Readers offer insights into federal ownership of banks. How should America decide “who-gets-money”?

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.

●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●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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The great thing about having readers is they not only offer solutions you might not have considered, but perhaps more importantly, offer questions you are forced to answer. For that I must thank readers Yuu Kim and Woj for their very insightful comments and questions.

Yuu Kim asked the a question, elegant in its simplicity:

If the government is the banker, then what would be the point of making loans to the public?

My answer was:

Not only does the government not need to make a profit, it doesn’t even need to receive the loan money back. The government literally could give money rather than lend it.

The problem then becomes: To whom to give the money, and how much? The credit system provides a method, albeit a method that could be criticized on many fronts: Give (or lend) money to people who have good credit. It’s weak, but it’s a method.

It was a lousy answer, especially since I often have criticized the European Union for lending, not giving, euros to the euro nations. Clearly, loans to people who can’t repay, make no sense.

But Yuu Kim’s question implies, “Does it make any more sense to refuse loans to people who can’t repay — if you don’t need repayment?

Then came Woj, who said:

The (current) credit system, however, works because it is a market in which the profit motive helps different individual/institutions price credit.

Yes, that is partially true — though only partially. Credit card issuers are notorious for not considering credit ratings, whether for granting credit or establishing rates. Mortgage lenders consider credit ratings more on a “go, no-go” basis, than on a rate-setting basis.

That said, nothing would prevent a federally owned bank from setting lending rates according to credit rating — if that were important. We really need to explore the notion that a lender with infinite dollar resources (the U.S. government) should charge interest, or if it does charge interest, scale that interest according to credit rating — or lend at all.

Currently, the government gives, not lends, dollars to people whom the government judges “need” dollars or “are entitled to” dollars. All poverty aid falls into this category. Social Security and Medicare (which, by the way, are not paid for by FICA), are gifts from the government. So are roads, food inspection, military protection and thousands of other valuables.

So I ask:

1. Should a person with poor credit be charged higher interest than a person with good credit, if the lender doesn’t need the loan to be repaid?

2. Should that lender even charge interest, or rather should it lend on a no-interest basis?

3. Should that lender actually lend at all, or should it only give?

4. What should be the determining factors with regard to whether a person or business receives a loan with interest (and what interest rate) vs. a gift?

Currently, the for-profit market makes those determinations, but is that the best, public-interest way? The for-profit market puts roadblocks in the way of “money-needers” having poor credit. But, should all such money-needers be denied money or charged more for it?

What happens to America, when someone wants to buy a house or rent an apartment, build a business, pursue an invention or get an education, but can’t receive an affordable loan? No one knows.

Is there a homeless genius out there, whose ideas could revolutionize the world, but whose homelessness precludes his advancing those ideas? No one knows.

Is there a 180 IQ somewhere, who can’t afford to go to college, not only because of tuition costs, but because she needs to work to support her family? No one knows.

Every year, millions of dollars are destroyed in our economy, as loans are repaid. How much has this money destruction inhibited economic growth and contributed to recessions and depressions, joblessness and misery? No one knows.

Is private banking’s profit motive the best determinant (or even a good determinant) of “who-gets-money“? Is credit rating the best allocation method for America? Currently, the government spends trillions answering that question. But the private banks spend even more trillions.

Consider the criminal banksters who caused the Great Recession. What role in “who-gets-money” should they have? Then consider private credit rating agencies that gave AAA ratings to worthless investments — ratings that helped cause the Great Recession. What should be their role in “who-gets-money“?

Finally, consider our inept, politically driven Congress, President and Supreme Court. Should they be the sole determinants of “who-gets-money,” or do the private sector criminals provide some sort of economic balance against the public sector criminals?

In short, how should America decide “who-gets-money”?

Questions, questions, questions. My intuition (without proof) says:

1. Federally owned banks would be less criminal than the large privately owned, profit-driven banks. Some may believe that small banks would be more responsive to the public, though my personal experience with a local Social Security office (survey of one) has been excellent. A federally owned agency can deal with the public, just as well as a private bank, even on an individual customer basis.

2. Lending, rather than giving, weeds out those who do not have a serious purpose, so though federally owned banks could give, they should lend.

3. The federal bank lending rate should be zero for all. If, according to whatever lending criteria the bank sets, the borrower deserves a loan, that loan should not carry interest. Neither interest payment to the government, nor punishment of borrowers, serves any public purpose.

Consider this a think-piece, and tell me: What do you think?

Rodger Malcolm Mitchell
Monetary Sovereignty


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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

30 thoughts on “Readers offer insights into federal ownership of banks. How should America decide “who-gets-money”?

  1. Rodger,

    In my view, the Government, which is the ultimate issuer of money, and has an infinite capacity to issue such money, subject to the inflation constraint has three options.

