A quick note - if the Greek Government introduced a Tax on The Use of Money, many of the current problems might be solved.
The tax would solve the problem of unpaid and uncollected tax revenue, at little extra cost.
The flow of financial information would alleviate the concerns of the lending banks.
The transparency of tax revenue would help plot the long term loan repayment schedules.
It is more than likely that the EU banks would view Greece as a much more secure investment and extend the loans.
Showing posts with label credit crisis. Show all posts
Showing posts with label credit crisis. Show all posts
Monday, July 27, 2015
Tuesday, June 23, 2015
The Inventions of Depressions
Finance had always been a bit risky. Funds invested in agriculture, trade, and mining were often lost due to bad weather, drought, physical hardship and ill-health, war and banditry.
But the invention of banking and the creation of State sanctioned central banks, with the ability to issue bank notes only vaguely related to actual gold reserves, created the conditions for booms and busts on whole community, whole region, and entire State based scale.
Mercantile based booms and busts started to appear in the 1600's as banking services made it possible to get credit and funds in exchange for debt, and notes against trade and goods. The first major boom was the Netherlands 1630's speculation in tulip bulbs. Money poured into Holland, and initial speculators made enormous profits, triggering ruinous investment by later speculators. The availability of bank notes made it possible for working class people, and minor merchants, to invest, so the crash affected whole communities and ruined land holders and nobles alike.
In 1717 a Scottish financier John Law, persuaded the French Government to establish the Banque Royale, which issued bank notes underpinned by his speculative Mississippi Company. He paid navvies to march through Paris supposedly on their way to dig up gold in South America, and managed to create a long run on the shares. It created such a bubble that he was able to take on the entire French national debt, and turn it into paper notes, which he issued to the french population.
In 1720 the bubble burst.
At the same time 1711, the South Sea Company was created as a public–private partnership to consolidate and reduce the cost of UK national debt. The company was granted a monopoly to trade with Spain controlled South America. There was no realistic prospect that trade would take place and the company never realised any significant profit from its monopoly. Company stock rose to ten times its orginal value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing, ruining many who had taken on debt, via bank notes to buy share.
In the 1840's there was similar speculative booms and busts in railway shares in England, the US and Europe. In each case there is belief in some technological or economic breakthrough that will permanently change the market - but it is the ready expansion of bank notes to meet the speculative urge that created the boom.
In 1929 the new US Federal Reserve was widely believed to be the perfect financial safety net, controlling interest rates and money supply by buying and selling government bonds.
A new investment house opened every day of 1929 issuing $2.5 billion of securities, financing both businesses and the purchase of shares. Shares "bought" using the bank notes issued, were used as security for further loans. Until in October 1929 when a number of minor shocks triggered the collapse of confidence and the rush to sell triggered wholesale collapse.
The fragility of such a boom is highlighted by some of these minor shocks - the arrest of a London based stock broker over fraud; the tabling of a bill to introduce tariffs on imported goods; and the discovery by public investors that the ticker tape method of reporting on share trading and share values was running hours later than the actual trades.
Junk Bonds
Junk Bonds took speculative investment, supported by banks issuing notes and demand debt, to a new level. The credit risk of a bond issued by a company ( an agreement to pay a specific sum on a specific date in return for a loan ), refers to the probability and probable loss upon a credit event (eg: default on scheduled payments, bankruptcy, or bond restructure) or a credit quality change issued by a rating agency. A high risk bond offers high interest or returns to the holder making them attractive where a loss can be borne, and these were called junk bonds.
In the 1980's bank and finance deregulation allowed traders to create junk bonds in one company, based on the promise to buy another company and fund the bond from the cash reserves, or sale of assets of the second company. Again this novel "innovation" started speculation, but it was the banks compliance in issuing notes and debt that spurred the boom.
A second innovation in the 2000's was the creation of Collateralised Debt Obligations (CDO) where bonds, mortgages, and other debt agreements are bundled so that the nett risk rating meets the minimum levels of institutional, and conservative investors. In some cases the bundles are rebundled, so that accurate audit and risk assessment becomes difficult. Again a boom was created by banks being prepared to create debt and issue notes to support the speculation, and in fact further bank deregulation had made it possible to be both an investment advisor and the debt creator.
