In our society, who earns the most?
Basically people in the financial industry. Bankers, for shorthand.
Why? Because they can print money. In fact, they print almost all the money in society.
There is an argument that inequality exists because some people are just so much more productive than others.
This argument is a fantasy. To be sure there are a few “ten times” programmers and inventors who improved society and so on, but, as a group, the people who earn the most money in society are the people who destroy the most value. Bankers, prior to 2008, destroyed more money than they had made for the last decade. This is not in question. They destroyed trillions.
If they had taken their losses, they and almost every rich person in the First World would have been wiped out. Toxic debt was trading at less than ten cents on the dollar before the Fed stepped in and started accepting it as collateral at near par and said that it could be kept on books at “mark to model,” rather than market prices.
The effects of this were real. Real companies went out of business. Real people lost jobs. Real people wound up on the street. Real incomes cratered. Drive around suburban and exurban America. Look at the empty malls. The damage is right there.
Private bankers and financial execs make almost all of the investment decisions in our society. They decide what will be built, what jobs will be created, etc. They are the people who decide if something will happen and they make terrible decisions–even based on their own valuation system.
Based on what society needs, combined with central bankers, they make even worse decisions.
The bull market that started in 1980 and continues today has made a lot of people rich, and built a lot of houses (which were then condemned to keep their prices artificially high).
But there was an opportunity cost.
An opportunity cost is what wasn’t done.
The opportunity cost of the great bull market (that created all the oligarchs) is all the infrastructure work that wasn’t done, and all the avoiding climate change that wasn’t done. Or the fact that NASA was not properly funded, so that we had to wait until now to finally get cheap, reusable rockets.
The cost of this will be the many deaths from climate change, among other things.
That is the cost of bankers salaries, and oligarch’s tax rates, and the great bull market.
These people are not the most productive people in society, they are the most destructive people in society. They make the money they do because they have a positional advantage; they have more power than other people.
Earnings have nothing to do with merit, social usefulness, or productivity. They are a measure only of how much some people were able to grab. In this, they are little different than looting barbarians, replete with the huge death toll, and the raping (all the rapes which occur in the prison-industrial complex), and the pillaging, and so on.
Do not speak of “salary” and “merit” in the same sentence except with scorn. When the CEO doesn’t show up, so what? When the janitor doesn’t show up, though, hey! We find out who really matters.
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thwap
Well said. Especially with the fact that Canadian governments borrowed all their billions from private banks instead of from the Bank of Canada, which cost us huge.
vvd
Without the bubble, the American public would have borne the brunt of the cost of the wars in Iraq and Afghanistan wars while they were ongoing, support for Bush would have evaporated, and PNAC would have crashed and burned.
The bubble made it possible to offload the ongoing cost of the wars onto Europe and Asia, denied Asian businesses any benefit from Asia’s very high personal savings rate, and shattered European social democracy when it collapsed. From the perspective of an American MOTU, that’s win-win-win. The bubble was deliberate economic warfare in the service of securing American dominance for the foreseeable future.
The bankers naturally weren’t punished, because they did exactly what they were supposed to do at the time.
vvd
Feh. “of the wars in Iraq and Afghanistan.”
paulmeli
” …in fact they print almost all the money in society”
No, they don’t. This is a meme promoted by the bankers that too many progressives buy into. Another unforced error by the left. It takes incredibly convoluted accounting logic to get to this conclusion.
Credit outstanding (US) is currently at ~ $46T, while the federal government over history has spent about $80T. Anyone can look this up using FRED data.
‘Printing’ means spending, the only possible transmission mechanism that can get money ($ for instance) into non-government bank accounts and onto our balance sheets. There are no ‘helicopter drops’ in the real world.
Banks cannot ‘spend’ new $ into the system. Any money banks ‘spend’ already exists.