    1) give away money,
    2) spend money
    3) lend money

    Giving away money always raises the issue of a moral hazard unless given away to each individual equally unless there is a well established standard. The government indeed does give away money without requiring anything in return – by providing healthcare and welfare payments to the indigent and disabled.

    Spending money. The government spends money by buying goods and services for the public good – this could be extended by providing a job guarantee for any able bodied person. This would set the anchor wage of labor as posited by the MMT economists.

    The lending comes in order to avoid a moral hazard, and to make available to individuals, and groups of individuals monetary assets that will enable them to accomplish their goals – goals that do not have community well being as their primary goal subject of course to their doing no harm to the community. And this money would be repayable by them either by producing a profit if it is a for profit project, or if not (e.g. a home loan) by engaging in other economic activities.

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  2. Rodger — Your absolutely right, of course. Having the profit motive as a part of the money-provisioning process has really made a mess of things. Removing it by basically nationalizing the banks could avoid a lot of problems. I haven’t come to any conclusions about government vs. small banks, but I do remember the old days before deregulation of the S&L’s and banks. The old banker’s formula was 6 – 3 – 3. Lend at 6%, borrow (from savers) at 3% and be on the golf course by 3:00 pm. The economy was doing quite well back in those days. Oh, and the top marginal tax rate was 91%!

    On your point #2 just above. I agree that the evaluation of a borrower’s seriousness is important. You don’t want to give money to someone who is not going to use it to expand the economy somehow. At least, give them no more than they need to live with a measure of dignity. Here, I think we are talking about capital for business or personal advancement beyond the needs for daily living. That said, requiring a business plan from the “borrower” and tracking its execution in order to continue receiving support would be a way to make sure the money is not being used inappropriately.

    One of the realizations in the analysis of the loan-granting privilege that banks have been given is that although the government eventually provides the necessary reserves and/or base money for the loan/deposit, there is no provision to provide the needed NFA’s to pay the interest. Which supports your third point.

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  3. You said “3. The fed­er­al bank lend­ing rate should be zero for all. If, accord­ing to what­ev­er lend­ing cri­te­ria the bank sets, the bor­row­er deserves a loan, that loan should not carry inter­est. Nei­ther inter­est pay­ment to the gov­ern­ment, nor pun­ish­ment of bor­row­ers, serves any pub­lic pur­pose.”

    But I thought your way of controlling inflation was to have the FED manage the interest rates.
    Now here you are saying we no longer need interest rates and all loans are at 0% with some having the option NOT to pay it all back.
    What happens to inflation then? Would a MS nation still be able to import goods and services from other nations using its MS currency?
    -netbacker

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    1. Good questions, netbacker.

      Fixing interest rates at zero makes sense because the government doesn’t need the money, and the interest going to the government would reduce the money supply — i.e., anti-stimulus.

      But you are correct that a fixed interest rate — any fixed interest rate, even a rate above zero — reduces somewhat the Fed’s options for fighting inflation. So, perhaps zero should be a target rate, with the option to increase it, in case of inflation.

      Also, T-securities could pay an above-zero rate, which would increase the reward for owning dollars, thus increasing the value of dollars — that is, if we were to continue issuing T-securities (another question).

      The U.S. is such a gigantic customer, I suspect we never have to worry about other nations accepting our dollars to get our business.

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      1. Wouldn’t the astute individual/corporation then borrow from the government at 0% and invest in T-securities at say 2-3%? Isn’t that what the banks are doing with their QE money now?

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        1. “What is the purpose of this loan?”

          “My broker is no longer allowed to lend to me, so I would like to borrow from you to finance my investments, since you are the only bank left.”

          I gather that would no longer be a “valid” purpose for borrowing?

          Silver crashed when they raised the margin requirement something like from 2% to 5%. What would happen to the stock market when margin is raised from 20% to 100%?

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  4. Rodger,
    Thank you for the kind words. My hope is to inspire further questions/discussion since your posts do that for me.

    In the discussion above you mention the possibility of charging interest. Part of my earlier view is that doing so requires profit-loss calculations, even if the goal is to break-even.

    Whether you choose lending or giving, I think you clearly need restrictions on who gets loans and how much. My fear in the plan you lay out is not solvency but inflation. If the govt offers free loans or money, demand should increase substantially. However, if the govt is too lax in its lending then inflation will become a problem. At that point the govt would be forced to cut back on loans. Individuals therefore have an incentive to ask for as much as possible before inflation becomes a problem and the system clearly provides an advantage to those who receive funds first.

    This is not to say that in theory this type of system couldn’t work better than the current one, but I have reservations about whether in practice those improvements could be achieved.

