Previous posts in this discussion:
PostHow to Fix Central Banks (Tor Guimaraes, USA, 09/04/19 3:48 am)
From everything I have learned about Central Banks (CB), two things are obvious:
1. Like any tool, CB (money creation) can be used for good or evil. As the examples illustrated they have been used mostly for evil (powerful rich people getting richer at the nation's expense). They also can help to prevent economic depressions, if the CB is used to create money so banks can lend for productive purposes like new technology, entrepreneurship, business innovation, new jobs, and economic development. Obviously we want our CB to be engaged in that as much as possible, but always under intelligent, balanced supervision mechanisms. If the CB is corrupted by big banks, politicians and other private interests, the CB needs to be stopped. That is what is happening in the US today, before and after the 2008 financial disaster: under Alan Greenspan's lack of regulations, the CB allowed big banks to create money for financial speculation (not productive for the nation); when the bubble burst the big banks got bailed out by the government because they were too big to fail.
Unfortunately, after the bailout the big banks said thank you and the CB has enabled them to hijack the money-creation process, getting even bigger and more speculative. This is already creating misery (negative interest rates and massive uncertainty) for the American people despite the money flood.
2. The way to fix this mess (probably politically impossible because most people are unaware, and politicians are corrupted by the big banks' financial power) is to have two sets of regulations to control the CB and bank lending under two sets of guidelines. One for the local banks which tend to loan to small businesses essential for job creation and economic prosperity, but precluding them from local corruption such as nepotism, cronyism, and other undue influences over the lending process. Another set of guidelines for the big banks, precluding them from using money creation to enrich themselves with speculative investment in derivatives, housing and other asset-bubble creation, and inducing them to lend for infrastructure development and other projects of national importance.
JE comments: I certainly would endorse a mechanism to oblige banks to play fairly. But please allow a naïve question from a guy who teaches literature: is there a way in today's economy to distinguish between "productive" and "speculative" investment?
"Productive" vs "Speculative" Investments
(José Ignacio Soler, Venezuela
09/05/19 4:56 AM)
As an amateur in economics, I have been following Tor Guimaraes's interesting posts about the role of Central Banks. Unless I have misunderstood something from his comments, I am surprised Tor did not explicitly mention a very important role: When the Central Banks issue inorganic money without proper backup, or artificially devalue the local currency, what they are doing is creating a perverse "tax" on the people by means of currency inflation. At the end consumers "pay" this tax through increasing prices of goods and services, locally produced or imported. Is this not often a wicked political way of manipulating the economy?
John E commented on Tor's post with a question: "Is there a way in today's economy to distinguish between 'productive' and 'speculative' investment?" The classic answer would be simple. A productive investment is aimed at increasing or maintaining the "production" capacity. It is allocated to increase or maintain value, means of production, assets, infrastructures, R&D, technology, etc. In other words the investor expects a return in the medium and long term. A speculative investment is made when you expect your return in the short term, produced by a drastic change in "price." In other words, the goal is to increase the value of money itself, stocks, bonds, or other assets. "Buy low and sell high" is the ideal of the speculative investor.
An exceptional case might be a storekeeper, a merchant, who regularly must make both speculative and productive investments.
In a general sense, all investments are speculative. They all are made expecting a benefit in the short, medium or long range, however a speculative investment is normally only limited to financial transactions and not management of the object of investment. There are other differences in both concepts, but the distinction is more related to taxation, capital investment, capital gains, expenses, depreciation and so on, than its economic concept.
JE comments: The crucial difference may be historical and philosophical: production is good, speculation is evil. "Speculation," particularly in wartime, makes you an enemy of the people. Both Stalin and Mao shot millions for it.
Speculators are now perfectly respectable, except when they're not. Warren Buffett is the only acknowledged "Sage" we have in America, despite having produced nothing but paper.
Next, Tor Guimaraes takes a stab at defining production vs speculation.
- "Productive" vs "Speculative" under the Microscope (Tor Guimaraes, USA 09/05/19 5:48 AM)
John E commented on my last post with a question, "Is there a way in today's economy to distinguish between 'productive' and 'speculative' investment?"
