions of the state, the government, the whole society. Banking divorced from the government the way say, making and selling shoes or steel can be – is something that has never happened in the history of humanity, because it cannot happen. Closest approximation was probably in the chaotic parts of the European Middle Ages, in the “nations of bankers” that developed into modern banking over the centuries until the founding of the Bank of England.
Banking has always been controlled one way or another by the state. The question is whether this governmental function, banking, will be controlled by pretend-private bankers to enrich themselves & their cronies, and eventually enslave everyone else. Or whether ordinary people will have a say in the exercise of this governmental function. That is – Ooh, evilly-socialistically-communistically “nationalize the banks”. There is no other choice. The US constitution & democratic theory say the latter. But it has to be supported by the renewed understanding of money, which Rodger & others have been trying to teach.
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Mark,
Yep, sometimes I amaze myself. But now that I’ve recovered, let’s think about the point you made:
“Poor service:” The privately owned banks provided such good service that millions of people were granted mortgages they had no hope of paying, and then, when they were underwater, the banks stalled and stalled on the President’s HAMP program — all the while trying to nickel and dime customers with creative charges. I cannot imagine any industry providing worse service than the banking industry.
“Government picking winners and losers.” That’s exactly what the government does now, urged on by the profit-motivated TBTF banks. How do you think these banks got so big? Eliminate the profit, and the political pressure would ease.
“Poor underwriting.” I almost laughed out loud when I saw this one. The profit motive caused the banks’ underwriting (or lack thereof), which caused the recession. Private industry was the culprit.
“Postal service poorly run” The postal service is required to deliver the type of mail that no one else wants to deliver, at prices no one else wants to charge. For example: Advertising mailers and first class everywhere.
For about $.45 you can send a letter anywhere in the country. Who else will do that, even for triple the price? For even less, you can send advertising mailers all over the nation, and have them hand-placed right in mail boxes.
Yesterday, mailed four books at the rate of $2.35, total. Fed Ex would have charged me $10. I can mail a 5lb. box anywhere in the country for about $5. That same box will cost me more than $50 if shipped by UPS, depending on where (I’m required to figure that out for myself).
The postal service is one of our better services, but it should be supported by the government, not limited as it is now.
Rodger Malcolm Mitchell
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The establishment of the Federal Reserve in 1913 put all US banks under government control. Before Fed was established the Only banks that had issues were government run banks. Freddie and Fannie are government enterprises as well. What you are saying is that by socializing banking and getting rid of the profit motive, all would turn out just fine. I guess communism and socialism has been a great success. Just look how both worked in China, India, and Russia (Vietnam is doing swell I guess). China has been endorsing capitalism for that 20-25 years. Of course, they have failed down that path, haven’t they? Look at what Apple has done to those poor Chinese workers who lined up for a job at Foxxcom. I don’t seem to see any Apple people pointing iPhones to the workers heads telling them to build faster iPads. The good news is that agencies such as CFPB is so poorly organized that it take them years before they discover any issues with the government managed banking system.
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John,
Roger is not advocating that banks should be “socialized” and for the simple reason that they are socialized ANYWAY. According to Andrew Haldane of the Bank of England, the TBTF subsidy that banks get is far bigger than bank profits. Plus banks get rescued by taxpayers when the c*ck it up (which they do regularly).
Personally I favour capitalism. That’s a system under which when a firm goes bust it goes bust. And bust means bust means bust.
Either we have banks work in a genuine capitalistic environment (which I favour), or we admit that they already are socialized and go the whole hog and formally nationalize them. We cannot continue with the present system under which bank shareholders take profits in the good times, and then get bailed out by taxpayers when it all goes wrong.