For the US at least (and other sovereigns) only the federal government or private borrowers can spend new $ into the system (as long as we run trade deficits). The causal event is Congress appropriating funds or qualified borrowers walking through the banks doors and taking out loans. If no one chose to borrow there wouldn’t be anything for banks to do. Banks do accounting, an ex-post exercise.
These are the original sources of all $ in the non-government, so from there only accounting sleight-of-hand can get you to your statement. Removing $…destroying either by federal taxation or amortization…does not change this reality.
Apologies if this comes across as argumentative, just stating facts, and zombie myths are extremely hard to kill (almost impossible it seems).
DMCw
A good relevant review here regarding this topic and the previous inequality thread:
https://philebersole.wordpress.com/2016/01/02/les-leopold-on-runaway-inequality/#more-66073
Ian Welsh
Virtually all money is created by lending, whether to private or public borrowers. Banks decide WHO to lend to, and how much. Yes, if there’s no demand for borrowing, they can’t lend. But when the effective rate for borrowing is extremely low and the stock market is rising faster than that, well, there’s plenty. (Plus all sorts of other scams).
Money that is loaned is created out of mid-air, it is printed, in effect (though these days that just means adding some numbers to an account.) We do not even have a fractional banking system.
Governments fund spending thru taxes and by borrowing. That’s what Treasuries are.
No, it’s not Zombie myth, it’s fact.
Money is debt.
(And the fact that the Federal Govt. has spent 80 trillion while there is 46 Trillion outstanding is irrelevant. Government spends, taxes back. You could spend 80 trillion that way with very little outstanding debt if the tax rate was high enough.)
Those who want more details can go here:
http://positivemoney.org/how-money-works/how-banks-create-money/
or, believe the Bank of England.
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf#page=1
This isn’t a myth. This is just the way the modern economy works. Almost all money is created by private issuers, as debt.
Those who are unsure who to believe should remember that Google is their friend. Go to it.
Creigh Gordon
Ian, maybe you and paulmeli are arguing about semantics.
What banks create “out of thin air” is, I think, better referred to as credit, not money. Credit is counted in dollars (speaking of the US, of course) and can buy stuff just like US Dollars, but it comes with strings attached, namely debt and interest. I’d describe this credit as ‘a claim on real (government issued) dollars.’ Basically, the way it works is this: Banks get government dollars as capital, as deposits, and through borrowing (including, for banks that are part of the Federal Reserve System, from the Federal Reserve Bank which is part of the Government). They then allow their borrowers a temporary claim on the Government dollars they hold in exchange for interest. And because the dollars they lend rarely leave the banking system, they can lend the same dollars to multiple borrowers (and earn interest from multiple borrowers).
It is true that there is much more bank credit dollars in existence than there are government issued dollars, that is, more claims on government dollars than there are government dollars. That’s a source of instability in the economy.
But here’s the real problem with this system: if the interest earned by banks is recycled into new loans rather than consumption, indebtedness climbs. Eventually things crash, and the bankers pick up the pieces in foreclosures. Over time, the bankers come to own most of the assets, and the economy is strangled by interest payments and rents.
You are correct when you say “money is debt.” That includes the dollars issued by the US Government which are a liability of the Government. Government money has a debt string attached too, but there’s a difference; bank money creates private debt, whereas Government money creates public debt. And public debt doesn’t have the consequence I described in the previous paragraph.
And of course you’re right about bankers being compensated far beyond their value to society.
paulmeli
“Virtually all money is created by lending”
I demonstrated that it wasn’t using simple arithmetic and factual data, my cards on the table. You chose appeal to authority as a response. For whatever reason you are unwilling to challenge my argument on it’s merits.
“Government spends, taxes back”
No. Taxes accrue against ALL sources of income, including that created by private borrowing and business investment. You have implied that taxes accrue only against government spending, which is false. This is where your argument falls apart.
“Money is debt.”
Yes, a consequence of double-entry accounting. Debits and credits. That doesn’t make ‘debt’ a burden automatically.
