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Today the trend to greater equality of incomes which characterised the postwar period has been reversed. Inequality is now rising rapidly. Contrary to the rising-tide hypothesis, the rising tide has only lifted the large yachts, and many of the smaller boats have been left dashed on the rocks. This is partly because the extraordinary growth in top incomes has coincided with an economic slowdown.
The trickle-down notion— along with its theoretical justification, marginal productivity theory— needs urgent rethinking. That theory attempts both to explain inequality— why it occurs— and to justify it— why it would be beneficial for the economy as a whole. This essay looks critically at both claims. It argues in favour of alternative explanations of inequality, with particular reference to the theory of rent-seeking and to the influence of institutional and political factors, which have shaped labour markets and patterns of remuneration. And it shows that, far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance. In light of this, it argues for a range of policies that would increase both equity and economic well-being.
Five minutes to midnight, marginal productivity theory "needs urgent rethinking."
[Wikipedia: Joseph Eugene Stiglitz is an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences and the John Bates Clark Medal. He is a former senior vice president and chief economist of the World Bank and is a former member and chairman of the Council of Economic Advisers. --Ed.]
(Score: 5, Informative) by jmorris on Saturday July 29 2017, @07:30PM (16 children)
Stop calling it fractional reserve banking for a start, nobody understands what it is or why it might be bad. That is why I like Moldbug's "Maturity Transformation" phrasing. One you explain what it is, it is easy for them to see it as an outright con and that banks depend on it for their living.
Basically what banking actually is involves handwaving a loan into a deposit and the bank getting all the interest.
In honest banking you bring them 1,000 in whatever, USD, Euros, BTC, and they hold it. You write checks against it and they either give it to the people presenting the checks or simply change the ledger to credit it to that person's account if they also bank with them. Banks exchange chits between themselves and occasionally transfer physical (or now virtual in the case of BTC) assets to keep the books balanced. They make money charging fees for this service, but your money is always your money in every sense of the word since they are only the custodian of it. If you agree to deposit for a period of time, they issue a Certificate of Deposit (CD) specifying a rate of interest, this means they are free to use that money to issue a loan of the same period, hopefully at a higher rate of interest and thus earn a profit.
What actually happens is you put your money on the counter and they take it and give you a Terms of Service agreement that way down in the fine print nobody reads says you are loaning them the money at 0% interest renewed daily. They agree to redeem checks against your account or withdrawals to the best of their ability but are NOT obligated to give you your money on demand because you have agreed that it isn't your money anymore. They then loan that money out at non-zero rates for periods much longer than a day. That is the Maturity Transformation scam. They are waving a wand (bribing the law to ignore) and suddenly one day money is transformed into part of a thirty year mortgage. Lots more hand waving goes into hiding it, papering over the most obvious side effects and building a great pyramid of Doom that every once in a while always goes FOOM! They buy lines of credit between banks to cover short runs, the Federal Reserve stands ready to jump in and print money, the FDIC promises they will stand as the last line of defense, etc. But none of it would be required if they weren't committing the sin of lying in the first place. They made a thirty year loan with money they don't have and played the odds that only a "typical" percentage of depositors would close their accounts or suffer losses in their balances sufficient to expose the fact their money isn't really there.
Also supporting the scam is the entire accounting industry. If bank deposits had to be accounted for as loans (at zero interest) instead of counting as cash equivalents it would quickly induce depositors to seek out banks that actually deposited funds. But because the accountants agree to count it as a cash equivalent money deposited undergoes "credit expansion" in that we count our "deposited" thousand as ours, the bank counts it as "theirs" when they loan it back out so there are now 2,000 circulating and doing productive work where once there was only 1,000. This causes inflation of course, reducing the buying power of all 2,000 circulating. Now imagine the case where your 1,000 is transformed into a loan to a small business. In this case the bank simply adds it to that person's account... where it instantly becomes available for retransformation. And the pyramid rises.
What you call "fractional reserve banking" is nothing more than the government imposing rules to limit the practice to levels that reduce the incidence of failed banks enough to keep confidence in the system. Once you understand that outright fraud is involved you can be a pure capitalist and still support ending the practice.
(Score: 2) by Whoever on Saturday July 29 2017, @08:06PM (8 children)
While we are banning fractional reserve banking, we should go back to the gold standard. Don't worry about the impact on the economy, though, I'm sure we will all get used to being poor quickly enough.