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    1. Woj,

      You speculated, “if the govt is too lax in its lending then inflation will become a problem.” Yet, the private sector was too lax in its lending and inflation did not become a problem. Mostly, we’ve been in danger of deflation.

      Historically, inflation has been caused by oil prices. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

      So the question becomes, who do we trust more, the government or the private sector, when it comes to lending laxness? The profit motive encourages the private sector to be lax.

      I don’t believe federally charged interest requires profit-loss calculations. Because the federal government should not care about profit-loss, it merely can establish interest rates at any level it chooses, with one consideration being inflation.

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      1. Rodger,

        Inflation has not been a problem but there was clearly inflation in housing (not included in national stats) from lax lending which caused trouble.

        Interest rates may not require profit-loss calculations but how else do you propose to set differing interest rates for types of individuals and loans? Would it be random?

        As for your response to netbacker, why would there be a FED? Liquidity is not an issue. Interest rates can be set by the Treasury, if at all. Why not integrate any desired actions into the Treasury? Also, why have Treasuries? They are simply a way of paying interest to the private sector and method for the FED to control interest rates. Instead of Treasuries, just have the Treasury grant more loans or provide funds at no cost.

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    2. “…restrictions on who gets loans and how much…”

      here’s an idea for a “restriction” that just popped into my head… what about setting quotas? yes, i know that’s a bad word, but…

      let’s say the government goes ahead and sets up a public bank. if they have accurate models of consumer spending, they should be able to “guestimate” at what point prices may go up too much where it would be a problem. so, they could say “this year we should be able to lend out this much amount of money. and if we hit our “lending target’ this year, then next year we might be able to lend out this much money.” and when they set up their “lending targets”, instead of having a single target, they should have a range and focus on hitting the lower range of that target.

      also, the lending could be targeted to certain percentage of businesses and individuals and perhaps regions of the country.

      another possible restriction is that loans could go only to borrowers below a certain income cap. for example, warren mosler’s JG proposal (i bring it up, rodger, just to make a point) calls for a $8/hr. “transition job.” well, i’ve lived in a few states here in the US and in some towns in the state i’m originally from, that might just work, but where i currently live that’s not even close to being a real minimal wage. perhaps a loan, or, better yet, a credit card from the government might help someone on a meager salary like that who happens to live here.

      anyhow, these are just on-the-fly ideas–i haven’t yet thought this out completely. also, thanks for the kind words, rodger, and the thoughtful blog.

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      1. Yuu,

        Not to be harsh, but the idea of quotas for lending run through the central govt is starting to sound an awful lot like China today. I’m not sure that’s a good direction. As for the plan itself, how would the govt accurately model consumer spending? At best maybe for a quarter, but over longer periods exogenous and endogenous factors will make this extremely difficult.

        As for only lending to those below certain income, does that mean people above that level cannot borrow at all? Or if so, from what entity? Credit/Debt is certainly a primary factor in financial instability but it is equally important to economic growth. I’m inclined to think the latter is far more critical to maintain than the removing the former.

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      2. Obviously there has to be a limit to total lending, which by definition one could call a “quota”. Not in any pejorative sense, though. There is a limit to total lending today, set by the interaction of borrowers and lenders in a relatively free marketplace, although with something of a government-set floor to rates.

        The problem is how to allocate the privilege of borrowing among the population. Without a price mechanism, it must be done by fiat, as it were, meaning by government dictate. Tyranny of the majority, perhaps. Could be something that changes with each election, like the number of aircraft carriers we think we ought to have.

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  5. “whatever lending criteria the bank sets”

    Interesting. As if it would be something other than the likelihood of the loan being repaid. Perfectly possible, since there is no profit motive nor any need for repayment. If it is something else, then what? On what moral basis can a loan be given to one and not the other? Assuming, of course, that unlimited loans would be undesirable, economically.

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      1. So, if I wanted to borrow some money just for my own benefit, I’m no longer allowed to borrow? Or I have to go to someone outside the banking system, which would be illegal, I suppose?

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    1. Morality requires a group context. At the upper end the national context is all citizens and legal residents of the USA. At the lower end there are groups of one, individuals. Intermediate natural kinship groups are nuclear families, extended families, clans, tribes and ethnoraces. Fair money distributions to kinship groups would be proportional to the numbers of people in those kinship groups. Distributions within kinship group would be managed by the kinship groups themselves for ethnocultural and other group purposes.

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      1. That devolves to a fixed amount of lending to each individual. But whether at the individual level or some kinship group, what happens when one desires to borrow less, and another desires to borrow more? If unequal lending is not allowed, how would the optimum level of lending be maintained? Would some be forced against their will to borrow more, if they won’t do it on their own? And how do you prevent black market loans, which might cause the optimum level to be exceeded?

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  6. Rodger,

    Did you come across this little item? – A Debt Jubilee via Eminent Domain?

