Forget entrepreneurs, only banks can create wealth

[CHIMO]

Entrepreneurs, it has been said so many times over the past 30 years, create wealth. Right this minute, the foolish government is sitting around, waiting with bated breath, for glamorous entrepreneurs to get on with doing just that. But there are no signs that a great boom in business ingenuity is on its way.

So why are entrepreneurs being so shy? Don't they want to create wealth? They probably do. But the fact is this: the entire entrepreneurs-create-wealth thing is a fallacy, and the government is wrong to place its faith in it. Entrepreneurs don't create wealth. Banks create wealth, only banks. If you wonder why politicians seem so powerless to "rein them in", then wonder no more. It is for this simple reason: banks have a monopoly on wealth creation.

Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last "boom"). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: "This is mine." The velveteen rabbit, in the eponymous children's story by Margery Williams, needs love to make it "real". In a similar sort of way, the banks need borrowers to make their money "real".

But not just any old borrowers, of course. That's why the banks are so cavalier about ordinary customers and their savings, and even ordinary businesspeople and their relatively meagre profits. The banks crave borrowers who can take lots of their money and use it to attract lots of other people's money, so that the money they created has a profitable link to actual stuff that has actual value, such as solid investments, belongings that hold or increase their own value, labour and skills. Entrepreneurs provide not wealth, but new money-circuits, so that money can be distributed through a long chain of people, preferably nice and fast, picking up more value as it travels through. Essentially, it's like money laundering, except that instead of turning illegal cash into legal cash, the money-circuit turns abstract cash into real money, then delivers it back to the banks.

http://www.guardian.co.uk/commentisfree/2011/jun/02/only-banks-can-create-wealth

[saras]

1. Excellent article. K & R, can't imagine who anonymously unrecced it.

[goldstein_emmanuel]

2. I don't think this woman understands economics at all.

1) Banks use their capital to-->2) lend to entrepreneurs--> 3) entrepreneurs start businesses and make stuff--> 4) consumers buy stuff--> 5) entrepreneurs make a profit--> 6) pay off banks at a rate profitable for banks themselves-->return to step 1)

So: where in this chain has the system broken down? Do banks have money to lend? Check. Are there lots of entrepreneurs out there who'd like to make stuff and sell it to consumers? I would say, yes. In fact, we have lots of existing productive capacity sitting idle. So never mind new entrepreneurs, existing entrepreneurs are anxious to find new customers.

So clearly the system has broken down because consumers can no longer buy stuff. Why? Wage stagnation over the past 30-40 years (thanks to offshoring, destruction of labor unions, Free trade agreements like NAFTA, etc. etc). For a while during the housing bubble consumers borrowed to spend, but now that the bubble has burst, consumers are debt-saturated. In fact, many of them are in over their heads and in financial distress (look eg at foreclosure rates).

But who, or what, created this situation? In the context of US politics, Banks (and I'd give people 10 to 1 odds, if I were a gambling man, which I'm not, that it's the same in the UK, Spain, Greece, etc etc). Specifically, Big Finance interests and their agents were key in pushing through stuff like NAFTA, the Gramm-Leach-Bliley Act which set the stage for the Housing bubble, etc.

And why did they push all this stuff? Simple: They wanted to hog more money for themselves.

So really, the fundamental problem with the economy can be described as the wealth distribution reaching such an unbalanced state that the system has just seized up. The finance capital/lending class has hogged too much of the money, and the folks whose job it is to consume, so entrepreneurs can make profits, so they'll want to borrow money from banks, etc., simply can no longer afford to buy stuff.

Do banks create wealth? Sure, I guess. FOR THEMSELVES. That is the key point. They're in the business of creating wealth for themselves, which means that whatever they do at this point, they can only make the situation worse, not better. Can you see these banksters voluntarily transferring wealth from themselves to the poor and the working class? Neither can I. And yet that's the only thing that can get the system going again.

And you can see that this is the way it works by looking at what they are doing right now - right now they're raking in record profits by speculating and inflating the commodities bubble. So the economic collapse has not affected the Banks' ability to create electronic make-believe money wealth for themselves, at all. They're still at it, with commodities speculation and derivatives trading. The problem is, at the end of the day they can use this make-believe money they've made in the Wall Street derivatives/commodities casino, and actually purchase real goods and services on main street. Which undermines everyone else's purchasing power. And by inflating the commodities bubble they're impoverishing Main Street even further. People paying $4.00 per gallon or gas are going to have much less purchasing power than when they were paying $2.50 for each gallon of gas.

[orangeapple]

3. I see another culprit

"So clearly the system has broken down because consumers can no longer buy stuff. Why? Wage stagnation over the past 30-40 years"

It's hard to gauge because of the interference of inflation, but I think you'll find it takes fewer man hours of labor to buy a refrigerator, TV, or even car. I don't think real wages have stagnated insomuch as patience has evaporated.

What I do think you can see is that America is way over leveraged. You can't continually buy new stuff on credit. Eventually the credit payments swamp your ability to continue funding a living standard you hadn't achieved. Then your living standard falls not merely to what your wages support, but what is necessary to pay for yesterday's living standard too.

Recessions are normally periods to work off excess debt and deleverage in order to be better positioned to grow (able to commit more income to investment/savings than debt servicing). We didn't really do that this last time around. The retrenchment in the private markets was small, in large part because the Fed stepped in and backstopped enormous debts that otherwise would have been liquidated.

Instead of burying the corpse corporations as capitalism would the interventionists spritzed perfume on them and told us that two years later there isn't really a stench.

[westerebus]

4. Welcome to DU.

How are things in the re-education camps going these days? Just kidding.