(Score: 0) by Anonymous Coward on Saturday July 29 2017, @08:19PM
The gold standard sounds like a much better plan then the fed printing money and giving it to Goldman-Sacks. They have not figured out how to print gold...yet!
(Score: 2) by jmorris on Saturday July 29 2017, @08:31PM (6 children)
So where is the error in what I wrote? Do you support fraud? Or do you simply attack reflexively?
Maturity Transformation is the primary driver of the boom, bust "business cycle" in that it creates a lot of phantom money that causes misallocation of resources leading to a "correction" in the form of a recession, where the excess assets are written down. Is it your position that boom, bust cycles make us wealthier?
As for the gold standard, I'm a lot less absolute on that these days, if banking were fixed there wouldn't be much difference. We wouldn't really need the FED, for example. And right now hard money would be fatal as inflation is the only possible path to "repaying" the debts every Western government has run up trying to maintain a welfare state. People loaned governments money both sides should have realized could never be repaid so both sides are going to end up eating their share of it one way or another. high but short of hyperinflation rates of Inflation is the traditional way that doesn't involve a total collapse and war. No matter how, this is going to hurt but stupid is supposed to hurt so we learn not to be stupid.
(Score: 1) by Zobeid Zuma on Saturday July 29 2017, @08:54PM (5 children)
What I disagree with is your language characterizing the system as a scam, a fraud, and claiming that there's some conspiracy to hide all of this from the public. The basic way that banks work (fractional reserve banking) is no secret to anyone who didn't sleep through their classes in school. The expansion of the money supply through loans is something you can get (and in a lot more depth) from Macro Economics 101.
Throwing around loaded terms like "scam" and "fraud" and "pyramid of doom" is not the same as making a rational argument. It demonstrates that you don't like the system -- yeah, we get that -- but it doesn't tell us when or how you think it's going to fail or how some possible alternative would work out better.
(Score: 2) by jmorris on Saturday July 29 2017, @09:32PM (3 children)
I don't like lies. Loaning money you don't in fact have is a lie. There is no other word that applies, and if anyone who isn't part of the banking industry does it they lock you up for it. Those books you speak of take pains to gloss over that uncomfortable reality.
If you loan money you actually have possession of, it is a good thing and makes everyone better off in the long run. But when a bank loans money it doesn't actually own, it always ends up badly. Adding multiple layers of obfuscation over that basic crime delays the day of reckoning at the expense of making the eventual settling of accounts a greater economic bust.
The fact people often fail to see the problem usually stems from a more basic problem, a failure to understand what money is. This is of course intentional on the part of the Powers That Be, who benefit greatly from the current system.
(Score: 3, Insightful) by aristarchus on Sunday July 30 2017, @11:10AM (2 children)
For someone who doesn't like lies, jmorris, you certainly tell a lot. Or do you think they are not because you actually believe this batshit crazy info-wars stuff?
Loaning money they don't have? Um, are you an idiot? If the Fed says they have it, they have it. That is what money is, you know. It has no, let me repeat this, no intrinsic value. Money is worth nothing, unless it functions in an economy as a means of exchange. So if you have money, and you hoard it like I know you do, it is in fact not your money because it is not really money. You, oh simplistic jmorris, do not understand money. Moldy Goldbug does not understand money.
Are you one of those idiots who thought that Obama could not just order the Mint to create a One Trillion Dollar Platinum coin, and deposit it in the Fed, because there is not a trillion dollars worth of platinum available? Or that such a coin would be too big to move? (Never bothered the Yappese!)
And since you do not understand money, you do not understand economy, you do not understand value, and you do not understand hard work. Good day, jmorris!!
(Score: 0) by Anonymous Coward on Wednesday August 02 2017, @09:19AM (1 child)
loaning money they don't have is the essence of fractional reserve banking
If I want to loan you a 100 dollars I need to have a 100 dollars
If a fractional reserve bank wants to loan you a 100 dollars they only need to have 5 dollars (or whatever % the fractional reserve part is currently mandated at), yet they get to charge interest as if they had a 100 dollars
this is fraud no mather how you spin it
(Score: 2) by aristarchus on Wednesday August 02 2017, @05:00PM
Yes, the concept is rather easy to understand. But evidently you fail to grasp what money is. Money does not exist as a natural object, and thus it cannot be something one simply "has" or not. You are reifying money, and possibly even, one suspects, deifying it.