    Local government officials in San Bernardino county have apparently heard enough about how the overhang of mortgage debt is holding back the recovery, and they’re considering taking matters into their own hands. Reuters‘ Matthew Goldstein and Jennifer Ablan report on the background discussions leading up to a proposal that is being considered by officials in San Bernardino, California—a county where almost half of all mortgages are “underwater.” The general idea is to use eminent domain as a kind of mortgage debt forgiveness program: principal reduction would be achieved by forcing the sale of mortgages that have been packaged into securities; the mortgages would then be restructured on more favorable terms. Homeowners with underwater mortgages who are current on their payments would be able to participate.

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    1. Interesting concept.

      If banks were “normal” businesses, they would do this, themselves. They would turn non-performing mortgages into performing mortgages, by working with mortgagees individually to find a serviceable rate and/or mortgage balance.

      But banks are not normal businesses. They keep those dead mortgages on the books as a part of bank assets, the real basis for bank lending.

      The banks can make more money with a million dollar, non-performing mortgage on the books, than with a 1/2 million dollar, performing mortgage.

      The article doesn’t say how the county would turn each mortgage into a performing mortgage, however.

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  7. RMM, what about arbitrage?

    If I can borrow from the government a 0% interest, and then purchase T-securities at higher than 0% interest… Ive just found myself a bottomless well of financial wealth. I think they call this sort of thing arbitrage, but I could be wrong.

    This dilemma would need to be resolved. At first blush, it seems like we cant have both 0% borrowing AND a guaranteed rate of return by the issuer: that would turn lending into giving.

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    1. That assumes the government will lend to you, endlessly, and without asking the purpose of the loan.

      By the way, the private banks already have a “bottomless well of financial wealth.” They pay essentially zero interest on savings accounts, then receive a higher rate on the T-securities they buy with those dollars.

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  8. Woj,

    At any given time, some commodities and services will be over priced. Housing was an example. Several years ago, NASDAQ was an example. Facebook was a brief example.

    I didn’t propose setting differing interest rates. I proposed that at any given moment in time, we set one interest rate for all.

    Since 8/15/71, T-securities have not functioned as a means for the government to obtain dollars. But they have functioned as a safe investment opportunity.

    The need for T-securities is a complex question, as is the need for the Fed. We might do well without either.

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  9. Presumably if the federal government just gave money to people (instead of loaning) there could still be oversight. Grant programs today evaluate potential recipients, and there are penalties for not using the money for the purpose it was granted.

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    1. Yes, but we’re talking about replacing the whole private banking system, where lots of people borrow money without stating any reason, except that they want to borrow. And most of them do not have any valid public purpose in mind, although one might say that any spending on US products advances the public good. But some people might want to borrow in order to buy something outside the US, perhaps a foreign company to merge into their own company, or some real estate to use as a vacation home or retirement home. Today they can do that, but will oversight allow it?

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  10. The loans that caused the financial crisis were not motivated by hope of profit. They were done by corrupt individuals fraudulently using their employers’ offices to enrich themselves, fully expecting losses for the lenders, not profits.

    The greatest difficulty in a government takeover of anything is replacing the pricing mechanism. The more free the market, the more effectively it balances demand and supply at the price which maximizes utility to both buyers and sellers. In un-free markets, monopolists set prices to maximize their own profit, without regard to the buyers’ well-being. Monopolists are often regulated by government to force prices lower than the monopoly price, while preserving some level of profit for the supplier. Government as a monopoly supplier of anything needs to devise a pricing methodology that serves the public purpose, since there is no longer any profit involved. There are examples where governments have done that successfully, including ownership of things from public utilities to liquor stores, but they do it at the expense of individual liberty, and they do use a non-zero price to limit demand, imitating the free market to some extent.

    If the interest rate represents the price of a loan, then at zero interest the demand for loans will be more than the amount of prudent lending. Without a price to ration the loans, and equalize demand at the level that the government wants to supply, there must be another rationing mechanism, and black markets will arise to serve those who have been turned down by the rationing process.

    At any non-zero but fixed rate for all borrowers, some borrowers will be paying more interest than an effective underwriting process would have charged them, and others will be paying less. Again, black markets and arbitrage will fill the gaps between supply and demand at the selected price.

    The banking system needs reform, but it did little harm to us before repeal of Glass-Steagall, and the GFC is arguably due entirely to that repeal. Reinstating it would fix pretty much all the problems that need to be fixed, and a good banking regulator like Bill Black could fix the rest.

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  11. RAFOL!!!

    If it looks impossible, it’s because it is. I sure hope the bums in government don’t put this great idea to work.

    Try running this one by the productive capacity in the country. I’m sure they will be thrilled to receive the useless dollars for their goods and services. You want to collapse a nation, follow these steps.

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