7 ms·

"Once understood, it is self-evident that banks are wholly responsible for asset bubbles. " No, it's not remotely. They are no more responsible than the count

by jasmer 4y ago

"Once understood, it is self-evident that banks are wholly responsible for asset bubbles. " No, it's not remotely. They are no more responsible than the counterparts to the loan. Every loan a bank makes comes with risks to the bank. This idea you have about what is a 'productive investment' or not is fairy interventionist. Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive? If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks. The banks make the loan if the collateral and risk line up - that's what they do. They are not in the business of deciding what is good for the economy overall, nor should they be. Finally, that banks create the money is not 'obfuscated' moreover, the amount of leverage in the system is actually controlled by the central bank by setting reserve requirements. I suggest there's a lot of misunderstanding in our comment.

atq2119 4y ago
> When someone buys a building to lease out flats, is that not productive? Why would that be productive? Would the previous owner have left the building empty? If so, why, and isn't that an issue that should be addressed first? Maybe you have other scenarios in mind where a change of ownership isn't the only thing that happens, but then the productivity is, at least to the first order, due to that other thing, not due to the change of ownership.
- sokoloff 4y ago
  When a builder Alex builds an original building (typically using a construction loan), we both agree that’s productive (that construction loans are good things to exist). Now that the building is standing, Billie wants to buy it. Maybe they want to live in it; maybe they want to rent it out. Is that purchase productive or unproductive? Since it’s the way Alex gets the money to pay off the construction loan (and thus be able to build another building), I think it’s as productive as the construction loan. (Further, no bank would make the original construction loan if there was no prospect for it to be paid off, so builders would have to hold buildings for their economic life if no one else could get loans to buy them.) Now some more time passes and Charlie wishes to take a loan to buy the building from Billie. Is that productive? Well, it supports Billie’s ability to pay off their loan which supported Alex’s ability to pay off theirs, which is what supported the building existing at all, so…
  - atq2119 4y ago
    Yeah, it's pretty clear that the first two loans are productive. The third one not so much, and I think that's the original point about asset inflation creeping in at some point. Though it's obviously a matter of degree and context. If we're really talking about Billies and Charlies here, chances are that the last loan really is beneficial in terms of how it allows capital allocation to change. Perhaps Billie rented out units and just can't continue with that business anymore for some reason, but Charlie can. If however we're talking about institutional investors or the very rich who will anyway employ somebody else to do the productive work, then the case for the loan is much weaker.
    - sokoloff 4y ago
      Ok. I read your previous as suggesting that even Billie’s loan was unproductive or Alex was doing something wrong. (Alex has built a spec property and intends to leave it empty until sale as they’re in the construction business.)
brabel 4y ago
> They are not in the business of deciding what is good for the economy overall, nor should they be. > This idea you have about what is a 'productive investment' or not is fairy interventionist. So, banks do not give a damn about what's good for the economy (while having enormous power to drive economies), but you believe interventionsim is bad anyway? Also, if you don't know what a productive asset is, you just need to read a little bit: it's not hard to know.
- jasmer 4y ago
  The delusion of efficient central planning is maybe one of the most poignant problems in civilization, because free markets are completely counter intuitive. The 'reading' that needs to be done here is Adam Smith. It is extremely difficult to know what a 'productive asset' is. Luxury items: feels like a waste? But this is a way for rich people to spend stupid amounts of money on something that only they value in their heads, but which nobody else values, and money spreads into the hands of working people. And there are a lot of intangibles that come out of that. Rich guys spending billions on race car teams is where a lot of automotive innovation comes from. Education: feels productive? Show me millions and millions of papers that nobody else reads, that nobody will ever read and where the 'value' in that is. It would be more 'productive' to send them into Nursing in many cases. But who is going to decide which 'Scientists' are worthy and which one's are not? Tough job! It goes on and on.
lsiq 4y ago
"When someone buys a building to lease out flats, is that not productive?" That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally. "it's the fault of those speculators for the speculating, not the banks." Both the speculators and banks respond to financial incentives and must work within the laws. "This idea you have about what is a 'productive investment' or not is fairy interventionist." Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600? It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.
- imtringued 4y ago
  But at least in the US mortgage origination is heavily influenced by the fact that Fannie Mae will buy the mortgages which means the banks don't really care whether new construction is being funded or old buildings are being bought at yet a higher price. Just looking at the commercial banks alone won't get you the high level picture.
- jasmer 4y ago
  Landlords provide an economic service, in fact for most of them it's not just arbitrage. "It is inevitable that banks will eventually only loan for productive purposes." They will always lend to those who can pay them back with the least risk at the highest rate. That's it. Productivity is a second order thing and it will always be second order.
  - lsiq 4y ago
roenxi 4y ago
> Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive? In theory there is a powerful argument here, but in practice I am suspicious because when people attempt to start settling trades in, say, gold the police will soon get involved. If we're appealing to principles of freedom of opinion, there has to be a really good justification for why we all have to agree with the bank's opinions on who is creditworthy? I think somewhere in the mess I'm being robbed, and everyone being forced to participate in the system is not allaying my suspicions. It is the old argument against socialism - while there is often not a good argument against the individual parts; it is the communists building the wall to keep people in. Looks kinda suspicious and the people controlling the monetary system see little reason to compromise or allow people to choose the best personal options.
- WalterBright 4y ago
  > we all have to agree with the bank's opinions on who is creditworthy? We don't. You can go to another bank.
- CraigJPerry 4y ago
  >> socialism - while there is often not a good argument against the individual parts; it is the communists building the wall Communism and socialism are distinct. The confusion arises because Marx (& Engels) used the terms interchangeably but that was a long time ago and a lot has changed in the interim (as has just about every other discipline in the world) and now these terms refer to distinct ideas. Within socialism, there’s a few major branches. The one of most interest to western countries would be democratic socialism. Just to help cement the idea that there’s fundamental differences, here’s some ideas from socialism that might be surprising if you equate socialism with communism: They’re against redistributive taxes because they’re heavy in administrative overhead and can reduce the desire to work. Instead they prefer the idea that income distributions are maintained fairly. E.g. for one example, the board can award the CEO any amount they desire limited only by the available money to the company - however, the lowest paid employee, regardless of role within the firm, must not earn less than 0.X times the remuneration of the CEO. Where X is set such that the lowest and highest paid workers dont diverge by excessive amounts. Socialists believe in individual creativity - they strive to provide freedom to be creative to all individuals. While ultimately they’re against the waste of capitalism (e.g. a sweeping simplification but advertising driven consumption - consumption not based on need but based on wants) socialists do seek to beat production of the capitalist approach where communism has no interest in this.
unity1001 4y ago
> If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks. It doesnt matter whose responsibility is it if it screws up the entire economy. Breaking everything for everyone is not something that should be allowed regardless of justification.

