Wednesday, April 18, 2012

Money Matters in a Capitalist Economy

The Keynes, Schumpeter, Minsky tradition holds that equilibrium is a goal but not an intrinsic feature of political economy. Beyond that, political action can result in differing equilibria, some better some worse. At the micro level numerous equilibria exist and serve the pricing function, but they are an emergent property of the system when it’s being managed well, not an intrinsic property of a self governing system. And the reason they see it that way is they all saw money and banking as central to capitalism, in fact money and banking are precisely what distinguishes an economy as capitalist. And they didn’t propose to eliminate banking, they proposed to optimize it for national utility, quite different from socializing it.

The ISLM, DSGE and their spawn, the dominant models now are all descendants of Samuelson not Keynes. The absurd fallacy these models all assume is the irrelevance of money and the absence of a banking sector. These are models that describe something other than a capitalist economy. When you have 20 minutes watch this and consider the wisdom of these assumptions. I believe there is a central issue of framing separating Krugman along with the mainstream from possibilities of really progressive positions, from the possibility of actual solutions and it is inherent in this essential defect in their models. I think the centrality of credit, money and banking to capitalism is the fundamental blind spot of mainstream macro economics and as a consequence our politics generally: we won’t find the right track until we illuminate this blind spot, the only thing "the veil of money" really obscures is its own centrality to power.

My dog in this fight is the relationship between the money economy and the real one. Invisible to the world of finance, there are a substantial majority of folks out there like me who until recently saw money as a medium of exchange and liquidity hedge and then were temperamentally disinclined to think about money if we could at all avoid it. We can no longer avoid it. We’re the suckers of the last thirty years who when we heard “big swinging dicks” say “its not about the money” tended to take it at face value: we all worked for a living, but money is not what we live for so we accorded an un-earned benefit of the doubt to the money men, thinking ourselves good little capitalists and assuming they thought their job was the allocation of capital. We have been badly burned for our naive faith.

The stakes in the MMT/Post Keynesian/Krugman spat I posted about last have to do with where you set the boundaries for what is politically responsible thinking about the money system with Krugman as the gate keeper on the left border of legitimacy. The problem with Krugman’s ISLM formulation is that its model for combined monetary and fiscal operations only map tightly over the empirical fact set in the conditions it calls a “liquidity trap”. Once out of such a trap the model flips over into validating what I believe is an essentially unstable laissez faire model built on the false principle of internal equilibrium because it relies on a non-existent “money multiplier” that, should it happen to exist would limit the scope of bubbles. Such a thing however does not exist: loans create deposits, deposits are reserve equivalents (so long as a bank has deposits, even in extremis, the Central Bank will make reserves available at modest cost) leaving credit growth unrestrained by reserves and organically prone to bubbles. The ISLM model works for "liquidity traps" because it appends a schematic account of money to an otherwise moneyless model that happens to coincide with actual conditions in a depression which it calls a "liquidity trap", outside the trap it is no better than DSGE. 

Money systems are essentially unstable because money is a highly abstract man made infrastructure that few people fully understand. Minskys’ hedge, speculative and ponzi phases grow naturally out of an engagement between heuristics, evolved intuitive ways people naturally respond to things in the world that misapprehend counterintuitive aspects of money/credit relationships. In a stable hedge environment creditors will inevitably discover that easier loans produce better returns and within the cycle they will not see the eventual losses this decay of underwriting imposes. It is only after the expansion of investment balloons profit through the speculative to the insane levels of the terminal ponzi phase that the losses are forced on the system as a whole. But by this point most losses are born by individuals and entities quite remote from the creditors who’s failure to underwrite responsibly created the artificial expansion in the first place. 

Minsky understood this as human nature and did not blame finance, nor did Keynes or Schumpeter. They did however all believe the effects were emergent and predictable and the state had the tools and the obligation to mitigate the deleterious effects. They all understood as well the cycle is subject to predatory manipulation by unscrupulous creditors who’s understanding of it can be used to leverage money directly into power: the credit cycle can be used as a tool tailor made for expropriation by “will to power” where knowledge of the end game in the penultimate phase allows planning for power grabs. This understanding has been amply corroborated in the gaming of federal backstops by the finance industry in our latest debacle. 

To the extent that economies periodically experience stability at all, and that’s a recent, episodic and short term phenomenon where we’ve seen it, it is because PEOPLE tend to stability, desperately when occasion requires! And because of this we periodically rise up against the abuse of money power and re-constitute institutional forms where baseline fairness is transparent to everyone. ISLM, DSGE and the whole neo-liberal/neo-classical edifice are structured around the false idols of a magical intrinsic equilibrium, rational expectations and “the veil of money”, the idea that money obscures the functions of a capitalist economy rather than embodying them. Keynes, Schumpeter and even more Minsky saw that money is in fact the essence of capitalism and any model that abstracts it out has abstracted out the central lever by which “will to power” re-orders markets to anti-social and predatory purposes, the tool by which, unregulated, the invisible hand becomes a pick pocket rather than a distributional and creative force.