Money is created by a relationship between humans. Thus is the Fed makes a loan, even on a factional basis, the loan itself creates the relationship that is "money". In economic theory this is sometimes referred to as M1, and further relations based on this loan multiply money, creating what economists call M2, M3, etc.
There is nothing surprising if the first step seems to create money out of "nothing". Unless you are a "conservative" who pines for the gold standard, because you are incapable of abstract thought and think that money has to be a commodity that embodies value intrinsically. But about commodities, um, those only have value relationally, some one has to want to buy your gold, or it too would not exist.
(Score: 1, Insightful) by Anonymous Coward on Saturday July 29 2017, @10:29PM
It's a ponzi scheme. There can never be enough money in circulation to repay the interest on the loans without more deposits (more money creation). How exactly is it not a giant scam?
(Score: 2) by linuxrocks123 on Saturday July 29 2017, @08:55PM (5 children)
You actually give a fairly accurate account here of how fractional reserve banking works. The only really incorrect detail is that the reserve ratio requirement is to limit the velocity of money, not to reduce bank failures. Your analysis of these facts, however, is deeply flawed.
First, there's no fraud involved here. I know precisely how fractional reserve banking works, and I have bank accounts. No one is defrauding me, and, if others have an incorrect idea of how banks work, that's their own fault for not paying attention in high school and also never paying attention to that one scene in It's A Wonderful Life. Fractional reserve banking isn't like a Ponzi scam, where there's no real value underlying the nominal value of the shares. In fractional reserve banking, the balance sheets still balance; it's just that part of the balance is illiquid. We want it to be that way, because we want investment in the future to be part of the economy.
Second, you present this system as obviously horrible and unsound, but it's not. It's no more unsound than oversubscribing broadband Internet. The system works on the assumption that most people aren't going to take all their money out of their checking accounts every day, and, in practice, they don't. Your alternative -- only allow lending on CDs, and charge fees to administer checking accounts -- is abysmally inefficient and ineffective in comparison to the system we have now.
Most people don't want to sign up for 30-year CDs, though they will sign up for 30-year mortgages, so you've effectively reduced credit to almost zero. Interest rates would skyrocket and investment would plummet as the credit potential of everyone's collected checking and savings accounts sat unused. Breaking a CD would be impossible in your scheme, too, which would cause unnecessary liquidity problems for individuals. So you've not only destroyed most of the nation's credit, but also shifted the liquidity risk for what's left of it from businesses that are able to handle it to individuals that are not. Every part of your idea is horrible.
And there's no reason for coming up with it in the first place. We all accept oversubscription, "in practice", and "good enough" as valid principles for networking and networking protocols, as well as other areas of computing, like UUIDs and file hashing. Well, "good enough" is good enough for banks' liquidity management as well.
(Score: 2, Troll) by jmorris on Saturday July 29 2017, @10:17PM (4 children)
It's A Wonderful Life is the perfect example. Because it is a movie it all worked out to a happy ending, but the history books are littered with examples where everyone didn't live happily ever after. But at least he was honest in that he wasn't claiming to be a bank. A Savings and Loan explicitly is loaning out people's SAVINGS. They acted like a bank though, which is what lead to the customers thinking they could take their money out when it looked like the thing was about to fail and Jimmy Stewart giving them, and the audience, a civics lesson on how the thing actually works.
The fraud is when you transform the maturity on loans to improperly create phantom money. It is stealing, no matter how many times you get away with it. And sooner or later reality makes you pay for your sins. Bernie Madoff got away with his scheme for a long time, everything was great right up until it wasn't. Our economies do exactly the same thing under fractional reserve, they hum right along right up until they don't. Like clockwork we keep going through boom and bust cycles. We inflate bubbles until they pop. Fake money.
You claim that our economy would collapse without it, these belief sare entirely unfounded. There is demand for home mortgages so there would be mortgages. Look at the current situation, there is literally trillions of dollars chasing around the world looking for a landing spot. Not finding any returns in bonds it is flooding into the stock market, real estate, etc and creating bubbles. Everybody knows it is a bubble being inflated yet we seem powerless to avert the impending disaster. Why? Now imagine a sane banking system. To sell those mortgages they would have to sell bonds/CDs in equal volume paying interest rates sufficient to sell them, which would then set the rate the home buyers paid at a point or two higher. Suddenly the market would rebalance to accept a crapload of money moving from the bubbles into bonds and CDs Of course on one level we already have this process running, we call them mortgage backed securities.