Derivatives
If you find the idea of CDO's and Junk Bonds a worry, you will love derivatives.
This is a contract that gets its value from the performance ( not the value ) of an underlying entity. This can be an asset, index, or interest rate. Derivatives can be used to insure against price movements (hedging), but more often pure speculation on price movements for speculation - eg: forwards & futures (the right to buy in the future at a set price), options, swaps, synthetic collateralized debt obligations and credit default swaps (the risk that someone won't be paid by someone else).
Again, the preparedness of banks to support investment in derivatives, and the banks ability to create the debt out of thin air - fractional reserve banking - drove speculation in this new innovation. In 2001 it was estimated that $44,000 billion was invested in derivatives in Wall Street, and to put this into perspective, the world wide losses on stock market adjusts over 2000-2003 was $7,000 billion
The size of the derivatives market is obscured because much of the activity take place within hedge funds. In 2010-12 the majority of countries cooperated to create and legislate bodies to make derivative trading more transparent and subject to regulation. This was driven in part by the reported $39.5 billion in derivative trade losses due to fraud and market collapse in the decade 2000-2010.
But the invention of banking and the creation of State sanctioned central banks, with the ability to issue bank notes only vaguely related to actual gold reserves, created the conditions for booms and busts on whole community, whole region, and entire State based scale.
Mercantile based booms and busts started to appear in the 1600's as banking services made it possible to get credit and funds in exchange for debt, and notes against trade and goods. The first major boom was the Netherlands 1630's speculation in tulip bulbs. Money poured into Holland, and initial speculators made enormous profits, triggering ruinous investment by later speculators. The availability of bank notes made it possible for working class people, and minor merchants, to invest, so the crash affected whole communities and ruined land holders and nobles alike.
In 1717 a Scottish financier John Law, persuaded the French Government to establish the Banque Royale, which issued bank notes underpinned by his speculative Mississippi Company. He paid navvies to march through Paris supposedly on their way to dig up gold in South America, and managed to create a long run on the shares. It created such a bubble that he was able to take on the entire French national debt, and turn it into paper notes, which he issued to the french population.
In 1720 the bubble burst.
At the same time 1711, the South Sea Company was created as a public–private partnership to consolidate and reduce the cost of UK national debt. The company was granted a monopoly to trade with Spain controlled South America. There was no realistic prospect that trade would take place and the company never realised any significant profit from its monopoly. Company stock rose to ten times its orginal value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing, ruining many who had taken on debt, via bank notes to buy share.
In the 1840's there was similar speculative booms and busts in railway shares in England, the US and Europe. In each case there is belief in some technological or economic breakthrough that will permanently change the market - but it is the ready expansion of bank notes to meet the speculative urge that created the boom.
In 1929 the new US Federal Reserve was widely believed to be the perfect financial safety net, controlling interest rates and money supply by buying and selling government bonds.
A new investment house opened every day of 1929 issuing $2.5 billion of securities, financing both businesses and the purchase of shares. Shares "bought" using the bank notes issued, were used as security for further loans. Until in October 1929 when a number of minor shocks triggered the collapse of confidence and the rush to sell triggered wholesale collapse.
The fragility of such a boom is highlighted by some of these minor shocks - the arrest of a London based stock broker over fraud; the tabling of a bill to introduce tariffs on imported goods; and the discovery by public investors that the ticker tape method of reporting on share trading and share values was running hours later than the actual trades.
Junk Bonds
Junk Bonds took speculative investment, supported by banks issuing notes and demand debt, to a new level. The credit risk of a bond issued by a company ( an agreement to pay a specific sum on a specific date in return for a loan ), refers to the probability and probable loss upon a credit event (eg: default on scheduled payments, bankruptcy, or bond restructure) or a credit quality change issued by a rating agency. A high risk bond offers high interest or returns to the holder making them attractive where a loss can be borne, and these were called junk bonds.