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Great post. The US is a mixed economy, government trying to control the private sector. They do this using legislation and enforcement. the banking industry is 75-80% control (force regulations) by the government. On the other hand, technology is around 20% regulated. Think of it this way, is the US or government capable of producing a iPad? I’ll answer that one NO. They don’t have the talent or mindset to be creative. I will say, not all private institutions are real capitalist. GE used to be and now relies on government laws and oversight to keep them afloat. Of course, tyne US auto industry would have been long gone without government help. Just think of all those worthless unions workers faced with reality. I guess the silver lining in all of this, the weight of the followers of government control will have them sink in the quick sand that the government foundation is built upon.
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John,
Yep, just as I predicted in the 2nd paragraph — here comes the old “socialism” pejorative. How did I know?
By taking things to an extreme, you negate your own position. I didn’t say all industries should be owned by the government. I didn’t say Apple should be owned by the government. Are you saying no industries should be owned by the government?
There are certain industries where the profit motive seems to play havoc with the best interests of the people. Banking is one of those. Remember, it’s the banks that caused the recession. Not a good testament for private ownership.
Rodger Malcolm Mitchell
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Sorry Roger as usual you ate wrong. The banks did what the government allowed them to do and that is take risk. They also knew the government would bail them out because of the securities they held. For example, they largest mortgage company in the US once was CountryWide. Both Dodd and Frank had personal relationships with CountryWide. It bailed, BOA was forced to take on its bad mortgages, who in-turn turn over those bad mortgages to Fannie and Freddie. Dodd and Frank got their billed passed, they don’t exited their seats (Frank is still around, but not for long). The biggest winner of the Dodd-Frank bill was Not CFPB, but dizzy Lizzy who now running for Senator in Mass. CFPB is just OTS renamed and funned by the FRB (10% of the FRB operating budget goes to CFPB). CFPB even took over OTS office on 1700G Street. My Apple example was way over your liberal head, so I apologize for bring them up. However, it is nice to see a real capitalist company doing well. Now, for my final thought, can you name just One government body that has successfully served the citizens of the US, besides the US Military and made America better? Just one -)
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John, I ate wrong? Gee, I finished my veggies.
Anyway, why do you think the banks did what they did? Profit motive.
And in answer to your “final thought” (I should be so lucky) question: Social Security.
Rodger Malcolm Mitchell
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The motive of the banksters was not the profitability of the businesses they had a fiduciary duty to, it was their own personal enrichment through a corrupt bonus process that they put in place for themselves. If they wanted the bank to make a profit, would they ever have made loans that they knew had no chance of being repaid? Of course not. They did it because their bonus depended on loan volume, not loan profitability.
Beyond the question of whether the profit motive caused their actions, is the question of why they were able to socialize the risks that they took, and the cost of their failures. Safeway can’t do that. If Safeway’s managers make bad business decisions they lose their shareholders’ money and their own jobs, they don’t take down A&P and Kroger and Albertson’s and all the other grocery chains along with them, and cause a global food crisis. The difference between the banking industry and the grocery industry is the unique relationship between banks and government that enables banks to imperil the rest of us in ways that no other industry can do. Without government involvement in banking, Lehman Brothers could have gone the way of Circuit City and Kodak and nobody else would have been any poorer for it.
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Spot on. I will also add each crony bank / institution has people working in the Treasury, FDIC, SEC, Freddie and Fannie, OCC, CFPB, and more.
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Good post Rodger, it reminded me of something Henry Simons wrote in his 1934 book, “A Positive Program for Laissez Faire”:
“We may endure regulation for a time, on the dubious assumption that governments are more nearly competent to regulate than to operate. In general, however, the state should face the necessity of actually taking over, owning, and managing directly… industries in which it is impossible to maintain effectively competitive conditions.”
http://billtotten.blogspot.com/2009/12/positive-progra
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Problem with the link.
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I don’t know that quote, but I agree that any industry where there is monopoly, the government ought to run it for the benefit of the community instead of allowing private parties with a profit motive operate it against the best interests of the community.
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This url should work for Beowulf’s Henry SImons essay.
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Please click on my name to find my report to the President
“On the Unconstitutionality of a National Bank.”
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