by jasmer 4y ago

atq2119 4y ago

> When someone buys a building to lease out flats, is that not productive? Why would that be productive? Would the previous owner have left the building empty? If so, why, and isn't that an issue that should be addressed first? Maybe you have other scenarios in mind where a change of ownership isn't the only thing that happens, but then the productivity is, at least to the first order, due to that other thing, not due to the change of ownership.

sokoloff 4y ago
When a builder Alex builds an original building (typically using a construction loan), we both agree that’s productive (that construction loans are good things to exist). Now that the building is standing, Billie wants to buy it. Maybe they want to live in it; maybe they want to rent it out. Is that purchase productive or unproductive? Since it’s the way Alex gets the money to pay off the construction loan (and thus be able to build another building), I think it’s as productive as the construction loan. (Further, no bank would make the original construction loan if there was no prospect for it to be paid off, so builders would have to hold buildings for their economic life if no one else could get loans to buy them.) Now some more time passes and Charlie wishes to take a loan to buy the building from Billie. Is that productive? Well, it supports Billie’s ability to pay off their loan which supported Alex’s ability to pay off theirs, which is what supported the building existing at all, so…
- atq2119 4y ago
  Yeah, it's pretty clear that the first two loans are productive. The third one not so much, and I think that's the original point about asset inflation creeping in at some point. Though it's obviously a matter of degree and context. If we're really talking about Billies and Charlies here, chances are that the last loan really is beneficial in terms of how it allows capital allocation to change. Perhaps Billie rented out units and just can't continue with that business anymore for some reason, but Charlie can. If however we're talking about institutional investors or the very rich who will anyway employ somebody else to do the productive work, then the case for the loan is much weaker.
  - sokoloff 4y ago
    Ok. I read your previous as suggesting that even Billie’s loan was unproductive or Alex was doing something wrong. (Alex has built a spec property and intends to leave it empty until sale as they’re in the construction business.)