In the 1980's bank and finance deregulation allowed traders to create junk bonds in one company, based on the promise to buy another company and fund the bond from the cash reserves, or sale of assets of the second company. Again this novel "innovation" started speculation, but it was the banks compliance in issuing notes and debt that spurred the boom.
A second innovation in the 2000's was the creation of Collateralised Debt Obligations (CDO) where bonds, mortgages, and other debt agreements are bundled so that the nett risk rating meets the minimum levels of institutional, and conservative investors. In some cases the bundles are rebundled, so that accurate audit and risk assessment becomes difficult. Again a boom was created by banks being prepared to create debt and issue notes to support the speculation, and in fact further bank deregulation had made it possible to be both an investment advisor and the debt creator.
Derivatives
If you find the idea of CDO's and Junk Bonds a worry, you will love derivatives.
This is a contract that gets its value from the performance ( not the value ) of an underlying entity. This can be an asset, index, or interest rate. Derivatives can be used to insure against price movements (hedging), but more often pure speculation on price movements for speculation - eg: forwards & futures (the right to buy in the future at a set price), options, swaps, synthetic collateralized debt obligations and credit default swaps (the risk that someone won't be paid by someone else).
Again, the preparedness of banks to support investment in derivatives, and the banks ability to create the debt out of thin air - fractional reserve banking - drove speculation in this new innovation. In 2001 it was estimated that $44,000 billion was invested in derivatives in Wall Street, and to put this into perspective, the world wide losses on stock market adjusts over 2000-2003 was $7,000 billion
The size of the derivatives market is obscured because much of the activity take place within hedge funds. In 2010-12 the majority of countries cooperated to create and legislate bodies to make derivative trading more transparent and subject to regulation. This was driven in part by the reported $39.5 billion in derivative trade losses due to fraud and market collapse in the decade 2000-2010.
Monday, December 9, 2013
Mr. Soddy’s Ecological Economy
Frederick Soddy, born in 1877 in England, was a chemist with Ernest Rutherford when they jointly determined that radioactivity was atom decay and transformation. Back in Scotland, he described and named the concept of an isotope, and determined the changes in atomic number brought about by radioactivity. He received the 1921 Nobel laureate in Chemistry for his work on radioactive decay, and foresaw the energy potential of atomic fission.
He turned to economics, revolted by the mass chemical deaths of World War I, published four books from 1921 to 1934, and campaigned for a radical restructuring of global monetary relationships, but was dismissed as a crank.
He saw economics as a physical machine that must draw energy from outside itself.
The first and second laws of thermodynamics forbid perpetual motion - systems that create energy out of nothing or recycle it forever. He criticized the prevailing belief of the economy capable of generating infinite wealth.
Current economists model the economy as a living system. drawing from its environment valuable (or “low entropy”) matter and energy, ores, the raw materials provided by plants and animals. And like all life, an economy emits a high-entropy wake — it spews degraded matter and energy: waste heat, waste gases, toxic byproducts, apple cores, the molecules of iron lost to rust and abrasion. High entropy emissions include trash and pollution in all their forms, including yesterday’s newspaper, last year’s sneakers, last decade’s rusted automobile.
Matter taken up into the economy can be recycled, using energy; but energy, used once, is forever unavailable to us at that level again. The law of entropy commands a one-way flow downward from more to less useful forms. An animal can’t live perpetually on its own excreta. Neither can you fill the tank of your car by pushing it backwards. Thus, Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: “Biology, not mechanics, is our Mecca.”
Following Soddy, Georgescu-Roegen and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars.
The dollars aren’t real wealth, but only symbols that represent the bearer’s claim on an economy’s ability to generate wealth.
Debt, for its part, is a claim on the economy’s ability to generate wealth in the future.
Soddy said that the ruling passion of the age, is to convert wealth into debt — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made.
Problems arise when wealth and debt are not kept in proper relation.
The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide to accept.
Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.
It’s like musical chairs — in the wake of some shock (say, the run-up of the price of gas to $4 a gallon), holders of abstract debt suddenly want to hold money or real wealth instead.