The public institutions that have recently socialized all of the financial losses of what appears to me a mostly predatory set of private financial institutions were themselves the products of previous popular uprisings against money power. The Fed came into being to stabilize the payments system to prevent banking crises from debilitating the agricultural and industrial economy tangent to it. The ECB was set up in the same spirit. The folks that set them up understood that private finance could and should occasionally screw things up, but should be held to account through bankruptcy without destroying the flows necessary for the perseverance of capitalist production in the real economy during these periodic financial failures. The ECB  however is only half a money system, set up after the Samuelson synthesis obscured the centrality of money and banking, thus without a central fiscal authority and doomed as a result. However, financiers understand intuitively how to convert cash to influence and have been stunningly successful in consolidating power since the Samuelson, Friedman/Greenspan revolution institutionalized ISLM and latter “equilibrium”, "rational expectations" and “veil of money” models of the economy which all serve to deny the legitimacy of political engagement directly with markets as if markets could somehow exist without political institutions to underpin them. 

It is by placing “equilibrium” INSIDE the economic model that you can argue that markets are self regulating and theoretically justify all the economic power grabs of the last thirty years, from breaking unions to deregulating industries to abandoning enforcement regimes first in securities and now in property law itself. The results beggar the imagination, what seventy years of Soviet Communism did to land records in Eastern Europe, MERS and the "mortgage settlement" have accomplished here in a decade. By hiving off politics from economics, by making economy an idealized and perfect closed system the forms of representative politics have been stripped of all meaning where regulation fails to regulate and something called the “JOBS Act”, through the invisible hand of our political marketplace legalizes the pocket picking of investors. This is entirely predictable as the next phase of our particular American form of corruption. The poor have already been dispossessed and for the moment Dodd Frank has closed the sluice of free government money so small investors are the largest pools of money that remain to be drained. The predators who now write the rules for markets know exactly where the money is and simply re-write the law wherever required to steal it.

Once political economy is broken into its constituent parts, monetarily naïve elected representatives can easily be blackmailed into bailouts because to get elected in the first place they had buy into the unique perfection of free markets. Once you buy into that foundation myth all the counter-cyclical tools of earlier more egalitarian eras appear to exist purely to bail out finance and have been extravagantly used recently to this end. The dispossessed protest in the streets while the laws are re-written to make such displays illegal by politicians paid handsomely for the effort. It will be interesting to watch the courts adjudicate free speech in this new world where jurists have been taught to keep politics out of markets as if that were possible. A court has been built these last thirty years reorganized around this faith in the perfection of markets that has no problem with judicial radicalism so long as it favors strong market actors against the week. 

It is the decoupling of politics from economics first embodied in Samuelson’s model, debunked at the time by Joan Robinson who’s success was entirely ignored, that allowed “the free market” to become a god. But deified it is now beyond the reach of politicians and most of the western world is being run by bankers and for bankers as a result. The austerity in the Euro zone is a bald power grab by callous creditors who have used the credit cycle in very predictable ways to aggregate vast money power. For thirty years they used cash to propagandize against any public interest. Having established the false idea "there is no such thing as public money, there is only tax payers' money", the governments of Europe were convinced to give up monetary sovereignty and join the Euro, which as a system without political legitimacy and a fiscal authority denies the states that use it the "public money" that prevents monetary sovereigns like the UK, Japan and the US from loosing control of the interest rate at which their bonds sell.  Without this public control of interest rates nations subject to the ECB have lost control of what rates they must pay on their bonds. This has the affect of converting these bonds into debts no different from those held by businesses, households or any other non-soveriegn user of a money. 

In Europe the political control of the money system has been handed over to the ECB, a super-national bank, run by bankers who's only qualification to run the continent is that they are bankers, and who predictably run the system entirely for the benefit of private bankers like themselves. In doing so they offer the power to speculators to attack the interest rates of the constituent nations that make the Union. By forcing governments into supplicant roles to an unelected ECB, the EU has handed these bankers the power to dismantle the constituent governments by de-funding them and the ECB has seized the opportunity with both hands. The resulting austerity being forced on member states are turning into an economic liquidation of the peripheral governments. This is a massive creditor expropriation of public assets, a bald power grab, a conquest through money power that a thousand years of continental warfare failed to effect.

By buying into the myth of perfect markets we are allowing money power to destroy the patrimony of Western Civilization: what remains of a great civilization hangs by a thread now and the answer to the question of the legitimate use of public money is that it is the only remaining lever available to us to revive and rebuild what remains. Money power is already killing people. If we can’t figure out how to make government again a creature of the people who’s primary concern is the common good, the money men who have stolen government have the power to liquidate the entire common enterprise of Western Civilization and they are at the moment using the money system as a tool of conquest and total domination in Southern Europe as they did in the Baltic states and Ireland before. Krugman just can’t see it yet because he’s still committed to the idea that the market is carrying us to one of its endogenous solutions, a new equilibrium: he just can’t quite bring himself to believe yet the only solution it proposes is to liquidate the population.  

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