There is technical debt…debits on a ledger…and real debt that must be repaid. They are not the same thing. Loan yourself $100.00. Have you burdened yourself?
The debits on the government side of the ledger are accounting artifacts that create no real-world burden on the government or the citizens. The interest is income to the non-government, and anyone who chooses to do so can hold Treasuries. Since we are greedy, we gamble in the stock market instead.
“Governments fund spending thru taxes…”
(Federal) Taxes come AFTER spending…Spending => income => Taxation…so logically taxes can’t fund spending. Look up the Arrow of Time. Sometimes Google IS your friend.
Governments don’t tax in order to spend. They tax first to force the use of the currency (you must acquire it to satisfy your tax liability) and thereafter to control inflation.
I think the first thing one needs to do is define ‘create’. The agencies that do the accounting of money creation do so after the fact, as accounting is an ex-post operation…it can only record that which has already happened. None of the agencies in question (Treasury, Fed) has the power to say no or the power to spend on their own. In the case of the Fed, it can only ‘spend’ by purchasing existing securities, so it isn’t creating anything, it is engaging in asset-swaps, and adds nothing to GDP, so doesn’t technically qualify as spending. Everything else it does involves managing liquidity in the banking system…accounting.
Creation occurs at the moment someone makes the decision to spend and follows up on it. Congress, private borrowers.
If Congress didn’t spend and borrowers didn’t take out loans there would be no $ in existence.
The agencies you are endowing with the power to ‘create’ money are pushing on a string, have little more to do than prey on the whims of individual actors. Knowing human nature, this is no mean feat, but the decision to borrow starts with the borrower, not the bank.
Your way of thinking is what gives bankers their power.
Bill Hicks
The Bolsheviks had the right idea at least in the beginning–the only way you can truly change a modern society is by executing the greedy, sociopathic, parasitical scum at the top who leech off of everyone else. They will never voluntarily change or stop trying to undermine any system that does not serve their interests, and it simply is not possible to remove their influence on without permanently removing them.
Unfortunately, the communists in Russia ultimately ended up replacing one group of unaccountable elites with another. Seems to be the natural way of things in modern industrial societies, unfortunately.
Ian Welsh
The Bank of England on money creation:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf#page=1
Kindly don’t continue this conversation in comments. If you feel some quixotic need to go on, do it elsewhere.
John Poynton
Shades of cynicism here. Try my post at http://jepoynton.com/2015/07/31/the-banking-crisis-and-executive-pay
There is certainly a case for reducing the income gap, which has been hugely exacerbated here in Europe by the effects of uncontrolled immigration promoted by the European Union. But it is the central banks that print money and they have had to do that because the investment banks destroyed so much through making bad loans. A case of poor regulation mainly.
Ian Welsh
Most money is still created by private banks. And I say that as someone who has made exactly that point about private banks and who has repeatedly talked about QE, etc..
There is still more than enough money in the world, what there is not are enough things to do with that money which are actually productive and useful.
John
paulmeli:
1. “Banks do accounting, an ex-post exercise.” True about the accounting, but not primarily or exclusively. I think you missed the most important part of the operation from a bankers point of view, ‘skimming fees’. That’s how they make their money. In the bubble, they lent money into existence to skim their fees from dubious borrowers resting in their IBG/YBG confidence. i think that is still going on.
2. And if money creation is all up to the borrower and not the banker, I have greatly misunderstood how things work. You mean that $10million dollars that I would like to create by having Well Fargo extend my equity line is something that I could have always had. I knew I was living below my station and means and that I deserved more. I’m going to create it this afternoon.;-))
CMike
Ian says:
There is still more than enough money in the world, what there is not are enough things to do with that money which are actually productive and useful.
In the sense that for people with access to cash, and the inclination to do so, there are not enough opportunities these days to invest in ventures that would provide both a satisfactory return for putting their money at risk and increase total economic production, that statement is true.