But not all of them can. One person’s loss causes another’s, and the whole system cascades into crisis. Each and every one of the crises that has beset the American economy in recent years has been, at heart, a crisis of debt repudiation. And we are unlikely to avoid more of them until we stop allowing claims on income to grow faster than income.
The problem isn’t simply greed, or ignorance, or a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are willing to invent instruments of debt that will someday need to be repudiated.
Soddy suggested five policy prescriptions - taken at the time as evidence that his theories were unworkable. And yet these four are now conventional practice:
abandon the gold standard,
let international exchange rates float,
use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and
establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort.
Soddy’s fifth proposal, was to stop banks from creating money (and debt) out of nothing.
Banks do this by lending out more than they physically hold of their depositors’ money at interest — creating debt ( a claim on real wealth in the future ) and creating apparent debit balances in the borrower’s demand deposit (checking) account, where it can be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.
Herman Daly, an ecological economist, and many others have proposed a gradual, legislated move to 100-percent reserve requirement on demand deposits.
Banks could still support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They could still make loans and still be able to lend at interest, but based on the real money of real depositors. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth.
The immediate response to this economic theory and its fifth proposal, is horror at the impact it would have on GDP, the share market, and economic activity.
But real debts do exist. These are mainly the real world matter and energy high entropy emissions and environmental impacts. The currently, un-costed, costs of removing CO2 from the atmosphere and oceans; of repairing degraded land and water supplies; of neutralising the toxins and organochlorides; and of redressing social inequity and poverty caused by the debt process.
And the problem is that these real debts have to be paid from current wealth generation.
They are not a claim on future real wealth. And they have physical priority over the interest created and charged from debt creation.
We are at a stage where real debts are increasing eroding our current wealth creation, making us all a little poorer each year, and throwing into doubt our ability to create wealth in the future, and so seriously weakening the claims by debt to that wealth.
This is both creating social and personal dissatisfaction and tension, and bringing forward the likelihood of financial crisis and collapse - debt repudiation.
It is increasingly likely that Soddy’s fifth proposal will also become conventional practice.
He turned to economics, revolted by the mass chemical deaths of World War I, published four books from 1921 to 1934, and campaigned for a radical restructuring of global monetary relationships, but was dismissed as a crank.
He saw economics as a physical machine that must draw energy from outside itself.
The first and second laws of thermodynamics forbid perpetual motion - systems that create energy out of nothing or recycle it forever. He criticized the prevailing belief of the economy capable of generating infinite wealth.
Current economists model the economy as a living system. drawing from its environment valuable (or “low entropy”) matter and energy, ores, the raw materials provided by plants and animals. And like all life, an economy emits a high-entropy wake — it spews degraded matter and energy: waste heat, waste gases, toxic byproducts, apple cores, the molecules of iron lost to rust and abrasion. High entropy emissions include trash and pollution in all their forms, including yesterday’s newspaper, last year’s sneakers, last decade’s rusted automobile.
Matter taken up into the economy can be recycled, using energy; but energy, used once, is forever unavailable to us at that level again. The law of entropy commands a one-way flow downward from more to less useful forms. An animal can’t live perpetually on its own excreta. Neither can you fill the tank of your car by pushing it backwards. Thus, Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: “Biology, not mechanics, is our Mecca.”
Following Soddy, Georgescu-Roegen and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars.
The dollars aren’t real wealth, but only symbols that represent the bearer’s claim on an economy’s ability to generate wealth.
Debt, for its part, is a claim on the economy’s ability to generate wealth in the future.
Soddy said that the ruling passion of the age, is to convert wealth into debt — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made.
Problems arise when wealth and debt are not kept in proper relation.
The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide to accept.
Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.
It’s like musical chairs — in the wake of some shock (say, the run-up of the price of gas to $4 a gallon), holders of abstract debt suddenly want to hold money or real wealth instead.
But not all of them can. One person’s loss causes another’s, and the whole system cascades into crisis. Each and every one of the crises that has beset the American economy in recent years has been, at heart, a crisis of debt repudiation. And we are unlikely to avoid more of them until we stop allowing claims on income to grow faster than income.