It is a very good question and the answer is yes. It is true that many business innovation projects, the development of new products, and/or changing business processes, may involve substantial uncertainty and may be considered speculative in that sense. Whether or not a particular application for a bank loan is too risky or not, should ultimately be a decision by the loan department, which in turn, should be properly supervised.
On the other hand, if bank loans are used to invest in the stock market (sometimes at very high leveraged rates with options and other derivatives) and totally unsupervised, this in the aggregate is not only extremely risky to the entire financial system, but it is also totally unproductive for the nation as a whole (in accounting terms, such loans have no impact on the GDP) and can be profitable only for the speculators. Thus, using CB money creation for this purpose, as we are wildly engaged in today, is a massive government subsidy for the speculators.
JE comments: Can we hone in on Tor's final point--specifically, have Central Banks largely turned into bottomless piggy banks for speculation by banks? (Yikes, that was a clumsy question.) My initial answer would be yes. At least it seems this way from the hinterlands of Main Street/Flyover Country.
- Gramm-Leach-Bliley Act 1999: Did This Cause the Banking Mess? (Eugenio Battaglia, Italy 09/09/19 10:06 AM)
In response to the excellent (as usual) post of Tor Guimaraes (4 September) and the again excellent comments from John E, may I, even as a foreigner, offer a response?
The Glass-Steagall Act worked effectively for more than 60 years. But the greedy banking industry after 1980 worked to have it repealed. On 12 November 1999 president Bill Clinton agreed, with the Gramm-Leach-Bliley Act.
Thank you, "good" president Clinton!
JE comments: Can we blame every financial transgression on the repeal of Glass-Steagall? Some have, although this is certainly an oversimplification. Given that we're coming up on the 20th anniversary of Gramm-Leach-Bliley (and the 10th anniversary of the depths of the Great Recession), it's an excellent time for deeper reflection.
Who will get the ball rolling?
Can We Blame "Everything" on the Repeal of Glass-Steagall?
(Tor Guimaraes, USA
09/11/19 4:10 AM)
My friend and maker of wonderful olive oil, Eugenio Battaglia, wrote on September 9th:
"The Glass-Steagall Act worked effectively for more than 60 years. But the greedy banking industry after 1980 worked to have it repealed. On 12 November 1999 president Bill Clinton agreed, with the Gramm-Leach-Bliley Act."
JE asked in reply: "Can we blame every financial transgression on the repeal of Glass-Steagall? Some have, although this is certainly an oversimplification."
Repealing the Glass-Steagall Act (separating commercial banking from investment banking) is bad enough, but it amounts to icing on the cake. The effect of a few other things adds up to the financial pickle (inverted yield curves, negative interest rates, submarine inflation, consumer debt, national deficits as far as the eye can see) we are in.
Nixon took us off the $35 dollar/ounce gold peg so he could pay for the Vietnam War. Then all the other wars were free, I mean on credit.
But remember, much earlier than that, the Fed's creation process starting with the special meeting on Jekyll Island (http://www.jekyllislandhistory.com/federalreserve.shtml ). The big banks from then on control the money supply and make bubbles at will. Can you believe it? Another more recent crucial piece of evidence for Fed slavery creation comes from an ex-Fed economist who was actually in charge of distributing the bailout money for the 2008 financial disaster. His name is Andrew Huszar and he quit the Fed in disgust over who was getting paid. There is a huge amount of evidence on this topic, available to anyone interested enough.
Republicans and Democrats, all together, live like a happy family of heroin addicts.
JE comments: The event that imagined the Fed took place at a duck-hunting lodge on Jekyll Island, Georgia. The year, 1910. I see images of guns, cigars, red meat, and cognac. The meeting was in response to the financial panic of 1907.
Off topic, but perhaps not: the Eipper family vacationed on Jekyll island sometime in the late 1960s. It's one of my earliest memories. To my knowledge we did not discuss banking or finance.
- "Productive" vs "Speculative" under the Microscope (Tor Guimaraes, USA 09/05/19 5:48 AM)