However, unless the national economy, or rather the world economy, is constrained by the full employment of its potential labor force or because of some sort of resource bottleneck that can’t be overcome in the immediate or the medium term or because some toxicity threshold has been crossed, I don’t think you’d be at a point at which there aren’t enough things to do which are productive and useful. The key here is to recognize there would be more investment opportunity if more of the money in the world were in the hands of consumers, ie those with a high propensity to consume, or if governments would spend more of it, rather than allowing it to be stockpiled and controlled by the investor class. The irony is that by creating buying power at the expense of the capitalist class you would create added opportunities for the capitalist class to find productive and useful ventures in which to invest.
We could point to examples that break the rule at the micro level or come up with alternative notions about how an economy should be organized all together, but, generally speaking, what is productive and useful is what someone, or some institution, with the means to do so is willing to buy.
Ian Welsh
Yes, badly phrased.
There are TON of productive useful things that need to be done.
They are not competitive, in profit/risk terms with the worthless damaging things or the financial games.
Tom W Harris
Actually, Bill, FDR found another way – Glass-Steagall. It worked well – until Billy Bob Clinton and his Congressional buds repealed it.
cripes
@Tom W Harris
Or, you could say FDR’s New Deal period was a stopgap to save capitalism from self-destruction, an outlier, in the progression of oligarch domination in the American economy (the Great Compression of wages). In the last 40 years, we have seen them come roaring back with a counter-reformation vengeance.
Hence, his point being the failure to eliminate that class has led to the resurgence of finance capital’s total control of the economy, politics and society. And it is a valid point to say the successors formed another unaccountable elite.
Still, maybe the Bolsheviks were on to something about eliminating the class. I’m not positive that requires eliminating each individual, but rather, destroy their power and privileges.
C
I really don’t follow. I’m with you politically, but…the uninterrupted bull market you claim began in 1980 could probably use a citation. Accepting your premise hypothetically, it would have been due to the relaxation of regulations that kept leveraging in check — in other words, whatever changed in 1980 changed because of the extension of consumer credit.
Uh, what does this have to do with global warming again?
Not to mention, the same reforms allowed for greater amounts of public debt, which means all infrastructural development that occurred since then was basically financed thanks to the new regulatory environment.
No love for the bankers, but I’m just not sure you fully grasp this stuff. I can tell by reading it that the comments section is going to be an echo chamber, so I’ll just leave this here to put my mind at ease.
Uh, that’s all.
Ian Welsh
Oh, that’s funny.
http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
(that’s log scale)
http://www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years
Now, if you bought the dips, which many people did, even the last 15 years have been great. The low in is 6,443 to 17k. It more than doubled. I know guys on Wall Street who consider it the best market in their lives. They are fucking ecstatic. Even the Bush era is fine if you sold the damn dip. Without question, however 1980-2K is a MASSIVE bull market. (Nor did I say uninterrupted. I said continued. There were interruptions, but the trend continued. I predicted the crashes, including predicting the 2008/9 one publicly.)
You do not agree with me politically at all, you are only pretending to.
It is well known (I’ll let you do your own Googling) that in fact infrastructure has not been repaired/bought in the US since then at the rate it was before.
Though borrowing money was cheaper for much of the period (not all) marginal tax rates kept dropping on the rich and corporations.
A bunch of different things happened in the 80s to change things. You might want to do some actual research rather than expecting a short article on one subject to cover everything.
I’ve even written a lot of those articles. Because I’m generous, I’ll give you some hints. Take a look at what happens to large strikes at 80. Take a look at what happens to the incarceration rate at 80. For stuff that is relevant to your question specifically and happens in the 80s, Google Greenspan Put. As for Bankers, yes, leverage matters. Actually, Treasuries in the early 80s at double digit interest rates matter (that period when interest rates weren’t low you skipped).
So often there is some dude who comes by, reads a single short article and thinks it is meant to cover the world.
And so often it is someone who claims to be left wing.