The problem isn’t simply greed, or ignorance, or a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are willing to invent instruments of debt that will someday need to be repudiated.
Soddy suggested five policy prescriptions - taken at the time as evidence that his theories were unworkable. And yet these four are now conventional practice:
abandon the gold standard,
let international exchange rates float,
use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and
establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort.
Soddy’s fifth proposal, was to stop banks from creating money (and debt) out of nothing.
Banks do this by lending out more than they physically hold of their depositors’ money at interest — creating debt ( a claim on real wealth in the future ) and creating apparent debit balances in the borrower’s demand deposit (checking) account, where it can be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.
Herman Daly, an ecological economist, and many others have proposed a gradual, legislated move to 100-percent reserve requirement on demand deposits.
Banks could still support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They could still make loans and still be able to lend at interest, but based on the real money of real depositors. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth.
The immediate response to this economic theory and its fifth proposal, is horror at the impact it would have on GDP, the share market, and economic activity.
But real debts do exist. These are mainly the real world matter and energy high entropy emissions and environmental impacts. The currently, un-costed, costs of removing CO2 from the atmosphere and oceans; of repairing degraded land and water supplies; of neutralising the toxins and organochlorides; and of redressing social inequity and poverty caused by the debt process.
And the problem is that these real debts have to be paid from current wealth generation.
They are not a claim on future real wealth. And they have physical priority over the interest created and charged from debt creation.
We are at a stage where real debts are increasing eroding our current wealth creation, making us all a little poorer each year, and throwing into doubt our ability to create wealth in the future, and so seriously weakening the claims by debt to that wealth.
This is both creating social and personal dissatisfaction and tension, and bringing forward the likelihood of financial crisis and collapse - debt repudiation.
It is increasingly likely that Soddy’s fifth proposal will also become conventional practice.
Tuesday, December 2, 2008
Fixing the Current Financial Problems
The theory runs that you can boost global demand by offering more credit - or increasing debt. And economists argue that the world needs the growth in total demand to absorb the productivity gains in Asia.
So let us look at schemes by which domestic demand can be boosted - offering increasing levels of credit/debt or alternatively - boosting social spending via domestic government programs; direct financing of government deficits by domestic central banks; and increasing the minimum wage and increasing other family incomes.
These last three increase inflation, but inflation is a debt reducing factor and in the current climate may be healthy.
The other side of the coin though is that the debt bubble has been politically encouraged because it boosts investment profits, and the political power assumed by this profit flow has meant that real wages have stagnated, more low and middle class wage earners owe more money to asset holders, and more small asset holders owe more money to big asset holders and their intermediaries.
A real and democratic solution would be to raise real family incomes and real wages, even creating jobs in stressed areas - but that requires an elected government facing off criticism from big business and economic think tanks, who actually know this action will solve the problem but are loath to admit it, preferring to offer the bail out of big business as the only solution.
Its a pity, but the political power lies with those who a) profited by the debt bubble, and b) look like profiting from the "solution"
So let us look at schemes by which domestic demand can be boosted - offering increasing levels of credit/debt or alternatively - boosting social spending via domestic government programs; direct financing of government deficits by domestic central banks; and increasing the minimum wage and increasing other family incomes.
These last three increase inflation, but inflation is a debt reducing factor and in the current climate may be healthy.
The other side of the coin though is that the debt bubble has been politically encouraged because it boosts investment profits, and the political power assumed by this profit flow has meant that real wages have stagnated, more low and middle class wage earners owe more money to asset holders, and more small asset holders owe more money to big asset holders and their intermediaries.
A real and democratic solution would be to raise real family incomes and real wages, even creating jobs in stressed areas - but that requires an elected government facing off criticism from big business and economic think tanks, who actually know this action will solve the problem but are loath to admit it, preferring to offer the bail out of big business as the only solution.
Its a pity, but the political power lies with those who a) profited by the debt bubble, and b) look like profiting from the "solution"
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