Majority think they know what money is, but after reading this, they understand they were wrong. Essential reading (including the links). Via Golem XIV.
There is a particular scene in the film “It’s a wonderful life” in which the hero of the story is trying to prevent a run on the Bailey Savings and Loan. In an effort to calm the anxious savers wanting to withdraw their money George Bailey cries out “you’ve got it all wrong, the money’s not here, well your money’s in Joe’s house, that’s right next to yours, and the Kennedy house and Mrs Maitland’s house and a hundred others”.
As films go it is a genuine classic. But unfortunately it has perhaps unwittingly perpetuated a whopping misrepresentation of how banks actually work; a little white lie that the IMF have recently just driven a sledgehammer right through.
Their working paper, titled “The Chicago Plan revisited”, seems to have slipped under the mainstream media attention (and most of ours!) during the summer lull. That is until Ambrose Evans-Pritchard of the Telegraph picked it up a few weeks ago. At the core of the IMF paper is a deep seated analysis of how banks actually function in the economy and their role in the money supply. It is nothing short of revolutionary in that the paper gives full acknowledgement of, and support for, an intellectual movement that has doggedly criticised the very nature of money. Criticism that has so far been completely ignored and dismissed by mainstream economics.
With Gold taking out new levels in Euro terms, here are a few thoughts by Jessie.
Gold and silver had sharp rallies today as the selling going in to the end of quarter and the gold option expiry dissipated and a sharp short squeeze ensued.
Gold hit a new high in euros today on the back of fresh uncertainties in Europe, particularly in Spain.
As you know money market funds are savings vehicles with a fixed unit price that pay dividends, like a savings account. They arose as alternatives to bank deposit accounts because they were able to present higher returns than the regulated banks.
The Banks, and their regulatory friends who have been mostly among the Republicans want the money markets to have a floating price like a stock, opening the possibility for negative returns on savings. Turbo Timmy G. came out today calling for reforms in the money market funds, and a ‘floating price’ for the money market fund.
Et tu Timmy? All day long. The young man is getting ready to leave Washington after the election and take a lucrative trip through the crony capitalist revolving door, and probably into the banking sector.
The increased uncertainty, the chance of negative returns on your savings if the funds are allowed to fluctuate below one dollar per unit, is sure to drive quite a bit of risk adverse money out of the money market funds. And it opens the door to price manipulation and fraud, doing nothing to help promote transparency and confidence.
Must read interview with Michael Hudson, via Renegade Economist.
KF: We welcome to the show Professor Michael Hudson, Distinguished Research Professor at the University of Missouri-Kansas City, the leading Post-Keynesian university in America. It’s been fantastic to see, Michael, that the public profile of UMKC has really taken off with Randall Wray, yourself and Stephanie Kelton being quoted quite widely these days. Can you explain what Post-Keynesianism is?
MH: The fact that we all have a very similar approach is what has enabled us to challenge the neoliberal Chicago School. Our approach is heterodox – we see that money is created, basically, on computer keyboards. When a bank lends money, they create a deposit by writing a loan. You sign an IOU, the bank has a promissory note from you to pay them interest and they open a deposit in your name. The Federal Reserve does the same thing, as does any central bank, except for Europe’s. On their keyboards, they can simply do what a commercial bank does, namely, create money by creating a bank deposit for the banks to draw on. That is basically how the Bank of England, the Federal Reserve Bank of New York, the national banks of China, Russia and other civilized countries create a finance of government deficit. That is why government debt in almost every country has gone up and up and up every year for the last few centuries. And as the government spends money into the economy, this is the money and the spending and the income that enables economies to grow.
Guest post by Azizonomics.
Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks. Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas.
Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored.
While the LTRO is saving the banks, people of Southern Europe are pulling money out of the local system and moving it to Northern safety. From Spiegel;
More and more people in southern euro-zone countries are moving their money north amid fears of losing their savings in the crisis. The capital flight makes things difficult for banks back home, but experts say there are no legal measures to stop it. Any steps would probably come too late, they say, and might even endanger the European project.
The TARGET2 numbers also show that a growing share of the money flow in crisis-stricken euro-zone member states is “involuntary.” The totals represent money borrowed by individual central banks from the ECB — and not foreign investment. Commerzbank analyst Lutz Karpowitz has calculated what capital flow balances would look like without the TARGET2 system. The result, as seen in the graphic below, is not terribly encouraging.
Another classical soap opera in finance is continuing. According to latest stupidity, Corzine, did not know pretty much anything about nothing. Nor does he have a clue where the money is. We can’t but ask ourselves what he did at MF Global, if he did not know the above. This is unfortunately a repeating story in the financial world. People take too much risk, and when it goes bad, they start the blame game.To be continued….
Is Finance run by Psychopaths? Below from Corzine’s I know nothing speech;
Recognizing the enormous impact on many peoples’ lives resulting from the eventssurrounding the MF Global bankruptcy, I appear at today’s hearing with great sadness. My sadness, of course, pales in comparison to the losses and hardships that customers, employeesand investors have suffered as a result of MF Global’s bankruptcy. Their plight weighs on mymind every day – every hour. And, as the chief executive officer of MF Global at the time of itsbankruptcy, I apologize to all those affected.Before I address what happened, I must make clear that since my departure from MFGlobal on November 3, 2011, I have had limited access to many relevant documents, includinginternal communications and account statements, and even my own notes, all of which areessential to my being able to testify accurately about the chaotic, sleepless nights preceding thedeclaration of bankruptcy. Furthermore, even when I was at MF Global, my involvement in thefirm’s clearing, settlement and payment mechanisms, and accounting was limited.