brabel 4y ago

> They are not in the business of deciding what is good for the economy overall, nor should they be. > This idea you have about what is a 'productive investment' or not is fairy interventionist. So, banks do not give a damn about what's good for the economy (while having enormous power to drive economies), but you believe interventionsim is bad anyway? Also, if you don't know what a productive asset is, you just need to read a little bit: it's not hard to know.

jasmer 4y ago
The delusion of efficient central planning is maybe one of the most poignant problems in civilization, because free markets are completely counter intuitive. The 'reading' that needs to be done here is Adam Smith. It is extremely difficult to know what a 'productive asset' is. Luxury items: feels like a waste? But this is a way for rich people to spend stupid amounts of money on something that only they value in their heads, but which nobody else values, and money spreads into the hands of working people. And there are a lot of intangibles that come out of that. Rich guys spending billions on race car teams is where a lot of automotive innovation comes from. Education: feels productive? Show me millions and millions of papers that nobody else reads, that nobody will ever read and where the 'value' in that is. It would be more 'productive' to send them into Nursing in many cases. But who is going to decide which 'Scientists' are worthy and which one's are not? Tough job! It goes on and on.

lsiq 4y ago

"When someone buys a building to lease out flats, is that not productive?" That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally. "it's the fault of those speculators for the speculating, not the banks." Both the speculators and banks respond to financial incentives and must work within the laws. "This idea you have about what is a 'productive investment' or not is fairy interventionist." Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600? It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.

imtringued 4y ago
But at least in the US mortgage origination is heavily influenced by the fact that Fannie Mae will buy the mortgages which means the banks don't really care whether new construction is being funded or old buildings are being bought at yet a higher price. Just looking at the commercial banks alone won't get you the high level picture.
jasmer 4y ago
Landlords provide an economic service, in fact for most of them it's not just arbitrage. "It is inevitable that banks will eventually only loan for productive purposes." They will always lend to those who can pay them back with the least risk at the highest rate. That's it. Productivity is a second order thing and it will always be second order.
- lsiq 4y ago

roenxi 4y ago

> Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive? In theory there is a powerful argument here, but in practice I am suspicious because when people attempt to start settling trades in, say, gold the police will soon get involved. If we're appealing to principles of freedom of opinion, there has to be a really good justification for why we all have to agree with the bank's opinions on who is creditworthy? I think somewhere in the mess I'm being robbed, and everyone being forced to participate in the system is not allaying my suspicions. It is the old argument against socialism - while there is often not a good argument against the individual parts; it is the communists building the wall to keep people in. Looks kinda suspicious and the people controlling the monetary system see little reason to compromise or allow people to choose the best personal options.

WalterBright 4y ago
> we all have to agree with the bank's opinions on who is creditworthy? We don't. You can go to another bank.
CraigJPerry 4y ago
>> socialism - while there is often not a good argument against the individual parts; it is the communists building the wall Communism and socialism are distinct. The confusion arises because Marx (& Engels) used the terms interchangeably but that was a long time ago and a lot has changed in the interim (as has just about every other discipline in the world) and now these terms refer to distinct ideas. Within socialism, there’s a few major branches. The one of most interest to western countries would be democratic socialism. Just to help cement the idea that there’s fundamental differences, here’s some ideas from socialism that might be surprising if you equate socialism with communism: They’re against redistributive taxes because they’re heavy in administrative overhead and can reduce the desire to work. Instead they prefer the idea that income distributions are maintained fairly. E.g. for one example, the board can award the CEO any amount they desire limited only by the available money to the company - however, the lowest paid employee, regardless of role within the firm, must not earn less than 0.X times the remuneration of the CEO. Where X is set such that the lowest and highest paid workers dont diverge by excessive amounts. Socialists believe in individual creativity - they strive to provide freedom to be creative to all individuals. While ultimately they’re against the waste of capitalism (e.g. a sweeping simplification but advertising driven consumption - consumption not based on need but based on wants) socialists do seek to beat production of the capitalist approach where communism has no interest in this.

unity1001 4y ago

> If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks. It doesnt matter whose responsibility is it if it screws up the entire economy. Breaking everything for everyone is not something that should be allowed regardless of justification.