Michael Baxter

Conspiracy theories, free lunches, and the theory that banks are destroying wealth

Written by: Michael Baxter on January 7th 2013

Category: Thought for the day

It’s all the fault of banks.  I mean all. Not just today’s economic woes, but the lot – World War I, the Great Depression, and a good deal besides.  That’s the gist of a series of articles I have been reading. The solution lies, or so it is suggested, in debt write-offs, monetisation of government debt, and no more attempts to balance the government’s budget. It’s a conspiracy theory, all right. But then I am reading a lot of conspiracy theories at the moment, because they are becoming part and parcel of economic thinking. Both the right and the left are becoming more extreme, more… well… frankly, more nutty. So let me tell you about a particular conspiracy theory on the evils of banking, and you can tell me whether you think the theory has any substance.

Alan Greenspan, as you may know, is a disciple of Ayn Rand. Her big idea was that government spending must be as low as possible, and governments must balance their budgets. Okay, that’s a simplification, but you get the point. But the real point I guess is that many top bankers, including Alan Greenspan, see these ideas as pretty sacrosanct. So ensuring governments have minimal debts has taken on a cause akin to religious fervour.

But let me quote from the articles I referred to above quoting someone else. “The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929….Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fuelled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.” See: Stephanie Kelton, “The ‘Fiscal Cliff’ Hoax,” December 21 2012 

The argument in essence runs like this. When there is a major war, such as World War I, or 2 or the American Civil War, governments fund their spending largely by printing money. They run up debts too, but because war time expenditure is often greater than the amount of money in the financial system, they have to create money in order for the funding they require to exist.

But such episodes are not normally followed by hyperinflation, or indeed inflation. They are quite often followed by economic boom.

Why don’t governments save money in order to be able to fund future wars when they occur?

Well, it would be pointless. Savings, when applied to the macro economy, is a pretty meaningless term. What are savings? Across the macro economy total income is determined by how many goods and services we produce. When we save, we delay expenditure. As individuals this may mean we have more money to spend in the future. For the macro economy, such savings do not have this effect.

The exception, of course, is if savings fund investment.  But what do we mean by investment?

We all need to save more to fund our retirement, right?  Well suppose we all do that. It seems to me that actually, the result may be fewer goods and services produced, and maybe in the future, the world will be worse off.

My point is that saving per se is not necessary a good thing. It depends on what we do with our savings.

History is written by the victors. Now, I quote: “When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.”  See: America’s deceptive fiscal cliff – Part I. 

This did not happen. The war went on, and on, because governments found they did not need to balance their budgets. After the war, Germany suffered from hyperinflation, but that was down to the costs forced upon Germany by the winners. But if governments can fund wars that way, why can’t they fund pension deficits and health care? If governments don’t save in advance of wars, why do they think it is necessary to save in advance of future health care bills?

Essentially, it is argued that bankers won the world wars, and so their philosophy won through. They don’t want governments to fund their spending by printing money, because if they did that there would be less need for the banks to lend money. And there would be no, ultra safe government bonds for them to put their money into.

Then there is the issue of taxation. Many economists think it is better to tax land and natural resources than labour or profits from investment.  We don’t do this, it is argued, because the banks and the very richest in society – the one 1 per cent – make their money from rent seeking.  (You see, I did warn you this was a conspiracy theory.)

Let me quote: “Francois Quesnay developed the first national income statistics, the Tableau Économique. [That was in 1758]. His aim was to show that the landed aristocracy’s rental rake-offs should form the basis for taxation rather than the excise taxes that were burdening industry and making it uncompetitive. But for the past hundred years, commercial banks have opposed property taxes, because taxing the land’s rent would mean less left over to pay interest. Some 80 per cent of bank loans are for real estate, mainly to capitalize the rental value left untaxed. A property and wealth tax would reduce this market – along with the government’s need to borrow, and hence to pay interest to bondholders. And without a fiscal squeeze there would have been less of an opportunity for the financial sector to push to privatize what remains of the public domain.”

Well this is strong stuff. I am not a fan of conspiracy theories. I think the world is complex enough, without assuming there is some clandestine group of men and women deliberately manipulating the world.

But what I think these articles do show is how opinions on the right and left right are becoming polarized. I have never known it like this; not in my adult life-time.  We are seeing a new battle of ideas emerge.

The articles I refer to here are long. If want to read them, here are the links: America’s deceptive fiscal cliff – Part I 

America’s deceptive fiscal cliff – Part II


America’s deceptive fiscal cliff – Part III

America’s deceptive fiscal cliff – Part IV 

If you are too busy to read them here the bits I think are most important.

“The situation is akin to that of medieval Europe in the wake of the Nordic invasions. The supra-national force of Rome in feudal times is now situated in Washington, with Christianity replaced by the Washington Consensus wielded via the IMF, World Bank, WTO and its satellite institutions such as the European Central Bank, backed by the moral and ideological role academic economists rather than the Church. And on the new financial battlefield, Wall Street underwriters have used the crisis as an opportunity to press for privatization. Chicago’s strong Democratic political machine sold rights to install parking meters on its sidewalks, and has tried to turn its public roads into privatized toll roads. And the city’s Mayor Rahm Emanuel has used privatization of its airport services to break labour unionization, Thatcher-style. The class war is back in business, with financial tactics playing a leading role barely anticipated a century ago.”

“This monopolization of property is what Europe’s medieval military conquests sought to achieve, and what its colonization of foreign continents replicated. But whereas it achieved this originally by military conquest of the land, today’s 1 per cent do it l by financializing the economy (although the military arm of force is not absent, to be sure, as the world saw in Chile after 1973).

“The financial plan is for the government is to supply nearly free credit to the banks, so that they can to lend debtors enough – at the widest interest-rate markups in recent memory (what banks charge borrowers and credit-card users over their less-than-1 per cent borrowing costs) – to pay down the debts that were run up before 2008.”

“This is not a program to increase market demand for the products of labour. It is not the kind of circular flow that economists have described as the essence of industrial capitalism. It is a financial rake-off of a magnitude such as has not existed since medieval European times, and the last stifling days of the oligarchic Roman Empire two thousand years ago.”

“Today’s central financial problem is that the banking system lends mainly for rent extraction opportunities rather than for tangible capital investment and economic growth to raise living standards. To maximize rent, it has lobbied to untax land and natural resources. At issue in today’s tax and financial crisis is thus whether the world is going to have an economy based on progressive industrial democracy or a financialized and polarizing rent-extracting society.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Tags: Ayn Rand Alan Greenspan, banks and Conspiracy theories, fiscal balance depressions, Francois Quesnay, property and wealth tax, tax land, what good are savings

Filter view