Without fractional reserve, all loans would have to be matched with an investment of money on the same maturity scale to pass auditor muster. The accounts would have to balance across time. That is the scam, they are unbalancing the books on the time axis with no mechanism to keep it from spiraling out of control except the inevitable bank crisis. Since a little cheating is so good, they keep going until it explodes because why wouldn't they? What do you think drives the derivatives market? Trying to leverage ever higher returns out of the same exploit. BOOM! Sooner or later, BOOM and the longer it gets pushed back the bigger the BOOM! Because eventually math wins. Math always wins.
Why? It is a financial instrument. It can be sold for whatever the market will bear, happens every day in the bond markets. The price is driven by the future payout value and the risk of the issuer actually delivering on the promise.
Your example of oversubscribed ISPs is making MY case, you are just too blind to see it. It is the same class of lie. If they were honest and sold a line as 100mps max speed with a base charge plus a x/GB usage rate and a given reliability rating it would be honest. But both sides seem to prefer the lie because they are convinced they can get the government to give them all of the good parts and prevent them from suffering the negative consequences. The providers like being able to call it "unlimited" safe in the knowledge MOST customers won't hit the cap and advertising a per GB charge scares customers, while avoiding building out the massive network that would be required to deliver the promised performance. Better to just drive off the few super pigs who threaten the network's viability. Customers want to run Netflix in HD on every screen in their home 24/7 or run bittorrent without paying what that sort of bandwidth should cost. Eventually the inherent conflict between the two groups will explode into chaos and reality will have to win.
(Score: 0) by Anonymous Coward on Sunday July 30 2017, @12:43AM (2 children)
Say goodbye to homeloans then. Nobody would lock their savings away for 30 years just so someone else can borrow it for a mortgage. Credit would come to a grinding halt. You think that's a good thing, but think again when no business can expand, no new idea can be capitalised. I suppose you will tell us insurance is a lie too.
How will ISP's build out their solid gold networks so that every little old lady checking her email can have the same data pipes as the household streaming hd netflicks 24/7 just in case. Evren though it will never be used. How totally ineficient, doubly so when there is no credit and the ISP can only expand via profits, as if there will be any of those left either.
You need banks to manage the different time horizons between buyers and sellers of money. Set a safe margin of reserves and away you go. It's only a problem if the banks get too greedy and bribe politicians into reducing those margins so they can make even more money. That's why we had a big crash. Risk need to be priced correctly, but that price isn't infinity like your claiming.
(Score: 2) by deimtee on Sunday July 30 2017, @01:58AM (1 child)
Back about 40 years ago, the price of an average house and land was about 3 to 5 times the annual average income. People took out 25 year mortgages, but many saved, worked hard and paid them off in 10 or less. You can actually make realistic 10 year plans.
Now a house costs 10 to 15 times the avarage income, it's worse than that even because inequality has increased and the 'average income' is skewed high.
So now it's take out a 30 year mortgage and work really hard and struggle to maybe pay it off in 25. Why is that better? Do you like having all the peasants in debt slavery?
And who can make realistic 30 year plans? When you were 20 did you have your life planned all the way out to 50, with no surprises?
If you cough while drinking cheap red wine it really cleans out your sinuses.
(Score: 0) by Anonymous Coward on Sunday July 30 2017, @03:11AM
Yes back about 40 years ago, we had fractional reserve banking, and people took out 25 year mortgages even though nobody took out 25 year savings accounts in order to loan them the money. Who is going to build all the new houses if no one can borrow any money to pay for them? Rent seeking and double incomes becoming more common is the reasons for the increase, not fractional reserve banking.
If the rent seeking capitalists who buy up all the properties and pay less tax via capital gains were taxed the same as workers earning wages, they would find somewhere more productive to park their money. People who wanted to live in houses could buy them instead.
(Score: 0) by Anonymous Coward on Sunday July 30 2017, @11:16AM
"Daddy, Ms. Knickerbocker says that every time a bell rings, jmorris gets his wings ripped off, again."
"That's right, Zuzu, that's right."
FIN
(Score: 2) by kaszz on Monday July 31 2017, @02:38PM
What is your suggestion to not having to compete with bank inflated buyers in the property market? And to grow earned money while not being subject to crashes?
If some can print money and others have to work hard for them. That will not be an equal playing field.